S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining S&P Global Ratings APAC Financial Institutions Quarterly Update Live Webinar and Q&A. My name is Gavin Gunning, Senior Director and Sector Lead for the Global and Asia Pacific Financial Institutions Ratings practice, and I'll be moderating this webinar for you today. So before we begin, allow me to take you through a quick overview of the web console on your screen and a few housekeeping notes. This webinar comes with audio and accompanying presentation slides. You can submit questions at any time during the webinar via the Q&A box. It's located on the left-hand side of your screen. Also on the left is the resource part where you can download a copy of the presentation slides and the latest report we published on this topic. Additionally, we invite you to complete a short survey at the end of the webinar. We'd really love to hear your feedback, and it helps us to continue shaping relevant content for you. And please do note that this presentation is not intended for and must not be distributed to retail clients in Australia. And finally, some of our speakers today are participating in this webinar remotely, as many of you are probably as well, so please do excuse any unforeseeable technical disruptions during the slide session. If you do face any technical issues, please let us know via the Q&A box. So moving on, I'm pleased to welcome my colleagues from the APAC Financial Institutions Ratings team who will be joining me today on this webinar. They are Andy Chang, Senior Director Analytical Manager for Taiwan; Ming Tan, Director and lead analyst for the Greater China region; Fern Wang, Director and lead analyst for Hong Kong; Chizuru Tateno, Director and lead analyst for Japan; Daehyun Kim, Director and lead analyst for Korea; Geeta Chugh, Senior Director and sector lead for South and Southeast Asia; Ivan Tan, Director and lead analyst for South and Southeast Asia; and Nico De Lange, Director for Australia and New Zealand. So before we do move on to Q&A -- excuse me there. I would like to offer you a few opening remarks. And then my colleagues and I will be very pleased to take on any questions you may have. So moving on to the next slide. The first point I'd like to note today is the current ratings and outlook distribution for the Asia Pacific financial institution sector is, in fact, in pretty good shape, although there clearly are a number of key risks on our radar screen. We'll cover some of those today. For banks, as at the end of last quarter, the vast majority of bank ratings were stable. Noteworthy is the net rating outlook bias was a positive 9%, that is positive outlooks outnumbered negative outlooks. During the coming quarter, however, we expect positive outlooks and negative outlooks to be much more balanced. Recently, a number of Taiwanese banks were actually upgraded with their outlook revised to stable from positive. This will reduce the numbers of positive outlooks. Also noteworthy is the net outlook bias for APAC banks has progressively skewed from a significant negative position during the heights of COVID-19. During the fourth quarter of 2020, the net outlook bias was actually a large 22%. But as economies across the region have rebounded and despite there being numerous remaining challenges, bank outlooks have progressively stabilized. From an overarching Pan Asia Pacific perspective across the 19 jurisdictions that we cover, banking jurisdictions where we have the most concerns currently are those where we identify negative economic risk trends in our banking industry country risk assessments. Those jurisdictions are Thailand, Malaysia and Indonesia, and for different reasons, New Zealand. For China, we believe that lower growth in systemwide leverage and property prices will ultimately assist banking sector creditworthiness in the long term. In the short term for China, however, banks will have to contend with significant stress, that is stress impacting the property development sector and uncertainties concerning COVID-19. For the other 14 jurisdictions across Asia Pacific, economic risk trends as they impact banking sector creditworthiness are broadly stable. So moving now on to the next slide. Since the outbreak of the Ukraine crisis in February 2022, our analytical outlook concerning the likely eventual impact on Asia Pacific banking is relatively unchanged. For Asia Pacific banks, the lack of material direct exposures to Russia and Ukraine counter parties should soften the impact of the conflict. We do remain very cautious, however, towards actual or potential secondary economic risks or other risks because of the conflict and obviously, the toll that these risks could ultimately take on banking sector creditworthiness. Direct exposures to Russia of Asia Pacific banks do appear low and broadly manageable in the context of current ratings and outlooks. Total Japanese banking exposures to Russia were a low $9 billion as of September 30, 2021. Now that's less than 0.2 of 1% of banking assets. Direct exposures and other BIS reported jurisdictions, notably including Korea, Taiwan and Australia are very small. We believe that direct exposures of Asia Pacific jurisdictions where BIS numbers are not publicly reported but includes China and India are also low. We also think these exposures are unlikely by themselves to have a material negative impact on bank's asset quality. So primary concerns are that the secondary impacts from the Ukraine crisis are hitting the real economy, thereby hurting bank borrowers in some jurisdictions and in turn, bank's asset quality. We expect the impact, however, could eventually be some -- we do expect the impact could eventually be somewhat uneven across the 19 jurisdictions that we cover. We note that recent negative revisions to GDP in numerous jurisdictions as announced by S&P Global Ratings leading up to and at the time of our quarter 1 2022 credit conditions report. Further, higher energy costs, in particular for importing jurisdictions that includes jurisdictions like India and Thailand also may ultimately challenge bank's asset quality. The banking jurisdictions where we have most concerns currently are those I mentioned earlier, where we already identify negative economic risk trends. These include Thailand, Malaysia and Indonesia. So shall we now move in to the next slide? As of April 27, 2022, S&P Global Ratings has taken 72 rating actions on financial institutions globally in the wake of the Russia-Ukraine conflict. Noteworthy is that all of these rating actions, both banks and NBFIs, have been based in Russia or in neighboring banking jurisdictions very close to Russia. To date, there have been no direct rating actions on financial institutions because of the Ukraine crisis in the Asia Pacific region. And moving on briefly to the next slide. This slide is primarily a recap slide. It outlines the 5 key risks for the global banking sector that we identified as part of our global banking outlook published in December and also our Asia Pacific banking outlook, which we published in January. And these 5 key risks still hold true in terms of the global banking sector. They are that the economic recovery envisaged in our base case stalls that we have seen some of that impact already because of Russia-Ukraine. Secondly, high debt leverage, clearly an issue for Asia Pacific banks, in particular, leverage associated with the government and corporate sectors, disorderly reflation and the potential disruption that, that could bring upon banks. By contrast, if inflation is orderly which is currently reflected in our economic forecast, that should have much less of a negative impact for banks. Fourthly, property sector challenges. These are playing out very differently across the region. China has obviously been in the spotlight recently. And the final one is a bit of a duality about this one. The low rates environment leading into this year, we saw that as a continuing challenge for banking business models. We still see banking business models has been challenged, and that's albeit that there's an inflationary impact across much of the region. So much just leave it there in terms of introductory comments. We're now going to turn to the questions submitted to the audience. I would like to remind you that you can send us your questions any time through the session via the Q&A box. It's located on the left-hand side of your console.

