2025 will be a bumpy ride for the Asia-Pacific financial institutions sector.  Foremost, we anticipate markets will experience significant added volatility. This will hit bank borrowers and in turn banks.

Asia-Pacific remains inextricably linked to the U.S.   S&P Global Ratings expects highly uncertain and volatile trade policy during the Trump administration. The exact transmission effects on Asia-Pacific banks during 2025 are uncertain. The U.S. will steadily add clarity on its trade and other policies, and this will give us more visibility on the implications for Asia-Pacific.

Financial institutions will most likely incur secondary effects from the added uncertainty and volatility that we anticipate.   The direct ratings effects could still be profound. Interlinkages among Asia-Pacific financial institutions and other sectors (cross-sector and cross-region) are complex, and the knock-on effects are difficult to predict. For example, potentially higher tariffs on the Mexican auto sector will affect the auto sector globally, including in the big carmaking hubs in Asia-Pacific (Japan, Korea, China). This could in turn affect Asia-Pacific banks that lend to the auto sector, along with related corporate borrower-clientele that are reliant on bank funding.

While it is early days for the new U.S. administration,  our base case is that relative rating stability across Asia-Pacific financial institutions will persist through 2025. The interplay of several key factors, however, could contribute to a change in our ratings view for banks:

A Change In Complexion Affecting Asia-Pacific Sovereigns

We believe that governments in 16 of the 19 banking systems that we cover in Asia-Pacific are supportive toward systemically important private-sector commercial banks (see chart 1).   That is, we believe that in the unlikely event of a banking crisis extraordinary government support would be available to these banks. Our credit view for the Asia-Pacific banking sector is somewhat of a contrast to other regions, notably Western Europe and the U.S. In these banking jurisdictions we believe that no banks would likely be a recipient of extraordinary government support, at least as a first port of call. In these jurisdictions we believe that additional loss absorbing capacity (ALAC) would be the most likely go-to if extraordinary support were needed.

Chart 1

As many Asia-Pacific banks benefit from rating uplifts due to their systemic importance they likewise are vulnerable to a change in sentiment affecting sovereign creditworthiness.  A sovereign ratings or outlook change in Asia-Pacific will result in an immediate and concomitant ratings change for some banks. However, of the 21 sovereigns that we rate in Asia-Pacific, 18 are on stable outlook (the other three are on positive outlook). Our base case for most sovereigns is for continuing ratings stability. A less-likely downside scenario is that certain sovereign ratings or outlooks will turn negative, hitting some banks.

Survival Of The Fittest

The flipside of the systemically important rated bank cohort across Asia-Pacific  is the (much larger) rated and unrated universe of non-systemically important--and financially weaker--banks and other financial institutions. That said, based on our outlook for credit fundamentals, and even considering a likely healthy dose of added market volatility in 2025, most rated, non-systemically important financial institutions are on stable outlook and our base case is that ratings stability is likely to endure during 2025 for most.

We fully anticipate that some further credit differentiation could occur, however, in 2025.

The credit-standing of many nonbank financial institutions (NBFIs) are already more vulnerable than banks. This principally reflects the more discrete and nuanced segments in which they operate, and their much more concentrated business, asset, and funding profiles. Added volatility in 2025 may simply accelerate credit vulnerabilities that are already apparent.

Furthermore, across the unrated space in some Asia-Pacific jurisdictions, we anticipate continuing rationalization and consolidation.  Inevitably, these will include failures--whether or not market volatility ramps up. These include small banks in the rural-bank sector in China. Some strains may play out against a backdrop of regulators and public authorities in this and some other jurisdictions pushing for a smaller number of more-robust and economically viable institutions. This is with the objective of moving toward a healthier banking industry.

Market Expectations Shimmy Materially Outside Our Current Forecasts

Our current ratings and outlooks on financial institutions consider our economic forecasts and credit conditions views.  (see "Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon," Nov. 24, 2024; and "Macro Effects of Proposed U.S. Tariffs Are Negative All-Around," Feb. 6, 2025). The evolution of a more extreme alternative scenario outside our forecasts will clearly have the potential to hit financial institutions.

