Fitch Ratings reports that Asia-Pacific banks are confronting elevated energy prices and sluggish economic growth, though the consequences will vary across regional markets. Given the area’s heavy reliance on oil and gas imports, it remains highly vulnerable to the fallout from the US-Iran conflict. Diminishing domestic demand and more stringent policy environments are expected to cause asset quality to decline in the region’s more exposed economies, with the Philippines, Thailand, and Sri Lanka projected to experience the most significant negative impacts.
In the Philippines, surging inflation is heavily impacting the consumer-driven economy. Fitch projects softer loan growth, elevated credit costs, and diminished operating profitability for local banks, despite higher interest rates offering some support to net interest margins.
For Sri Lanka, banking asset quality is anticipated to erode, and credit costs face a risk of steeper increases following a recent 100-basis-point policy rate hike paired with exchange rate volatility.
Thai financial institutions are also bracing for weakened asset quality and profitability, aggravated by the country’s persistent low-growth environment. Fitch notes that non-performing loans are poised to rise gradually, driven primarily by small and medium-sized enterprise portfolios and, to a lesser degree, retail segments.
Conversely, Japan is forecast to remain one of the most resilient banking sectors in the region. Fitch added that South Korea and India similarly appear structurally better positioned than many of their regional peers to weather the pressure of higher energy costs.
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