As the world faces a slowdown in growth and higher inflation, some Asian banks are expected to perform well in the next year. Investors are betting on banks in India and Indonesia, which have strong loan and profitability profiles, to provide returns amid the challenging environment.
Global rate hikes pose challenges for Asian banks
The global economy is set to slow down as inflation remains stickier than expected, leading to higher interest rates in many countries. The U.S. Federal Reserve has raised the benchmark fed funds rate to between 5.25% to 5.5% in the last year and a half, and warned that more rate hikes could be on the table. Other central banks, such as the Bank of England and the Reserve Bank of Australia, have also tightened their monetary policies.
These rate hikes pose challenges for Asian banks, which have to adjust their businesses and manage their liquidity and margins. Higher interest rates also increase the borrowing costs and debt burdens of their customers, which could affect their loan quality and repayment ability. Moreover, the geopolitical tensions between Russia and Ukraine, as well as China’s slowing growth, have added to the uncertainties and risks in the region.
India and Indonesia banks have strong fundamentals
Despite the headwinds, some Asian banks have strong fundamentals that could help them weather the storm. Investors are particularly optimistic about banks in India and Indonesia, which have the strongest loan and profitability profiles in the region, according to Moody’s Investors Service.
India’s banking sector has benefited from the robust economic recovery, which has boosted credit demand and improved asset quality. The country’s gross domestic product (GDP) grew by 8.4% year-on-year in the third quarter of 2023, the fastest among major economies. The government’s fiscal stimulus and reforms, as well as the central bank’s accommodative stance, have supported the growth momentum.
Indonesia’s banking sector has also shown resilience, as the country has managed to contain the Covid-19 pandemic and ramp up its vaccination program. The country’s GDP expanded by 5.1% year-on-year in the third quarter of 2023, the highest since the fourth quarter of 2019. The government’s infrastructure spending and social assistance, as well as the central bank’s policy easing, have helped the economy recover.
Both India and Indonesia have relatively low interest rates compared to other emerging markets, which gives them more room to maneuver and cushion the impact of global rate hikes. India’s repo rate, the rate at which the central bank lends to commercial banks, is currently at 4%, while Indonesia’s 7-day reverse repo rate, the benchmark interest rate, is at 3.5%. Both countries have also maintained stable exchange rates, which have reduced the volatility and pressure on their currencies.
Outlook and opportunities for India and Indonesia banks
The outlook for India and Indonesia banks is positive, as they are expected to maintain their strong performance in the next year. Moody’s forecasts that India’s banking sector will grow by 10% in 2023, while Indonesia’s banking sector will grow by 8%. Both countries’ banks will also see their profitability improve, as their net interest margins will widen and their credit costs will decline.
There are also opportunities for India and Indonesia banks to expand their businesses and increase their market share. Both countries have large and growing populations, with low banking penetration and high demand for financial services. India has a population of 1.4 billion, with only 80% of adults having a bank account, while Indonesia has a population of 276 million, with only 56% of adults having a bank account, according to the World Bank.
Both countries also have supportive policies and incentives for banks to lend to priority sectors and micro, small and medium enterprises (MSMEs), which are the backbone of their economies. India’s central bank has relaxed the statutory reserve requirements for banks that disburse loans to priority sectors and MSMEs, while Indonesia’s central bank has increased the remuneration for banks that meet the target macroprudential inclusive financing ratio. These measures aim to increase the banking industry’s contribution to inclusive financing and the national economic recovery.
