September 23, 2020: The transition from Libor benchmarks to risk-free rates (RFR) is unlikely to trigger near-term rating changes among banks in APAC, Fitch Ratings says.
However, it may over time alter competitive dynamics among banks active in the regional loan market, which could in turn influence our assessment of banks' profiles, funding and profitability in the medium term.
Quotes for all five Libor currencies are poised to be discontinued after 2021. Regulators have warned that the deadline for Libor's cessation will not be moved because of the coronavirus pandemic even though managerial attention has been focused on the crisis in 2020.
Domestic interbank offered rates and local-currency lending will not be directly affected by the change, except where Libor rates are inputs, including Singapore's swap offered rate, the Philippine interbank reference rate and the Thai baht interest rate fixing. In these instances, the Libor-linked benchmarks are being phased out or replaced.
APAC banks' floating-rate loans are most commonly denominated in US dollars, although yen loans also account for a significant share, concentrated mostly in Japan. The amount of lending affected by the Libor transition will be large. APAC banks' US dollar cross-border claims amounted to more than USD5 trillion at end-March 2020, according to data from the Bank for International Settlements (BIS). Much of this is likely to be based off floating rates, although loans that mature before end-2021 will not be affected by the transition.
Major banks in Australia, Japan, Singapore, Taiwan and Hong Kong – the regional leaders in US dollar syndicated lending – are likely to be the most affected. Cross-border claims data from the BIS similarly point to banks from these markets as the most exposed in concentration terms. Net cross-border claims at end-March accounted for 16%-40% of these markets' system assets, significantly more than other APAC markets, most of which have less than 5%.
The Libor transition will also affect regional banks' dollar funding. APAC banks in aggregate had about USD202 billion in US dollar floating-rate bonds and syndicated loans outstanding at end-August 2020, according to Bloomberg data. These liabilities are modest relative to the size of the banks' balance sheets and just over half of them mature before Libor's planned cessation. However, there are notable concentrations of exposure among banks in Australia and particularly Japan.
The migration of wholesale funding and lending to Libor replacement rates, which are transaction-based rather than anticipatory, may increase banks' exposure to mismatches in asset-liability maturities, rate reset periods and currencies. Under these circumstances, banks with surplus low-cost dollar liquidity – such as Singaporean and Taiwanese banks – could be better placed to adapt, compared with their dollar-deficient Australian and Japanese peers.
We do not expect the short-term impact of the Libor transition on earnings to be sufficiently material to change our assessment of bank profitability. However, the transition could act as a drag on a bank's earnings and profitability if it becomes structurally disadvantageous for the bank's dollar lending competitiveness in the longer term, which could in turn weigh on its standalone Viability Ratings.
Readiness for the Libor transition in APAC varies widely across the region and also within each market. A July 2020 survey from the Financial Stability Board highlighted that most APAC-based supervisory bodies have engaged with financial institutions and have a strategy in place to deal with the transition. It remains unclear how robustly banks have engaged with the process in some jurisdictions. However, major banks in Australia, Hong Kong, Japan and Singapore, which are among the most exposed to Libor, also tend to be better prepared.