Asian banks still hurting from the crash of 1997 are again being burdened with non-performing loans (NPL) amid an economic slowdown, and the global security crisis is compounding the situation, regional analysts said.
Even before the terrorist attacks on the US, an overhang of NPLs from the financial crisis four years ago and a sharp decline in economic output and trade were putting fresh pressure on regional banks after a flurry of mergers and clean-ups.
Credit evaluator Standard & Poor's warned last week that it was bearish on the short-term outlook for banks in emerging Asian markets, and noted that wealthier economies like Taiwan, Singapore and Hong Kong were also being affected by NPLs.
S&P said that, almost without exception, the levels of NPLs held by banks in emerging Asian economies were "hardening and, in some cases, starting to rise."
Charles Adams, an economic adviser at the Asian Development Bank in Manila, said well-capitalized banking systems with adequate provisioning "should be able to manage this increase in NPLs quite well."
"We would be most concerned about those countries which are still restructuring their financial systems in the wake of the 1997 to 1998 crisis. These countries have been making progress but have a long way to go in terms of rehabilitating their banking systems," he said.
"The slowdown is going to complicate things in these countries," he said.
Singapore's Deputy Prime Minister Lee Hsien Loong, chairman of the island's monetary authority, said Southeast Asian countries must address the huge loans still owed by the corporate sector by writing them off, or by foreclosure and bankruptcy.
"Banking sectors also need to be strengthened, with non-performing loans within the systems speedily resolved, and unsound banks cleaned up and re-capitalized," he said.
But restructuring will be tougher in the current environment.
"Definitely earnings will get hit. NPLs will go up and provisioning is going up. It's a double whammy in a sense," said Tay Chin Seng, banking analyst with ING Barings in Singapore, who noted that the most optimistic projection for a regional economic recovery was only in the second half of next year.
S&P has also cut outlook ratings on major Japanese banks, warning that "under the currently adverse operating environment, it is more likely that banks will face a faster growth of problem loans."
Japanese banks are under pressure to dispose of all non-performing loans in the next two to three years as part of a reform drive by Prime Minister Junichiro Koizumi.
S&P said that among the main victims of the 1997-1998 crisis, Thailand "has made the most disappointing progress in terms of recovery."
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