So we'll open up our questions. There's a couple of quite macro questions we've received. So we may start with those. The first question, I'll throw this one to you Ming and perhaps if you could pass on then to Geeta for a comment on India and then Ivan for South and Southeast Asia. The question is, do you expect profitability to remain constrained or back to pre-pandemic levels due to likely improvement in the operating environment? Or will profitability still be challenged. Over to you, Ming.

Thanks, Gavin, and thanks for the question. Now on China, we see the profitability to remain constrained. And the reason for this is that, as you know, China is actually seeing a resurgence in COVID. Lending rate actually been cut in China. So this is different from what's happening across most other markets. And so this lending rate is actually pressuring the net interest margin for the banks. Also because of the resurgence in COVID cases, the government is starting to continue to ask the banks to support businesses through efforts like cuts to the fees that you charge on businesses. So this will lead into the noninterest income growth as well for the banks. On the positive side, the buffer that the banks have built up, particularly on provisioning has been quite high. So we do expect that there will be some release in provision coverage over the years and this decline in credit costs will help to mitigate the impact on profitability because asset quality is likely to remain under control at this point. I'll stop here and pass it on to Geeta.

Thank you, Ming. Similar to China, I think India also has a few unique characteristics, as many of you would know. India entered the pandemic from a position of weakness. The weak loans for India were extremely high. They were in a double-digit number. We were expecting a recovery, but that recovery momentum slowed amid COVID though the [ extent ] has been on a reasonable footing. And the weak loans, which were in double digits have now come down, and we project that they would go down to 5%, 5.5% in a couple of years. So it's a reasonable improvement that is happening in -- for the asset quality of Indian financial institutions. I think we still are somewhat concerned about the uneven economic recovery and what it might mean for micro and small and medium-sized enterprises and some small portfolio in the unsecured retail space, including microfinance. So we still remain concerned that there may be residual risk in some of these segments. Nevertheless, given significant improvement in corporate financial health, reasonable deleveraging that has happened over the last few years, we believe that the credit costs will continue to decline and will support the earnings of Indian banking sector. We expect that the bank earnings will return to more than 1% return on assets by next year despite the fact that there has been very subdued earnings in the last few years, lower credit costs, pickup in loan growth, rising interest rates should help in the turnaround. And even sale of NPLs to bad bank would also lead to one-off gains and provide an upside to the banking systems profitability. So overall, we'll be a little more positive on Indian banking sector compared to what we were a few years back, though uneven economic recovery, some risks from inflationary trends could slow down the recovery pace for Indian banks. With that, I'll pass it to Ivan for your comments on Southeast Asia.

