ASEAN Banks Face Modest Worsening In Asset Quality As Interest Rates Rise

Inflation will result in higher interest rates, widening ASEAN banks' net interest margins

ASEAN Banks Face Modest Worsening In Asset Quality As Interest Rates Rise
Photo by Mike Enerio / Unsplash

Singapore, August 29, 2022 – Central banks in the Association of Southeast Asian Nations will tighten monetary policy as weakening local currencies increase import prices and worsen capital outflows, according to Moody's Investors Service in a new report.

"Although higher interest rates will largely widen banks' net interest margins, asset risks will also increase. Still, we expect interest rates to rise gradually and inflationary pressure to abate in 2023, keeping growth in problem loans modest," says Rebecca Tan, a Moody's Vice President and Senior Analyst.

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In the ASEAN economies of Indonesia, Malaysia, Philippines, Singapore and Thailand, banks' margins have historically widened in tandem with rises in inflation rates.

Worsening Asset Risks

Vietnam is an exception because of intense competition for deposits, banks' higher reliance on market funds, as well as regulatory requirements to keep lending rates low to support the economy.

Thai and Vietnamese banks would be most vulnerable compared to the four other ASEAN banking systems to worsening asset risks if interest rates spike because borrowers in the former two banking systems are the most indebted.

An acceleration of inflation has historically largely resulted in increases in nonperforming loans (NPLs) in ASEAN banking systems. This is because inflation typically results in an economic slowdown, with consequent rises in interest rates increasing the debt repayment burdens of borrowers.