Chinese, Vietnamese and Indonesian banks most risky in Asia

Banks domiciled in China, Indonesia and Vietnam are the most risky in Asia when it comes to economic and industry risk combined with problem assets, according to a 14-country study by rating agency Standard & Poor’s (S&P).

S&P defines economic risk – in the context of a banking system – as the risk level of a country's economy as it affects financial institutions rather than related to the country's own credit quality. “Included are the economy's strength, diversity and volatility; the financial health of the corporate and individual sectors; and the government's ability to manage the economy through boom and recessionary periods,” said the agency in a report, Asia-Pacific Banking: A Comparative Analysis of Industry Risk.

S&P said it had compiled its results based on a gross problematic assets (GPA) benchmark based on economic and industry risks, in addition to other data and discussions with banks and regulators. The GPA estimates represent the percentage of domestic credits extended to the private sector and to non-financial public entities that could become problematic in a reasonable worst-case economic recession or slowdown. “Problematic assets, in this context, include overdue loans, restructured assets (where the original terms have been altered), foreclosed assets and non-performing assets sold to special purpose vehicles,” S&P said.

“Financial sectors in the highest GPA range tend to exhibit poor institutional management, less rigorous prudential supervision, pervasive government-directed lending, moral hazard and – in the case of many transition economies – the ongoing drag of the bad debt of public and newly privatised enterprises,” S&P said. Australia ranked the lowest in terms of S&P’s GPA methodology.

In terms of estimated recovery rates on non-performing loans, Singapore ranked highest, with 75%, followed by Australia and New Zealand, with 70% each. While at the other end of the spectrum China and Indonesia ranked lowest, with 15% each. The Philippines came close, with a 25% estimated recovery rate.