In a recent report, Fitch Ratings says direct banking-system exposure to lending and investment in Russia and Ukraine varies across APAC but overall, the exposure is miniscule at 0.5% of total assets and thus unlikely to pose systemic risks. Certain jurisdictions such as Mongolia may have higher exposure, but strong commodity prices such as for coal may offset the risk. Despite attempts at ESG and sustainability, higher commodity prices would strengthen repayment capacity for APAC mining firms and agricultural producers.
Indirect exposures, including credit and market risks, may be more significant, Fitch Ratings says: "The war in Ukraine could lead to some revisions in our sector outlooks, which are mostly neutral to improving at present, based on our expectations of sector performance in 2022 compared with 2021."
Credit risks in for APAC may increase through inflation, supply chain disruption and higher interest rates. Economic growth in APAC could weaken, and banks are likely to face additional operational risks and costs complying with war-related sanctions.
"We think these developments are more likely to counter net interest margin improvements, and thus buffet profitability, in APAC banking systems than to result in meaningful capital erosion. Credit risks from the war may require additional provisioning, or delay reversals, that banks had previously anticipated," Fitch Ratings indicates.
Authorities in some jurisdictions may consider extending forbearance schemes established in response to the pandemic. "We believe this is more likely in markets where macroeconomic stresses are also rising due to Covid-19 outbreaks, such as in Hong Kong. This would alleviate near-term pressure on bank profitability, but could obscure underlying asset quality, especially in markets where forbearance has been in place for an extended period, such as in India and Indonesia," Fitch Ratings says.
The war may also add to pressure on EM exchange rates, especially in net commodity importing countries, as well as increase exchange-rate volatility, the report adds.