Table 1

More certainty concerning the potential additional tariffs on Asia-Pacific countries with a large trade deficit with the U.S. could change the equation for our view of economic risk as it affects banks.  China has the largest trade surplus with the U.S. globally, and Japan, South Korea, Taiwan, and Vietnam have significant trade surplus. The announcement of additional tariffs may ultimately result in dollar strength, causing currency depreciation in emerging markets and some developed markets. These dynamics may contribute to increasing interest rates in these jurisdictions, which may hurt borrowers and banks' asset quality.(Equally, higher interest rates--or lower than forecast rate cuts--may contribute to less pressure on banks' interest margins).

Furthermore, pain may be acute for some domestic corporations that borrow in U.S. dollars. That will happen if the borrowers haven't hedged--or have only partially unhedged--their U.S.-dollar cash outflows and they have no offsetting U.S.-dollar cash inflows. In turn, banks' asset quality will become strained.

Table 2

For banks, greater clarity is the name of the game for 2025.  As the trade policies and other of the U.S. become clearer as well as the retaliatory efforts of other countries this ultimately give us a clearer line of sight of the impact on banks.

Buffers Will Absorb Some Of The Strain

The Asia-Pacific banking sector is heading into an environment of escalating trade tensions and market uncertainty in overall good shape.  The sector is incredibly diverse across the 19 jurisdictions where we rate banks and it is far from a level playing field as to how and where problems could manifest. Heading into a more uncertain environment, however, we assess economic risks trends as they impact banks as stable (see table 3) in all 19 jurisdictions. This gives us confidence that all countries--within the context of their respective highly differential risk profiles--have a degree of financial strength and flexibility to contend with a worsening of the economic outlook driven by trade and currency wars.

Further reinforcing our view is that we assess industry risk trends as stable in 17 of 19 jurisdictions.

The table below presents S&P Global Ratings' views about key risks and risk trends for banking sectors in Asia-Pacific countries where we rate banks. According to our methodology, BICRAs fall into groups from'1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

Table 3

Banks' credit and financial metrics are also broadly supportive of ongoing credit stability.  Even a worsening of some metrics will not cause an immediate diminution in rating quality. While we expect credit losses across Asia-Pacific will increase over the next two years (see chart 2), we currently believe they will remain within tolerances for many banks at current rating levels. Furthermore, we anticipate capital levels will remain sound, noting idiosyncratic factors at play in certain jurisdictions associated with regulatory changes or industry developments that could drive a change in our view of capital.

Chart 2

Large Chinese Banks Can Withstand Tariff Increases

We believe that the stand-alone credit profiles (SACPs) of the largest rated Chinese banks can absorb the knock-on effects of trade and policy wars and market volatility.  Furthermore, issuer credit ratings on these banks are also likely to remain intact--assuming the China sovereign rating outlook remains stable. China is at the epicenter of the U.S.-China trade conflict and the four largest Chinese banks are also the four largest banks globally, by asset size.

Our view on economic risk as it affects our banking industry country risk assessment (BICRA) for China is stable. This indicates our view that the Chinese banking system can largely withstand trade tensions.  We see less than a one-in-three chance that we will revise down the stand-alone credit profiles of the four Chinese mega banks and the ratings on their Tier-1 capital instruments.

We already assess China as a relatively high-risk banking system by global standards (see table 3).  It is characterized by already-high economic imbalances, and very high credit risks in the economy as the Chinese property developer sector continues to unwind. Our current view is that there scope for diminution in the Chinese economy--driven by trade or other factors--with no immediate effect on our BICRA or anchor assessment as it affects bank ratings.

What-If Scenario--China Is Downgraded

All other factors remaining equal and unchanged, a downgrade or outlook revision for the Chinese sovereign rating will have a differential effect across the Chinese banking sector.  We reiterate that a Chinese sovereign downgrade is not our base case as the Chinese sovereign ratings are on stable outlook. It is an alternate, lower-probability 'what if' downside scenario outside our base case.

