Regional Banks At Risk When Small Businesses Need Them

Regional Banks At Risk When Small Businesses Need Them

Regional banks in Asia increasingly at risk, driven by years of low margins, bad debt and now the threat of ratings cuts even as they play key roles in ensuring credit availability to small businesses.

Small lenders from Japan and South Korea have been pressured by historically low rates but the recent virus outbreak has raised the probability that bad loans will pile up at the smaller businesses they serve, such as restaurants, gyms, and retail.

«The rapid global spread of the coronavirus has generated an unprecedented credit shock across many sectors with negative implications for financial institutions’ asset quality. Global monetary easing by central banks and related fiscal policy initiatives will help to relieve liquidity pressures but will weigh on profitability across the financial sector,» wrote Moody's in a recent note.

Placed On Review

Four South Korean regional banks - Busan Bank, Daegu Bank, Jeju Bank, and Kyongnam Bank- were placed on review for downgrade this week by Moody's Investors Service, which said the pandemic will hurt economic growth as well as banks' credit quality.

The asset quality of these banks could deteriorate because they have concentrated exposures to the regions worst-hit by the virus, namely Daegu and North Gyeongsang province, and highly affected sectors such as small and medium-sized enterprises in the tourism, services, food, and beverage, and retail sectors, Moody's said.

Rate Cuts To Squeeze NIMs

Rate cuts worldwide would squeeze banks' net interest margins, the difference between what they earn from loans and pay for deposits, as well as interest income abroad. 

The virus could cause bad loans to spike in China, while more regional lenders in Japan may start to post losses if the central bank there cuts rates further, analysts note.

Asset Quality Could Deteriorate

In China, the virus may cause the nation's non-performing loan ratio to more than triple to about 6.3 percent, amounting to an increase of 5.6 trillion yuan (S$1.14 trillion) in bad debt, according to S&P Global Ratings.

A deterioration in banks' asset quality and profitability are raising concerns that more regional lenders will come under pressure after at least three banks were rescued last year.