Source - SMW
The operating environment for banks across much of the Association of South East Asian Nations (ASEAN) has become more challenging over the last couple of years, Fitch Ratings says.

 And it says the region's banks also face risks stemming from a sharp rise in debt during the last decade, and are relatively exposed to developments in China. However, in most countries banks have adequate loss-absorption buffers that should support their ratings. 

Fitch says real GDP growth is higher in all six Fitch-rated ASEAN countries than their rating peer medians, but slower global GDP growth, weak world trade, currency depreciation and the drop in commodity prices have contributed to deterioration in the operating environment for many of the banks over the last couple of years, and asset quality has deteriorated.

Fitch expects NPL ratios - low by historical standards - to rise in 2016 and beyond in most of the banking sectors that Fitch assesses in south-east Asia.

The weaker operating environment could potentially expose vulnerabilities created in ASEAN's banking systems during the years of rapid credit growth that followed the 2008 global financial crisis. Credit growth has slowed in most countries over the past two years, although credit/GDP ratios are generally much higher than a decade ago. Household debt has risen particularly strongly in Malaysia, Thailand and Singapore. 

These risks have been manageable, but could become a source of larger asset-quality problems with a rise in unemployment or interest rates. 

The US Fed's lower-for-longer policy-rate path and a benign inflation outlook have allowed a number of countries in the region to cut domestic interest rates over the last two years, easing some strain on the banks. However, Fitch expects the Fed to hike rates again by year-end, which could close the window for further easing.