A hypothetical one-notch sovereign rating downgrade would likely cause us to downgrade three of the four Chinese mega banks by one notch.   That is, we would likely lower by one notch the issuer credit ratings on Agricultural Bank of China Ltd. (A/Stable/A-1), China Construction Bank Corp. (A/Stable/A-1) and Industrial and Commercial Bank of China Ltd. (A/Stable/A-1).

Meanwhile, we would likely affirm the issuer credit rating on Bank of China Ltd. (A/Stable/A-1) would likely be affirmed. This reflects Bank of China Ltd.'s higher stand-alone credit profile (SACP) compared with its three major domestic peers (see table 4). The higher SACP indicates that Bank of China Ltd. has greater flexibility to contend with a downgrade of China, all other factors equal and unchanged.

Table 4

Strong Risk Management Shields Hong Kong Banks

S&P Global Ratings expects Hong Kong's residential mortgage quality to remain stable over the next two years, driven by a stable unemployment rate and household income growth.  Sharp falls in economic growth or jumps in unemployment rates have a bigger impact on credit performance than home prices. This is because a potential shrinkage in household income could strain borrowers' capacity to service debt rather than a correction in property prices.

We expect Hong Kong's GDP growth to moderate to 2.3% for 2025 and stay at that level over the next two years, after our estimate of 2.7% growth in 2024. The unemployment rate should remain stable at about 3.0% in 2025 and inch down over the next two years. Our base case does not expect significant pressure on the credit quality of residential mortgages.

Hong Kong borrowers showed a remarkable capacity prepayment in the previous economic cycle.  This also reflects positively on the Hong Kong banking sector's record of risk management. Despite a 65% drop in home prices between 1997 and 2003, Hong Kong banks maintained a low delinquency ratio (90 days past due) of 1.5% for residential mortgage loans during this period. This was due to active management by regulators and banks, full recourse terms, and disciplined household saving. (see "Banking Brief: Employment, Not Home Prices, Shape Hong Kong Mortgage Quality," Jan. 16, 2025).

Digital Renminbi Use May Erode Chinese Banks' Fee Revenues

In our view, the revenue profiles of Chinese banks will allow them to absorb a hit from the increasing use of the e-CNY.  As of 2023, gross settlement fees from various services, accounted for only about 5.0% of bank profit before tax and 2.7% of pre-provision profit. This was according to the financial disclosures of the country's top 30 banks. The impact on net fees relating to correspondent bank services is likely to be at a lower and more manageable level.

Chinese banks are likely to increase investments in fintech to advance their digital renminbi operations.  This includes investments in risk management and the development of an e-CNY digital wallet. As of 2023, Chinese megabanks and joint-stock banks have increased their fintech investments to 3%-5% of revenues from 2%-3% five years ago. They've continued to digitalize their banking operation systems and offered incremental applications in part to compete with big tech. (see "China's Digital Renminbi May Curb Banking Income," Nov. 5, 2024).

Significant Risk Transfer Activity Is Picking Up

Significant risk transfer (SRT) activity is increasing as banks try to manage risk and support their capital ratios.  Banks transfer risk to nonbanks for capital and risk management purposes. By purchasing credit protection (or selling a portion of the credit risk) on specific assets through SRTs, banks can lower the amount of capital they must hold against those assets and boost shareholder returns.

Banks also use SRTs to manage risk, regardless of the impact on capital. They may use SRTs (even on low risk assets) to effectively reduce their exposures and concentrations by asset type, borrower, or other metrics--sometimes to avoid breaching related internal limits.

For most banks, SRT issuance has not been substantial enough to date to materially affect our assessment of creditworthiness.  Disclosure in public and regulatory filings is limited. However, as usage grows, SRTs could affect our view of a bank's risk position and positively affect our calculation of the S&P Global Ratings risk-adjusted capital (RAC) ratio--our proprietary measure of banks' capital adequacy. While SRTs have not affected our capital analysis of banks yet, they likely will have a greater effect as issuance grows.