Thanks, Geeta. So for Southeast Asia, it's a bit of a mixed bag. On the more positive end of the spectrum, we got the Singapore banks and to a lesser extent, the Philippine banks. Singapore banks have returned to pre-pandemic level of profitability. So the credit costs have more or less normalized as well. We are looking at some potential profitability upside, right, because of the Fed rate hikes, which will translate into higher net interest margins for the banks. Philippines is on a recovering path. Given the current trajectory, we think that by end 2023, they will reach the pre-pandemic, i.e., the 2019 level of profitability. Now the laggard in the region would be in highlighted that will be Thailand and Indonesia happen to have a negative -- or rather, we recently downgraded the Thai banks 1 month back, and we have a negative outlook on the Indonesia and the Malaysia banks, right? So for Thailand and Indonesia, in particular, while a lot of investors, I think COVID is a thing of the past, which if you look at the caseload is. But for the banking sector, the level of COVID restructured loans is still quite high. Thailand case in point, they have a lot of tourism-related industries, they simply don't have the cash flow to repay on their loans, right? So as a result, it's grappling with around 11% to 13% level of restructured loans. Many of these are either on payment holidays can reduce interest rate at this stage. So the profitability recovery on that part of the portfolio has not been great. The other thing is that banks have also proactively continued to make provisioning for these loans, right? So on the top line, the revenue has been impacted because high level of restructured loans. In the post provision like the profitability is impact, right, because of the elevated provisioning cost they have to sell side for this loan. So at least for Thailand and in Indonesia, both of which we have the economic trend on our banking system, negative trend, we are forcing a protracted recovery earlier by 2024, at best we're stretched up to 1 or 2 year beyond that base case. So yes, that's the brief overview for the Southeast Asia Bank. I'll pass it back to you, Gavin.

Great. Thanks very much, Ivan. Lots of other questions coming through in South and Southeast Asia. So we'll come back to you shortly, Ivan. We have a few questions here on ESG. So we might get -- cover these off now. So Andy, we'll throw a couple of questions to you. First question is which regulators are more advanced on ESG issues?

Okay. Thank you very much, Gavin. I think, first of all, in our observation, different regulators does have different initiatives. For example, some more advanced regulators like in Hong Kong, Singapore, Australia, Japan, even China, they already tried to provide guidelines to help banks to manage climate-related risks or even set aside carbon emission targets. However, on the other hand, there are also some regulators under discussions for this because in certain emerging markets, they need to balance out the ESG initiative as well as the economic development targets. So I think it is very difficult to judge which regulator is more advanced in this regard. However, I think one common thing we can comment despite the region has diversity, due to lack of center regulation, but all regulators are accelerating the ESG policies and initiatives. We believe this will be the common trend in the coming 2 years. Thanks. Back to you, Gavin.

Right. Thanks very much, Andy. We've also got another question for you here, Andy. This question is, could you please provide some comments on the focus on ESG in relation to sustainability and the regulatory environment?

Thank you, Gavin. Yes, I think, yes, regulators does have a big say in play regarding the development of the ESG and sustainability in Asia Pacific. I think in our observation, the common feature that most regulators already set aside a requirement of banks for their disclosure and transparency to the market. while some are more advanced already requesting to release [indiscernible] timing reports, some regulator may only provide percentages based on the countries, the specific needs. But however, I think one common thing in all banking regulator here is trying to encourage or even set aside minimal requirements focusing on disclosure and transparency. I think this is the key initiative based on the current regulatory environment. As we covered in previous questions, while there are some differences, we believe the initiatives and new policies will increase very rapidly in the coming years. And I think that is a good thing for the facility development in Asia Pacific. Back to you, Gavin.

Great. Thanks very much, Andy. We've got quite a few questions coming through on interest rates and currencies and the impact on banks. So we'll share this question around as well. The question is, how does U.S. interest rate hike affect the credit rating of Asian financial institutions? So Chizuru, perhaps pass over to you first off for a comment on Japan, then perhaps Daehyun for a comment on Korea and Fern for a comment on Hong Kong. Over to you, Chizuru.

Thank you for the question. For Japanese banks, especially data banks have meaningful investments, both in securities investments and loans in overseas market. And the banks have the largest overseas exposure in the United States. And so for the securities investments, actually for Japanese banks, for [ Meta Banks ], 30% of fixed investments are foreign bonds, so the used interest hike will negatively affect outstanding foreign currency bond portfolio because of the increase in unrealized losses. So to manage or control risks or to manage not to have further potential losses and to maintain healthy securities portfolio, the banks will rebalance their portfolio by realizing some of the losses from those bond investments. And also, if the funding -- 2023 funding cost increases, it could be a fact that we push banks net revenues from securities investments. And besides the 40 bond investments, Japanese tax also have a large equity investment portfolio. So the grouping equity price following the interest rate hike, we reduced the unrealized gain on equity portfolio. And for the loan portfolio for major banks, overseas loans amount for about 30% of total loans that the impact on overseas vending business will not be significant because most of overseas won't carry a market-based interest rate. So the impact of hike in investment rates will be generally a neutral for banks. And also, the loan portfolio, I mean, which are mostly long-term assets are funded by deposits and long-term funding. That's all. Thank you.

Okay. I'm going to cover for Korea. In short, with the Korean bank, to be able to maintain their credit works from the U.S. interest rate hike, in terms of profitability, the rising interest rate will likely be more favorable for Korean banks' operations. The expansion of the net interest margin will likely outraise some pressure arising from the credit losses. Despite the pandemic, Korean banks' managed their asset quality very well. Banks' nonperforming asset ratios improved to the historical low level despite COVID situation. Going forward, we expect the banks' loan growth to be moderated, which underpins the banks' overall adequate capitalization. Additionally, despite a potential increase in global financial market volatility, we expect Korean banks to be able to maintain their foreign currency funding and liquidity profile. This has been already demonstrated in 2020 during the outbreak of the pandemic. We believe the Korean banks have a record of foreign currency risk management, and close regulatory oversight is also in place. I will stop here and pass this to Fern on Hong Kong.

