How resilient are banks in emerging Asia against negative shocks?

Emerging Asian banks outperform other regions in Moody's stress tests.

Banks in Emerging Asia are well-prepared to withstand negative shocks, according to the results of Moody's Investors Service stress testing. The banks' cost efficiency, strong income generation and good levels of general loan reserves would help them to resist the conditions set out in the ratings agency's tests.

On average, banks in the region would see their capital ratio fall by 5.7 percentage points over the two-year testing period, down from 11%. Their non-performing loans would rise to 12.5% from 3% at the end of 2015. These are better results than the average of the near 80 banking systems that Moody's covered in its regular stress tests.

"There are a number of reasons that explain why Emerging Asian banks outperform other regions in our stress tests," said Jorge Rodriguez-Valez, a Moody's Vice President and co-author of the report. "Emerging Asian banks stand out in terms of cost efficiency and they have a strong income generation, as well as significant levels of general reserves, giving them an extra cushion to absorb losses.

"Finally, their asset composition is also favourable, in particular due to low exposure to equity securities, which tend to have high expected losses during periods of financial distress," Mr Ellis added.

However, within the results, there are some differences across countries. Philippines and Thailand outperform their peers. Banks in Indonesia benefit from very high levels of capital, which gives them enough buffer to withstand the stress test.

Conversely, banks in Pakistan, Mongolia, Sri Lanka and Vietnam remain vulnerable to stressed conditions. Their current levels of capitalization are low and their levels of non-performing loans high. They would also be severely hit by their exposures to government bonds with low ratings that would carry high expected loss rates if a stress scenario were to materialize.

Moody's stress test are calibrated to broadly represent a "1 in 25 year" event. It consisted of a common benchmark based on loss rates, multipliers and haircuts. This global, consistent approach allows comparability in results across banks and national banking systems for our rating purposes. The latest stress test involved 97 banks in the Emerging Asia region.