European banks are the most active issuers and U.S. peers have begun to follow suit.  SRTs are an established part of European banks' capital and risk management toolkits. Pillar 3 disclosures on retained SRT tranches indicate that the region's largest lenders dominate issuance volumes, led by Barclays and Santander. Usage is also increasing in other regions globally.

As more public information on SRT is disclosed by Asia-Pacific banks we will be better placed to make intra- and inter-region comparisons and assessments.

Australian Banks' Credit Losses Should Remain Low Over The Next Two Years

We expect credit losses to revert to pre-pandemic levels in 2025-2026 at about 15 basis points (bps).  Large Australian banks' reported sound earnings recently in line with our rating expectations. Profitability metrics are generally strong globally and continue to support our view of the banks' credit profiles.

• Commonwealth Bank of Australia (CBA) (AA-/Stable/A-1+) announced a cash net profit after tax of A$5.1 billion for the six months ended Dec. 31, 2024, up 2% over the previous corresponding period.

• Australia and New Zealand Banking Group Ltd (ANZ) (AA-/Stable/A-1+), reported a cash profit of A$6.7 billion for the year ended Sept. 30, 2024, down 9% on the prior year. This includes a one-off A$196 million charge related to the completion of its acquisition of Suncorp Bank on July 31, 2024.
• National Australia Bank (NAB) (AA-/Stable/A-1+) reported an 8.1% decline in cash earnings for the full year ended Sept. 30, 2024, compared with the prior year, but it was stable half on half.
• Westpac Banking Corp. (AA-/Stable/A-1+), reported a 3% decrease in its net profit after tax for the year ended Sept. 30, 2024.
• Macquarie Group Ltd. (BBB+/Stable/A-2) reported net profit of A$1,612 million for the six months ended Sept. 30, 2024. This was up 14% on the previous corresponding period, driven by loan growth in the bank and higher performance fees in the asset management business. This was offset by higher funding costs in the investment bank and subdued volatility in the commodities business(see "Related Research" for Australian bank bulletins for details).

The Australian regulatory proposal to phase out banks' additional tier 1 (AT1) capital should address the unique systemic risks posed by high retail investor exposure to Australian bank AT1 securities.  In December 2024, the Australian Prudential Regulation Authority (APRA) announced its decision to phase out the use of AT1 capital instruments to simplify and improve the effectiveness of bank capital in a crisis. We believe this would address unique systemic risks in the country. Domestic retail investors hold about half of such instruments, a concentration that may prove problematic in the event of a banking crisis. Nonetheless, we believe this phaseout has the potential to weaken stand-alone credit standings for some Australian banks (see "Phasing Out Bank AT1--An Australian Solution To An Australian Dilemma," Sept. 18, 2024)

Outlook For China's Securities Firms Hinges Upon Investor Sentiment

China's latest capital market measures could unlock earnings potential for securities firms.  But S&P Global Ratings believes much depends on whether investor sentiment will really improve. For now, some firms could see lower contributions from their consolidated mutual fund subsidiaries as fee income declines. Further, continued execution of swap facilities would increase the parents' stock market exposure--adding to volatility.

China's financial regulators have rolled out measures to push medium- and long-term funds to invest billions in the country's capital market.  As well as mutual funds, the regulator has targeted insurers, the national social security fund, the basic pension fund, enterprise annuity funds, and other long-term capital (see "China Brief: Securities Firms Await Revival In Market Sentiment," Jan. 27, 2025).

Global Banking Sector Will Stay On A Stable Rating Course In 2025

Our base case is for relative ratings stability in 2025 even as markets are likely to be volatile.  With the interest rate cycle already turning in numerous banking jurisdictions, some relief is within sight for bank borrowers. Banks' asset quality will eventually benefit although the transmission effect will take time and vary across geographies. For 2025 we anticipate about a 7% increase in global banks' credit losses compared with 2024, to about US$850 billion.

