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Direct impact of war on banks minimal, indirect impact through operational risk could impact costs

Goola Warden
Goola Warden3/18/2022 04:20 PM GMT+08  • 2 min read
Direct impact of war on banks minimal, indirect impact through operational risk could impact costs
Banks could experience higher operational risks, and higher credit costs as war drags on and APAC growth slows
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In a recent report, Fitch Ratings says direct banking-system exposure to lending and investment in Russia and Ukraine varies across APAC but overall, the exposure is miniscule at 0.5% of total assets and thus unlikely to pose systemic risks. Certain jurisdictions such as Mongolia may have higher exposure, but strong commodity prices such as for coal may offset the risk. Despite attempts at ESG and sustainability, higher commodity prices would strengthen repayment capacity for APAC mining firms and agricultural producers.

Indirect exposures, including credit and market risks, may be more significant, Fitch Ratings says: "The war in Ukraine could lead to some revisions in our sector outlooks, which are mostly neutral to improving at present, based on our expectations of sector performance in 2022 compared with 2021."

Credit risks in for APAC may increase through inflation, supply chain disruption and higher interest rates. Economic growth in APAC could weaken, and banks are likely to face additional operational risks and costs complying with war-related sanctions.

"We think these developments are more likely to counter net interest margin improvements, and thus buffet profitability, in APAC banking systems than to result in meaningful capital erosion. Credit risks from the war may require additional provisioning, or delay reversals, that banks had previously anticipated," Fitch Ratings indicates.

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