Thank you, Daehyun. For Hong Kong, U.S. rate hike is likely to drive net interest income for Hong Kong banks. And for this year and next year, as Hong Kong dollar is backed to the U.S. dollar, we see meaningful boost to the bank revenue, and net interest income were likely to return to the 2019 level by next year. It is beneficiary to especially banks with higher U.S. dollar exposure as Hong Kong dollar rate is likely to [indiscernible] the U.S. dollar rate hike due to the ample liquidity in the market. And it will be less beneficial to banks with larger RMB exposure as China shows a divergent monetary policy compared to the U.S. At this point, we do not see initial rate hikes to have significant impact to the current credit quality of the bank. I'll just stop there, and I'll pass back to you, Gavin. Thank you.

Right. Thanks very much, Fern. So Chizuru, this question back to you, a very topical issue this one. For Japanese banks, will further JPY depreciation, that is from the current level of about 130 hurt mega banks' common equity Tier 1 ratio as foreign currency assets would be inflated in JPY terms? Do mega banks hedge FX impact from a capital perspective?

Thank you, Gavin, and thank you for the question. For the yen depreciation, yes, as you mentioned, the regulatory risk-weighted assets will increase because of the yen depreciation. But there are some offsetting factors. I think the first one is the bank's capitalization level is CET1 ratio is quite high in to absorb the rapidity or increase in risk-weighted assets. And also, if yen depreciates and then the banks, we have some benefits in their revenues or profits. So as long as they generate overseas income and then they will accumulate more capital through the [indiscernible] . And also, I think some of the impact should be offset by the translation adjustments as well. So to the banks that do not disclose their hedging impacts from a capital perspective, but I believe the banks are using hedging for the -- to manage their risks. And also, as I mentioned, there are some offsetting factors or buffers to maintain healthy capitalization. Thank you. Back to you, Gavin.

Great. Thanks, Chizuru. Next question is for Nico. But just before passing over to Nico. Just a quick reminder, if you'd like to ask a question, we'll do our best to get through all of the questions or as many as we can. Just as a reminder, please, just log your question on the platform. It's located on the left-hand side of your screen that you're looking at now. So Nico, this question is for you. For Australian banks could the higher inflation slow down system-wide deposit growth as consumers have more -- have to spend more and reverse the improvement in bank funding profiles? Over to you.

So if one looks at the Australian banks, the funding profile over the past 10 years has been an improvement. The improvement is cured both on a deposit funding as well that has increased. And the systems' reliance on external also funding has decreased. And in part, the reason why was drawing that was posed to the GFC, it was highlighted as a risk. And then also in terms of regulations, the LCR, liquidity coverage ratio, and the net stable funding ratio that was introduced. Currently, at the moment, and if one looks at the system and if one looks at deposit funding, the in terms of savings deposits and offsite accounts, households had to build up quite a significant buffer. And I think one could expect that when inflation starts picking up and disposable income becomes a little bit less, that could have a slowdown effect on the deposit funding. I think from a systemwide funding side or perspective, the -- probably the -- to watch out a little bit more for is what's going to happen on the external wholesale funding side. And it is important thing that needs to happen there. One is on the term funding facility that needs to be replaced as well as the commited liquidity facility that will fall off and the banks' need to raise liquid assets for that. And the question is, how is that going to be funded, and how are banks going to raise funding for that, and are they going to tap into the offshore markets to run and set that funding. So I think that's the important side that we need to look at for the uncertainty around the systemwide funding assessment. Back to you, Gavin.

Great. Thanks, Nico. Very clear. Ivan got a number of questions here, actually in your patch. This question has come from the Philippines. So we'll presume it's referring to the Philippine banking system. The quick question is, how will the key risks impact banks in terms of consumer lending that is auto, housing cards and personal loans and lending for microfinance. Over to you.