See our comprehensive reports:

• Our overarching view and one-page summaries for 86 [just querying if this number is up to date] banking jurisdictions, titled, "Global Banks Country-By-Country Outlook 2025: Cautiously Confident," Nov. 13, 2024.
• A chartbook-style report presenting key messages and summarizing our outlooks, titled, "Global Banks Outlook 2025: Cautiously Confident," Nov. 13, 2024.

BICRA Changes

Over the past quarter (through January 30, 2025), following changes have been made to our Banking Industry Country Risk Assessments (BICRAs) in the Asia-Pacific region.

Mongolia:   We revised our assessment of economic risk to '8' from '9'. Economic risks for Mongolian banks have reduced, in our view. The country has a promising economic outlook. We forecast its real GDP growth will average about 6% annually through 2027, backed by robust exports of commodities such as coal and copper. Moderating inflation and higher public sector wages have also increased household consumption.

The industry risk trend of the banking sector is also improving. This is in view of Mongolia's evolving institutional framework, although the banking regulations in the country are relaxed compared with the international standards. The Mongolian government is likely to be supportive of banks. This is in view of the government's materially improved fiscal position amid favorable economic conditions.

We have published the following comprehensive BICRA reports in the past quarter in Asia-Pacific.

Banking Industry Country Risk Assessment: Bangladesh, Dec. 15, 2024

Banking Industry Country Risk Assessment: Mongolia, Dec. 9, 2024

Banking Industry Country Risk Assessment: Indonesia, Dec. 3, 2024

Banking Industry Country Risk Assessment: Korea, Nov. 29, 2024

Banking Industry Country Risk Assessment: Thailand, Oct. 29, 2024

Banking Industry Country Risk Assessment: Cambodia, Oct. 29, 2024

Table 5

Editors: Lex Hall, Jasper Moiseiwitsch

Digital Designer: Halie Mustow

Related Research

Banking Sector Research

• Asia-Pacific Financial Institutions 1Q 2025 Monitor: Most Banks Will Absorb U.S. Policy Volatility, Feb. 17, 2025
• Bulletin: Citic Financial AMC's Financial Challenges Remain Despite Profit Rebound, Jan. 21, 2025
• Banking Brief: Employment, Not Home Prices, Shape Hong Kong Mortgage Quality, Jan. 16, 2025
• CreditWeek: What Intersecting Risks Trends Are Key To Watch In 2025?, Jan. 16, 2025
• Ratings Component Scores For The Top 200 Banks Globally--December 2024, Dec. 23, 2024
• Banking Industry Country Risk Assessment Update: December 2024, Dec. 19, 2024
• How We Rate Financial Institutions, Dec. 14, 2024
• Global Credit Outlook 2025: Promise And Peril, Dec. 04, 2024
• Credit FAQ: Global Banking Outlook 2025: The Case For Cautious Confidence, Dec. 04, 2024
• Credit FAQ: How Would China Fare Under 60% U.S. Tariffs?, Nov. 18, 2024
• Bulletin: China Citic Financial's Investment Plan Signals Government Support, Will Enhance Regulatory Capital, Nov. 15, 2024
• Global Banks Outlook 2025: Cautiously Confident, Nov. 14, 2024
• Global Banks Country-By-Country Outlook 2025: Cautiously Confident, Nov. 14, 2024
• Research Update: Standard Chartered Bank Korea Upgraded To 'A+' On Increased Importance To The Group; Outlook Stable, Nov. 14, 2024
• Bulletin: China Bohai Bank Is On Track To Derisk, Nov. 12, 2024
• Bulletin: ANZ To Maintain Robust Credit Profile, Nov. 08, 2024
• Bulletin: Bank Australia's AUB Acquisition Will Boost Scale, Stability, Nov. 07, 2024
• Bulletin: Stabilizing Economic Conditions Will Support National Australia Bank, Nov. 07, 2024
• China's Digital Renminbi May Curb Banking Income, Nov. 06, 2024
• Bulletin: Westpac's Capital Levels Will Remain Solid, Nov. 04, 2024
• Bulletin: Diversity Continues To Support Macquarie Credit Profile, Nov. 01, 2024
• Hong Kong's Commercial Real Estate Downturn Is Spreading To Banks, Oct. 31, 2024
• China To Balance Debt Against Stagnation As Banks Face More Loan Losses, Say Panelists, Oct. 23, 2024
• Private Markets Monthly, October 2024: Rating Subscription-Line Facilities Provides Transparency At Inception Of Alternative Investment Funds, Oct. 23, 2024
• Top 200 Rated Banks' Capital Ratios Are On A Stable Trend, Oct. 21, 2024
• Highlights From S&P Global Ratings' European Financial Institutions Conferences 2024, Oct. 11, 2024
• Thai Financial Sector Will Weather Flood Damage, Oct. 08, 2024

