COVID-19: APAC Banks' Profitability To Deteriorate Next Few Years

KUALA LUMPUR, July 28 (Bernama) -- Asia-Pacific (APAC) banks’ profitability is expected to deteriorate over the next few years as the COVID-19 pandemic accelerates structural changes in their markets, said Moody’s Investors Service. In a statement Tuesday, Moody’s said banks in the region are all facing a growing need to change their business models to overcome these challenges. "Lower-for-longer interest rates, rising credit costs and operating expenses -- and in some countries, aging populations -- will weigh on the profitability of APAC banks in coming years, with many of these trends exacerbated by the coronavirus outbreak," said Moody's assistant vice president and analyst, Rebaca Tan. She said banks' return on assets (ROA) had declined in 12 out of 17 APAC banking systems between 2014 and 2019 and is likely to remain weak at least through 2020-21. Additionally, deflationary pressure from a reduction in aggregate demand and low oil prices will keep interest rates low for a prolonged period. This would lead to declines in net interest income (NII) and net interest margin (NIM) compression to levels that can only be partly offset by reductions in funding costs, said Tan. Increases in credit costs as asset quality weakens are also likely to affect profitability, while the accelerating shift to digital banking services will push up operating expenses. “To reduce their dependence on NII from domestic markets, banks will increasingly pursue other revenue sources or expand overseas while continuing with digitisation. “However, these options have their own challenges, especially for laggard banks that lack the vision or resources to overhaul their business models,” she said. Tan also opined that the gap between agile large and laggard banks in their ability to tackle profitability challenges means the former will widen their competitive edge. “In the long term, laggard banks that fail to change their business models will become acquisition targets or will have to merge to survive,” she added. -- BERNAMA