Asia-Pacific banks well placed to withstand any moderation in house prices, report says

TOKYO: 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 savingsrates, according to a report published on Monday, May 23 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  the region's residential property that could lead to systemic risk forAsia-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 theAsia-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 US 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," Nemoto said.