Economic And Credit Conditions Research

• Economic Research: Macro Effects Of Proposed U.S. Tariffs Are Negative All-Around, Feb. 6, 2025
• Economic Research: My Davos Week 2025, Jan. 23, 2025
• Economic Research: Slowing Immigration Could Derail U.S. Economic Growth Momentum, Jan. 17, 2025
• Credit Cycle Indicator Q1 2025: The Recovery Could Be More Elusive For Some, Jan. 15, 2025
• Economic Research: 2024: Resilience Almost Everywhere 2025: Reconfiguration, Not Rebalancing, Dec. 19, 2024
• Essential Economics: 2024: Inflation Is Back In Japan; 2025: Tariffs And Their Impact, Dec. 17, 2024
• Credit Conditions Asia-Pacific Q1 2025 Slides: Bracing For Volatility, Dec. 12, 2024
• Rising Protectionism Will Challenge Emerging Markets' Resilience, Says Monthly Highlights Report, Dec. 11, 2024
• Monetary Easing: What If The Interest Rate Descent Disappoints?, Dec. 04, 2024Global Trade: How Might Uncertain Trade Policies Affect Macro-Credit Conditions In 2025?, Dec. 04, 2024
• Credit Conditions Asia-Pacific Q1 2025: Bracing For Volatility, Dec. 03, 2024
• Economic Research: Global Economic Outlook Q1 2025: Buckle Up, Nov. 27, 2024
• Economic Outlook Emerging Markets Q1 2025: Trade Uncertainty Threatens Growth, Nov. 26, 2024
• Economic Research: Economic Outlook Asia-Pacific Q1 2025: U.S. Trade Shift Blurs The Horizon, Nov. 25, 2024
• Asia-Pacific Credit Outlook 2025: Cutting Through The Noise, Nov. 13, 2024
• Economic Research: Washington Week: Takeaways From The IMF And IIF Annual Meetings, Oct. 30, 2024
• Global Credit Conditions Q4 2024: Policy Rates Easing, Conflicts Simmering, Oct. 01, 2024
• Credit Cycle Indicator Q4 2024: Credit Recovery Prospects Are Mixed Across Markets, Oct. 01, 2024

Other Research

Please see Instant Insights: Key Takeaways From Our Research, published Feb. 12, 2025, which is a curated compilation of the key takeaways from our most up-to-date thought leadership.

• Impact Of U.S. Tariffs On China's Auto Sector: Watch For Second-Order Effects, Feb. 10, 2025

Webcasts: Asia-Pacific Banking Insights

In the last quarter, we have held the following webcasts to share our views on Asia-Pacific and other banking topics. The replays are available on

https://www.spglobal.com/ratings/en/events/webcast-replays/index#

• The Top Trends Shaping European Bank Ratings In 2025, Jan. 28, 2025
• The Outlook For Bank Operating Performance And Significant Risk Transfer Activity, Nov. 26, 2024
• Global Banks Outlook 2025, Nov. 20, 2024
• Request For Comment: Hybrid Capital Instruments With Sliding Step-Up Features, Nov. 18, 2024
• Impact Of Regulatory Clampdowns On Indian Finance Companies, Oct. 25, 2024