S&P: Asia-Pacific banks well placed for any housing correction

Mon May 23, 2011 12:12am EDT

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(The following was released by the rating agency)User

May 23, 2011--Banks around the Asia-Pacific region appear well placed to withstand any moderation in house prices, reflecting prudent lending practices, tight regulations, and high household savings rates, according to a report published today by Standard & Poor's Ratings Services, titled "Could A House Price Correction Threaten Asia-Pacific Banks?".

While house prices have escalated in many markets around the region in recent years, and there is scope for a correction in some "hot" areas, Standard & Poor's does not currently anticipate a deep, disruptive price correction for the region's residential property that could lead to systemic risk for Asia-Pacific's banks.

"We expect that the region's stable economic outlook and rising household income--factors that have influenced average house prices to date--can sustain the market," Standard & Poor's credit analyst Naoko Nemoto said. "We believe that in the event of a downturn, most rated banks around the region have the capacity to absorb potential credit losses with limited impact on overall credit quality."

Other factors supporting Standard & Poor's view include the region's generally conservative underwriting standards and low unemployment rates. Standard & Poor's also notes that prime residential mortgage loans form a large part of Asia-Pacific banks' mortgage portfolios and most legal systems in the Asia-Pacific region allow for full-recourse loans, which should protect the region's banks to some extent.

Standard & Poor's does not anticipate a material deterioration in the credit quality of the region's home loans expects under a stress scenario resulting in a 20%-30% price correction in house prices coupled with a 100 basis point interest rate hike for each system, or any subsequent substantial impact on ratings on Asia-Pacific banks.

While not anticipated, Standard & Poor's acknowledges that a more severe downturn could pose a greater threat to the region's banks. "As events in the U.S. and other markets have demonstrated, if there is a sharp drop in average house prices around the region, multiple sectors of the economy could suffer, potentially leading to a surge in credit losses across various asset classes," Ms. Nemoto said.

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