The 18-month outlook for the banking industry and ratings for the banking systems in China, including the mainland, Hong Kong and Taiwan, remained stable, Moody's Investors Service said in a report Tuesday.
Speaking at a media briefing in Hong Kong, Deborah Schuler, senior vice president of Moody's Asian Financial Institutions, said the sub-prime crisis and the ensuing credit crunch had been relatively minor issues for the banking industry in North Asia.
"Asia's sub-prime exposures have been small and the exceptionally strong levels of earnings recorded for 2007 have kept losses well contained," she said, citing mitigating factors such as strong growth of the Asian economies, limited involvement of the banks in the global capital markets and their generally healthy financial conditions.
The industry outlook for South Korea is negative due to challenges posed by liquidity management and slower economic growth, but the South Korean bank ratings outlook was stable.
Nevertheless, banks in the region will face increasing challenges due to unfavorable global environment, which has been troubled by the credit tightening, the sub-prime fallout, the global economic slowdown, inflation and high prices for oil and food, etc.
Greg Bauer, managing director of Moody's financial institutions group, said he expected the impact of the sub-prime fallout to extend further along the chain.
There might still be uncertainties ahead in terms of inflation, although it is likely to relieve in the coming months for China, said Thomas Byrne, senior vice president of Moody's sovereign risk unit, adding that the situation was not likely to have a significant impact on the Chinese economy as a whole.
Aninda Mitra, vice president of Moody's sovereign risk unit, said the international oil prices were likely to make a challenge by staying at 130-140 dollars a barrel.
Schuler said she expected volatility ahead for the financial market.
The financial fundamentals of banks on the Chinese mainland have improved due to recapitalization and reductions in bad loans. Their capacity to stand potential risks have improved but it was yet to be seen how much they have improved because the banks had seldom experienced any economic downturn yet, she added.
The banking system in Hong Kong benefited from very experienced management, although the banks in the city "are close to, if not at the top of the credit cycle," whereas on the Taiwan island, the macro-economic environment was stable.
The banking system in Mongolia was benefiting from a resources-driven boom.
But the year 2009 would be difficult for banks in the region, with the coming 18 months expected to mean slower loan growth and a moderate increase in non-performing loans for the banking industries.
While the banks in some Asian economies, like those in China, will manage in 2008 to exceed the record earnings of 2007, higher funding, operating and credit costs were likely to take a bite out of their income in 2009.
The region's very high levels of single-borrower concentrations have also increased asset quality risk, Schuler said.
"In 2009 we are not expecting them to lose money, but we do expect them to struggle," she said.