Yes. Thanks. So basically, the Philippine banks, right, around 80% to 85% of their loans are in the corporate loans. And the consumer and SME loans is a much smaller proportionate in our loan book. And if you talk to the larger Philippine banks, they have been trying to grow the consumer, the retail and SME books, right, simply because the use and the growth potentially stronger there. It kind of hit a bit of a brick wall during the COVID 2020 and 2021. And I think going forward, the bank are trying to definitely try to revitalize the growth in the consumer space really for diversification and new enhancement purposes. But against this backdrop, right, you have the Fed rate hike. You've got a very high inflation rate as well. So the Philippines, I think the inflation -- the latest inflation is 5% at this point. That's higher than the Central Bank target the inflation bank, right, 2% to 4% is what the Central Bank is comfortable with. So the reason why I'm raising this point is because we had initially thought that the interest rate will stay low. But given the latest development, our forecast is that there will be at least a 50 basis point rate hike. Base case is that it will take place in the second half of this year. But if you look at the latest inflation data that we see, right, there's a possibility that maybe that will be a 25 basis points rate high in the first half. So what this means for the diversification, new hand strategy of the Philippines Bank, which is really to grow their consumer loan book, there might be a bit of a roadblock, right? Because if the interest rate high take place, then the cost of borrowing will go up. And this might deter a consumer from -- maybe present a roadblock to the bank in terms of growing that book that they have. So I think it's a bit of a dive -- if the interest rates go up, yes, the net interest margins will benefit as well because the banks will obviously reprice on the loan. But in terms of the volume side of things, right, in terms of the high single digit or even in some banks, the double-digit consumer lending targets that they have. I think it might be harder to hit the volume targets that they have set simply because of the rising interest rate environment. I'll stop there. Thanks, Gavin.

Great. Thanks very much, Ivan. So the next question is covering a number of jurisdictions. Malaysia, Indonesia, Thailand and the Philippines. I think you've probably covered the Philippines, Ivan. The question is, what are the levels of loans under moratorium percentage of total loans in Indonesia, Malaysia, Thailand and the Philippines? What impact does S&P see on the asset quality in these countries. Over to you.

Thanks. So we got a negative banking industry trend for all these 3 by banking systems, Malaysia, Thailand and Indonesia as well. Philippines, we have revised it to stable at the beginning of this year. For Indonesia, Thailand and Malaysia, it's still quite high. Thailand is about 13% loss under moratorium for restructured loans, about 11% in Indonesia and 15% from Malaysia. Now the challenge is that these loans, right, they are under either a complete payment holiday, i.e., no interest or principal payment or some sort of cash principal, the deferral and reduced interest payment at this stage. Now the regulators have a lot of banks to classify these loans as a performing loans. But the very nature and despite the form, the substance of this law is that the borrower has difficulties repaying on their loan, right? That's why they need a moratorium and that's why that's a principal the deferment and reduction of the interest payment on this model. So the golden question, right, the analytical challenge for us is to be mean when this restructuring expires next year or by 2024, what proportion will transition to NPL, right? So realistically, depending on what the -- how the economic recovery plays out, that is going to be a key determinant. Our base case, at least for Malaysia and Indonesia at this point, judging by the trajectory of the economic recovery is of the poor restructured loans, 90% should be fine, right? Another 10%, despite all the assistance that is provided by the bank, they will still be unable -- they still not have the cash flow to repay on their loans, right? So that will represent maybe between a 1% to 1.5% increase in the nonperforming loan in the banking system there, which for the rating level that they have is still fine. But nevertheless, that's why the negative outlooks there, right? Because it represents downside risk to the underlying asset quality of the bank. Now Thailand is interesting. Thailand, we downgraded it last month. It has 13% of restructured loans. Now the nature of the restructuring is such that around half or more than half of this restructured loans is the deep and long kind of restructuring, right? So we are not talking about a 6- to 12-month extension of the loan. A lot of these loans are tied to the hotel tourism and hospitality industry, and tourism in Thailand has not recovered yet, right? So they don't have the cash flow to repay on their loan. But if you look at the nature of restructuring, it's basically in the more extreme cases, you've got no principal payment for 2 years, expansion of maturity by 5 to 10 years, right? So this is a very big count of restructuring. We look at the substance of the loans, right? Should these loans be classified as stage 1 loans. So we make an analytical judgment now, right? Some of it probably has to be stage 2. And if not for some of the regulatory dispensation, it might even have been an NPL at this stage. So we look past the form, we look at the substance of the loan. And that was what? That was the key reason driving our decision to lower assessment of the Thai bank system by 1 notch. Yes. So that's the high overview. So I'll stop there. Pass it back to you, Gavin. Thank you.

Great. Thanks, Ivan. Very clear answer. Thank you. There was also a question on -- another question on Thailand about secondary impacts of Russia-Ukraine, but I think you've already covered that one so we'll consider that one as answered already. So Daehyun, the next question is on Korea, so I'll throw over to you. The question is, in Korea, several Internet-only banks have been innovative and quite aggressive in their business in the last few years. How will this impact the traditional local bank's profitability and market share? Over to you.

