Higher rates to raise Asian bank’s net interest margins, but risks may intensify

Asset quality will not significantly deteriorate, but banks face risks if US rate hikes are larger than expected.

Higher interest rates are expected to lift Asian banks’ net interest margins (NIM) amidst the current monetary policy tightening cycle. However, risks may intensify depending on the rate and inflation increases.

“Should US rate hikes be larger than we expect, this could trigger faster or greater tightening in some APAC markets, as could domestic inflation that proves higher or more persistent than we forecast,” Fitch Ratings said in its special report, “Impact of Rising Interest Rates on APAC Banks.”

Rate increases are sighted to be sharpest in Hong Kong and Singapore, where exchange-rate regimes link local interest rates to the US Fed funds rate. Banks in these two markets are expected to enjoy the highest possibility of NIM upsides. 

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Significant tightening is also expected in Australia, New Zealand and India, as policymakers respond to above-target inflation. 

Rates are unlikely to change much in China, Japan or Vietnam, Fitch added. 

“We do not expect significant deterioration in asset quality in any APAC banking sector, though there may be pockets of vulnerability. This partly reflects our expectations for relatively moderate tightening across APAC, where inflation pressure is generally more subdued than in other regions,” Fitch noted, adding that securities portfolio losses should be manageable.

However, banks in Hong Kong, India, Indonesia, Malaysia and Taiwan have the largest securities portfolios and are the most sensitive to yields.

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More aggressive tightening would also add to asset-quality risks, with no more revenue benefits for banks. 

“Asset-quality deterioration could eventually outweigh revenue upside, particularly if economies were tipped toward recession,” Fitch warned.