May 24, 2024 (MLN): The outlook for Asia-Pacific (APAC) banking system operating environments (OE) is stable, although the scores Fitch Ratings has assigned across the 17 markets in Fitch’s coverage varies greatly from ‘aa’ to ‘ccc-’.
The OE scores in developed markets (DMs) are mostly in the ‘a’ category or higher, whereas emerging markets (EMs) scores are in the ‘bbb’ category or below.
The higher scores in APAC DMs reflect their greater resilience, supported by robust regulatory frameworks, typically higher sovereign ratings, and stronger economic fundamentals.
In comparison, APAC EMs' rapid growth and expanding financial inclusion present both opportunities and vulnerabilities for banks.
Our study shows that in addition to the differing resilience levels between EMs and DMs to economic shocks, Fitch's bank OE scores are closely aligned with their respective sovereign ratings.
This correlation underlines the substantial influence the drivers of sovereign ratings (such as stable economic fundamentals and sound policy frameworks) also have on the OE scores of banks.
Furthermore, sovereign ratings make up 40% of total adjustments in the evaluation of a bank's OE score across the globe, and in five of the nine APAC EM OE scores.
This emphasizes the intrinsic link between a market's economic health and its banking sector's ability to generate business volumes while managing an acceptable level of risk.
Fitch monitors banking system OEs and includes in its forecasts key changes to come over the next 12-24 months in assessing the risk of doing business for banks as well as score bank OEs as a crucial part of the ratings process.
This step is central in analyzing a bank’s standalone credit profile and assigning its Viability Rating (VR) as per Fitch’s Bank Rating Criteria.