All right. Thanks, Gavin, for the question. Yes, as you correctly pointed out, some of the Internet-only banks in Korea have been growing relatively quite fast. And actually, their financial performance has been also relatively successful, especially compared with other Internet-only banks in other countries. Some of the Internet banks in Korea have already made a breakeven and also they're making progress now despite very short history. But in terms of the business presence in the market, I would say there is still a big gap in terms of the market share in loans and deposits. So for example, nationwide commercial bank -- the 4 major nationwide commercial bank have about 10% of the loans or deposits market share out of the total deposit-taking institutions in Korea, while the 3 Internet-only bank combined market share still remains low 2%. So there's obviously some gap in terms of business presence. In terms of profitability, while the Internet-only banks if they are aggressive pricing on loans or deposits, it could hurt to some extent. But given the business scale, it won't be as significant as the undermining the traditional banks' profitability significantly. And also, I think the traditional banks are also introducing the online product and enhancing their operating efficiency and so on. And also amid the rising interest rate, we believe that not only the Internet-only bank, but also all traditional banks are benefiting from the rising interest rates, which increased their net interest margin. So going forward in the mid- to long term, if those Internet-only bank successfully grow their business and increase their scale, we could present more material competition or pressure to the [ trading Asian Bank ] but it is not in the coming 2 years at least. And lastly, one thing more to add is that the Internet banks are required to increase the portion of loans to mid to low credit profile customer loans, especially the senior unsecured loans and also the risk management to be tested amid this the higher financial market volatility. With this area needs to be seen for those Internet-only banks. I will pass back to you, Gavin.

Great. Thanks very much, Daehyun. So Geeta, we'll throw these 2 questions over to you, both on India. The first question is, can you provide some highlights of the interest rate hike on Indian banks? Over to you.

Thank you, Gavin. So the Central Bank of India has recently increased interest rates by about 40 basis points. We believe that the impact of it on the banking system will be relatively muted. And the reason for it is, firstly, the Indian corporate sector has been continuing to deleverage its balance sheet, continued free cash flow generation, more prudent financial policies and a generally favorable operating outlook has strengthened the credit profiles, particularly of the larger Indian companies. So we are less concerned about the ability to absorb a moderate increase in the interest rates. Having said that, while the refinancing risk remains low, rising interest rates will cause funding challenges for weaker issuers and some borrowers at the margin might not be able to repay and may use -- and may slip at the margin. In terms of household, generally speaking, the household leverage remains fairly low in India and even in a regional context. And we believe that retail should be in a reasonable position to absorb a moderate rise in interest rates. Therefore, overall, we expect that while some borrowers at the margin might face some pressure, but it will only be a very little increase in credit costs. Most of the borrowers will be able to take a moderate increase in the interest rates easily. It will have a positive impact on the net interest margins of the balance sheet though there might be some -- that the trading gains will come down from -- for the banks as banks have large government securities on their balance sheet. So overall, we do expect that for Indian banks, while there will be some bit of a NIM improvement, some decline in trading losses and some in credit is in credit costs, but overall, it will not make a material difference to Indian banks' earnings as long as the interest rates increase is moderate. Modest increase is our expectation at this point of time.

Great. Thanks, Geeta. And for the follow-up question, given high inflation pressure/rising inflation in India, do we see any ratings impact or change in the outlooks.

At this point, we do not see any change in -- at this point of time, we do not see any negative pressures on most of the ratings for India. Higher inflation would result into higher interest rates. And at this point of time, we do expect a moderate increase in the interest rate going forward. Importantly, India is one of the large importers of crude oil. And substantially higher energy prices could drive up India's current account deficit, particularly those price levels are maintained over an extended period. India has a very sound external metrics with very significant foreign exchange reserves, close to $600 billion. And government, though the government -- and also the government's external debt position is very limited. So we believe that currency and capital slight risk is relatively low risk for India. And therefore, we do not expect it to be a major issue for India. The key issue will be if inflation exceeds our expectation, then the interest rate hike could be somewhat higher than what we are building into our projections and may have some pressure on some borrowers. And at the margin, the ROA improvement, which were expected to go beyond 1% could be somewhat muted. But we believe -- there is a reasonable cushion in bank earnings, and therefore, we do not see any downside risk in any kind of an orderly increase in inflation and interest rates for India.

Great. Thanks very much, Geeta. Very clear. Ming, we have 2 questions here for you on China. The first question is how has the stress in China's real estate sector impacted the bank's asset quality? Do we expect any further downside on the banks from property developments? Over to you.

Yes. Thanks, Gavin. On property, we do expect the reported NPL to remain stable in China. Recent PBOC data and the bank results have actually shown that even if you see the real estate NPL tick increase that the overall bank liability actually do remain quite stable. And the reason for this is that there's diversification concentration limits. So the overall impact at the bank and the system level is actually quite manageable. In our base case, we do expect most of the property development loan stress. They will show up as special mention loans or other problem loans that don't require high levels of provisions. And the reason for this is because most of these ones are actually very well collateralized. Looking forward, we do think that the policy crackdown on the housing market has bottomed, but you'll probably take several quarters for the regulatory easing to feed through to the physical market. As such, we do expect home prices this year to see a modest decline, and there could be some short-term challenges. But from a long-term perspective, this is actually good in terms of preventing the property bubble from forming again. So I guess the short answer is that the overall asset for the -- is overall quite well managed, and they should be able to survive this property tightening cycle. Back to you, Gavin.

Great. Thanks very much, Ming. Very clear. Another one for you, Ming. The question is, how will China's zero-COVID policy impact the Chinese banks given the resurgence in recent months? Over to you.

