Chennai: Global credit rating agency Moody’s Investors Service on Monday said the asset quality of agriculture loans given by banks in Asia Pacific region (excluding Japan) including Indian banks are not expected to weaken.
According to Moody’s, the global agriculture prices have shown better performance relative to energy and metal prices.
Banks in Asia Pacific-except for banks in Vietnam and public-sector banks in India- also showed good capital buffers and profitability, providing a good line of defense against rising problem loans, Moody’s said.
In a report entitled `Commodity Exposure Will Add to Asset Quality and Profitability Pressure’ Moody’s points out that banks most exposed to agriculture are in New Zealand (14% of gross loans), India (13%), and Thailand (around 6%).
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According to the Moody’s report, banks in Asia Pacific (ex-Japan) show moderate loan exposure to borrowers in commodity-related industries, with such loans making up around seven percent of gross loans on average at end-2015.
“However, the quality of such loans will likely continue to deteriorate, based on Moody’s assessment that energy and commodity prices will remain low over a prolonged period,” Moody’s said.
“In Asia Pacific (ex-Japan), the riskiest exposure for banks in terms of energy and other commodity loans originate from metals and mining, as well as from certain parts of the oil and gas sector, including services, offshore marine and shipping and ship builders,” Eugene Tarzimanov, a Moody’s vice president and senior credit officer said.
“In general, we do not expect negative bank rating actions related to commodity exposures, because banks in Asia Pacific have either good financial buffers, moderate commodity exposures, or ratings that already capture asset quality weakness,” he added.
Moody’s expect the commodity prices will stay low for a prolonged period, corporate earnings will be negatively affected; thereby weakening the debt repayment capacity of many commodity firms, and creating pressure on or delaying the recovery of asset quality and profitability for the banks in Asia Pacific.
According to the report, banks most exposed to metals and mining sectors are in Mongolia (10 percent of gross loans), India (seven percent, including steel), Indonesia (around 5%) and China (around 4%).
The global metals and mining sector has been under stress for many years and some Asia Pacific banks demonstrate large legacy problem loans in this industry.
Moody’s report said that overall, banks in Asia Pacific demonstrate good buffers against rising credit risks, despite the likely continued pressure on the quality of their commodity portfolios.
Such buffers include their generally low problem loan ratios and a problem loan coverage above 80% for more than half of Asia Pacific banking systems.