Asia bank outlook increasingly negative, shares slump

Asian lenders have managed to mostly dodge the ravages of the subprime mortgage meltdown but now must survive depressed markets and a darkened economic picture.

"In the short-term, banks dependent on the cross-border capital markets and money markets will remain under the highest stress. In Asia, this includes most banks in Australia, New Zealand, and Korea," Jerry Chien, managing director, financial institutions for Moody's Asia Pacific, said in a report.

"Over the next 12-18 months, we expect banks to be facing the more traditional cyclical risks of an economic downturn, complicated by lingering inflation," he said, as shares of banks in Asia continued to plummet on fears of recession and weaker earnings.

South Korea, which has more negative rating outlooks on its banks than any other country in Asia, said on Thursday it planned to inject more foreign exchange liquidity to local banks to keep financing in its export-reliant economy working smoothly.

But government moves did little to calm investors, with the country's stock index falling over 9 percent, led by top lender Kookmin's parent, which plunged 15 percent.

Many analysts fear South Korea's banks could be the next victims of the global financial crisis, with their heavy exposure to the ailing property sectors and inadequate funding structures. The global credit crunch has also jacked up their funding costs and non-performing loans are likely to rise.

Asian banks which are dependent on domestic money and capital markets are also under stress, Moody's said, noting some depositors have been shifting their business from small and medium-sized banks to top-tier banks seen as less likely to fail, or even moving their cash to neighbouring countries which offer higher levels of deposit insurance.

But despite the increasingly gloomy outlook, the ratings agency said its outlook for Asia bank credit ratings generally remained stable, saying most lenders remained well capitalised and underlying economic growth in the region remained solid.

Japanese banks have strong liquidity, but are struggling to make money in a slowing economy, facing higher credit expenses and watching the value of their equity holdings disappear fast.

Cracks are also beginning to show in China's banking system, with market watchers fearing small rural and regional banks will have a much harder time weathering downturns and debt defaults than bigger, more diversified state-run banks.

China this month toughened guidance on capital ratios at some banks, a move seen as a pre-emptive step to prevent Chinese banks from repeating their near-bankrupt status roughly five years ago.

In Australia, NAB, the country's top lender, said full-year cash earnings would fall 11 percent, as the growing debt crisis weighs on its balance sheet, sending its shares down more than 4 percent on Thursday.

National Australia Bank has the biggest exposure to U.S. debt among Australia's big four lenders. Earlier this year, it announced a writedown of about A$1 billion as the U.S. subprime meltdown triggered a sharp drop in American property prices and turmoil in world credit markets.

Investors are now awaiting the bank's outlook next week for any signs that more large, unrealised losses may be lurking -- a fear shared by financial policymakers worldwide as governments desperately try to halt the fast-spreading financial crisis.

"We're heading into a downcycle for the banks in terms of the bad debt cycle, and next year's bad debt charges are probably going to be higher again," said a portfolio manager who did not wish to be identified due to company policy.

While Australian banks have managed to escape many of the problems seen by their European and U.S. counterparts so far -- apart from sharp drops in their share prices -- analysts expect NAB and Australia and New Zealand Banking Group to report double-digit falls in cash profit for their second half.

The Australian economy is slowing along with a global downturn, which will heighten investor worries about rising bad debts at home and slowing loan growth.

But Moody's said Australian banks are relatively strong, with limited exposure to highly leveraged clients and no U.S.-style subprime lending.