Yes. Thanks, Gavin. This is actually quite challenging for the economic environment for China at this point. And Shanghai, I guess, is a very good example of that. So we do think that for bond loans in China will pick up again this year after falling last year when the economy rebounded. So there will be some challenges on asset quality for the Chinese banks. But we do want to point out that back in 2020, when China's GDP was actually as low as 2%, the Chinese banks for bond loan experience was actually better than expected. So they have been through this and seem to be able to manage this with a lot of policies in place such as targeted lending for borrowers that are vulnerable to the lockdown as well as moratorium on the regulatory classification of bad debt. So overall, we do think that the Chinese banks can manage this, and that's why we are projecting credit cost to actually fall or stabilize, given that the provisioning level is actually quite high. Having said this, this is clearly a very uncertain environment, and it's still an evolving situation. So we'll continue to monitor this. But overall, we do think that at this point, the risk seems to be containable. Thanks. Back to you, Gavin.

Great. Thanks very much, Ming. Ivan, we're back to you a couple of other questions here. The question is, with the expectation of interest rate rising and the Ukraine war situation, how real is the recession risk in South and Southeast Asian banks, Singapore in particular, also given that the inflation rate is way higher? Over to you, Ivan.

Yes. Thanks. So for Singapore banks, we don't think that the recession rate is high. If you look at the fundamentals, they are quite strong. They have a Tier 1 ratio of between 13.5% to 14% for the large 3 domestic banks that we rate. The liquidity position is at an all-time strength, right? If there's one good thing that came out of the COVID pandemic on the last 2 years is that the savings, the amount of current net savings deposits that these 3 banks have accumulated is at an all-time high. So when you think about how the dynamics of things work with a rising interest rate and by environment, Singapore banks on the length of things, they will get to reprice outwards their loans in tandem, but their funding costs will not go up as fast, right? Because the CASA of the current savings deposits, the interest rate on those, regardless of what the interest rate environment is, the funding cost on those retail deposits, CASA deposits that they will stay low. So I think the potential for upside margin expansion is quite high. Our own forecast is that if you look at the Singapore banks, they are around 1.5% net interest margins at this point. The first quarter results, you can see basically a 3 or 4 basis points increase, right? And that's the first quarter of this year. If they continue this trajectory and assuming that, there's another 50 basis points is very high. I think they might well be well on their path to return to between 1.8% to 2% net interest margins by end of 2024. On the other hand, right, the downside risk of the rising interest rate environment is that the repayment capability our borrowers might be stretched, right? And if that is accompanied by increase in nonperforming loans and provisioning cost, depending on how bad that is, that can whip up any potential upside from the higher net interest margins that they earn. Now for Singapore banks specifically, we don't think that's the case, right? If you look at -- the economic recovery is quite strong. The unemployment rate is low. And while our base case forecast of a 50 basis point interest rate hike seems to be higher. You have to bear mind that the interest rate in the last 2 years has been extremely low. It is at an all-time low, right? So this is not really a very sharp increase in interest rate per se. This is more or less a normalization, right, from the ultra low interest rate environment that we had. So base case, I think capital is fine. Liquidity is a strength. Rising interest rate is a [ double ], but I think one that the Singapore bank will benefit from because of how their funding structure is and also really the economic and financial fundamentals, right, in the household and the corporate space is quite strong. So I don't think that we will see any material increase in delinquency from a 50 basis point rate hike. Thanks, Gavin.

Great. Very clear, Ivan. And one more for you, Ivan. The question is, given the economic reopening in Malaysia in retail loans exit moratorium, does S&P Global see Malaysia's bank's economic risks to have reduced?

Yes. So of the 3 banking systems that we have on negative banking system trend, we got Indonesia, Thailand and Malaysia. For Malaysia, right, the restructuring, you're right. Most of the from Moly, which is why they call their restructuring scheme actually ended in January this year, right? By the way, nonperforming loans works, right, is that you need to wait for the restructuring and then because NPL is a 3 months past due, right? So Jan 31st is when that restructuring ends, right? All you need to show on the balance sheet, you will have to wait until a April before any of those weak restructured loans were transitioned to NPL. So just looking at the first quarter results will not be very constructive at this point, right? Now our base case is all at 15%. Majority goes to the lower-income household. Some of these restructured loans go to SMEs. Our base case is that 90% should be fine, right? There will be a maximum 10% that were transitioned to NPL so the figure is not high. The nonperforming loans in Malaysia is actually quite low. It hasn't really meaningfully increased in the last 2 years because of this restructuring scheme, right? So potentially from a 2% NPL, you can maybe see increase to 2.5% or 3%, right? So in the rating level that we have, which is between the BBB+ and the A- rating category, that's still a tolerance, right? So if this base case plays out, which I expect to be the case, then the rating on Malaysia banks should be fine. So just to be clear, we've got 3 banking systems on a negative trend. Malaysia's restructuring scheme is the first one to end, right? So from a timing perspective, I think your observation is right on that. If there is going to be a recovery, we are looking at long recovery for Thailand and in Indonesia as well. But for Malaysia, it will most likely or this can be the fastest of the 3. Yes. Thanks, Gavin. I'll stop, passing back to you.

Great. Thanks very much, Ivan. Just one really quick question here, which I'll take. The question is on ESG, and it's on the topic of ESG. Does credit rating agencies factoring ESG and the rating methodology? The answer to that question is yes. And what we can do is we can provide you with a copy of our ESG indicator report for the Asia Pacific financial institutions or for the banking sectors, which was published in quarter 1 this year. It's quite a comprehensive report. So hopefully, you'll find that one helpful. So Geeta, back to you. There's a couple of questions here on India. First one is what will be the impact on liquidity in India. There is CRR increase. Over to you.

Thank you, Gavin. So India has recently increased the cash reserve ratio by 50 basis points to 4.5%. Now what it means is that it will have a reasonable impact on the liquidity. It will absorb roughly about [ 870 billion ] of system liquidity will get sucked out. Having said that, India has been in a surplus liquidity situation for a prolonged period of time. And we believe that this will not have any material impact on the overall system liquidity. It will have an impact on the bank's margins though. Any CRR in excess of 3% that the banks have to maintain with RBI is noninterest bearing, and therefore, bank margins would get eroded by 4 to 5 basis points. Though, as I said earlier, because of interest rate hike, there is going to be an overall NIM improvement. Net-net, with the combination of increase in repo rate and CRR hike, but it will still be NIM accretive for Indian banks. There will be minor impact on the liquidity, but I think it's a conscious part of RBI strategy to reduce the system liquidity, address inflation. We still think there is sufficient liquidity in the system, and it's not going to be a concern for Indian banks. Or for that matter, large borrowers as well, I think, there is sufficient liquidity in the system.

Okay. Thank you, Geeta. And next question also for Geeta, what will be the impact on midsized banks? Will they have any liquidity challenges.

Indian banking sector is dominated by government-owned banks, which account for about 70% of the banking sector. Now these banks have very strong liquidity profile. Most of them maintain loan-to-deposit ratio at much lower than the system as well, which could partly be due to lack of good lending opportunities. We could also attribute some of it to inefficiency, but they have been -- but they maintain high loan-to-deposit ratios. We don't think it will have an impact on the larger government-owned -- large to midsized government-owned banks. Even the top tier private sector banks, which are, of course, midsize in Indian context, they have good deposit trailing franchise, and they should not be impacted. The smaller, weaker players are getting marginalized in India. We are continuing to see a polarization where SBI top-tier private sector banks are continuing to gain market share, and we see some of the weaker banks getting more and more marginalized. I think that trend will continue. Some of these measures might just precipitate it a little faster. But overall, as far as the large and efficient mid-sized banks are concerned, we don't think there's going to be any impact on those banks. It will be more a financial for weaker smaller entities. Back to you, Gavin.

Great. Thanks very much, Geeta. There's a couple of other quick questions that are a bit more macro that I'll quickly respond to, and then we'll be wrapping up. The question is which countries in their banking sectors are relatively more shielded against macro and geopolitical headwinds? Hopefully, the sort of flavors already come across in today that of most of the jurisdictions in Asia Pacific, even though they're clearly facing numerous headwinds and numerous key risks that 14 out of the 19 jurisdictions we cover are actually on economic trends at stable. So the jurisdictions which we've already covered in this webinar, especially in Malaysia, Thailand and Indonesia, which are on negative, perhaps that's the flip side of this question. They're the ones that would be more vulnerable. There's also a question here on property prices across the region. Property prices are impacted by higher interest rates, which banks are the most exposed and which are relatively more insulated Well, I think really in developed markets across Asia Pacific, Australia, New Zealand, Hong Kong and Singapore have some vulnerabilities associated with them. How S&P looks at this is really in terms of some macro stats around household debt to GDP, also taking into account house price increases. And to various extent, those jurisdictions are perhaps more vulnerable compared with some others. They also happen to be jurisdictions with very low-risk institutional frameworks. We have a lot of confidence around the nature and quality of regulations and very sound competitive dynamics environments as well. So while the risk may be a little higher in those jurisdictions, the capacity to manage risk is also higher. So just offer you those comments on that question. We now pretty well need to wrap up. We've got just a minute or so to go. There's a couple of other questions that have come through on -- the little out of scope for the bank team, one on the Philippine election on the sovereign, for example, we'll segue those questions after the webcast to our colleagues in other practices and endeavor to try and get a response back to you. So that concludes our webcast -- webinar for today. We'd certainly hope you found the content insightful and valuable. Thank you to our speakers and to you, obviously, our audience for your time and attention. Please do contact us if you have any questions. And in addition, please do remember to complete our short survey, we'd really love to hear your feedback. We'd also note a replay of this session will be e-mailed to you later today. So please look out for that. And we also invite you to refer to our website at spglobal.com/ratings. This has our latest events, webinars commentaries, research and insights. So that includes our webinar for today. Thank you for attending, and goodbye.