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good afternoon ladies and gentlemen it's 4 p.m in singapore and hong kong and taiwan as well where one of our guests is currently located welcome to the asian banker radio finance session on the asia pacific banking industry outlook 2021. today we'll be turning to our guest banner of chief economists and industry experts to look at the key issues and factors that will affect the global economy financial system and specifically look at how banking system in asia will perform over the next 12 months we are happy to have as our guest today alicia garcia herrera who is the chief economist for asia pacific at french investment bank naticis we're also happy to have tamu bank who hates economics as well as macro strategy for interest rate credit currency and equities at dbs group research and finally eugene manoff the senior credit officer responsible for financial institution group at moody's investor service in this brainerd finance session we will discuss the outlook and the impact of the global pandemic on the banking industry rise in credit costs and declines in net interest margins as well as the overall profitability of banks across asia pacific in the coming year kovite 19 has plunged the global economy into its worst recession since the second world war economies cannot start to recover until the disease is brought under control the failure of leading economies to effectively control the spread of the contagion has caused unprecedented economic and social disruptions and set back decades of development that will have long-term impact on future growth prospects although effective vaccines have been found and approved for usage there are signs that the planned implementation of a universal vaccination program will take much longer than anticipated that may further impinge on the lifting of social distancing measures and a wider restoration of economic activities in its january global economic prospect report the world bank estimates that global growth in 2020 world contract by 4.3 percent a drop of 6.8 percent from its pre-coveted 19 forecast in january of 2020. it envisioned a sub new recovery in global economic output in 2021 which will grow at four percent but still remain more than five percent below its pre that pre-pandemic trend the growth of emerging markets and developing economies in east asia and pacific in particular is projected to grow significantly in 2020 to 0.9 percent a 4.8 percent contraction pre-commit 19 the lowest since 1967 while the world bank expect regional growth to rebound to 7.4 percent in 2021 as the pandemic subside with more widespread kovite 19 vaccination however should there be a protection of the health crisis it may heighten financial stress and precipitate a sharper and longer than expected contraction in global trade compounded by re-escalating trade tension this may result in financial crisis that will cause a collapse in landing and a longer global recession as well as global recovery while the world bank has won about the downside risk it has also upgraded its january forecast from june of 2020 it is obviously more sanguine about recovery and growth especially for asia pacific i'd like to get our guests view on how they see the pace of economic recovery in asia participate how that pace will change with the start of kavit 19 vaccination let's start with the moon to give us his take on growth this year thank you thanks for having us on this interesting topic which will of course remain topic collecting for years to come how do we deal with the pandemic and where do things go from here um the worst performers of 2020 will be at least on paper the best performers of 2021. so if you think of the outcome of 2020 in the context of a misery index if you will change in economic growth rate and change in inflation the worst three countries in asia unambiguously would be india indonesia and the philippines and thanks to the tyranny of the base effect those are the three countries that will show very strong rebound at least on an arithmetic number sequential growth you know we can talk about that later um so it is sort of you know not a hard task to come up with you know who with the shiny examples of market pleasing numbers in the context of 2021 and you're already beginning to see the green shoots of that strong rebound now we should also be you know keen to make sure that we understand the difference between rebound and recovery india indonesia philippines are rebounding very sharply you see that in their trade numbers you see it in their government receipts of taxation but by the time they recover all the lost gdp from 2020 it will very easily be 2022 they're not going back to the pre-covet level of gdp until next year but this year they will rebound very very sharply now beyond that what is the story in asia we have four very successful pandemic management cases well let's say three of them are pandemic management cases of success fourth one sort of winged it and got lucky so the three success cases would be taiwan where alicia is connecting us from uh then there is vietnam definitely china came back very strongly in the second half of last year and then in south asia it's bangladesh which will grow by all estimation over two percent in 2020 uh despite the fact that there was raging coveted infection and not much mitigation so big contrast from say their neighboring india where activity contracted shortly because the authorities embraced lockdown now the china case is interesting because the momentum for china is a very big influence of both market and economic sentiment in the region and you saw that in the third quarter of last year in the deep malaise of the covet fallout china started reporting stronger export numbers and then as a result you could also see that the regional supply chain was coming we were sending inputs to china china was putting it together and sending to the rest of the world and the rest of the world although reeling from the covet crisis was importing a lot of stuff buoyed by generous fiscal and monetary stimulus all over the western world in particular and you see this for example in the u.s trade numbers despite mr trump's four-year effort trade deficit vis-a-vis china actually expanded in the coveter and in the last four months of 2020 the us ran on average about 90 billion dollars of trade deficit of the whole world and substantial deficit vis-a-vis china so as china began to hum in the third quarter we got the first sort of push if you will in terms of post-covert recovery now what has happened in china since then is that the economy has gone straight to strength with the domestic demand engine of the economy starting to fire quite convincingly from september october onward so as we sit here in the middle of january 2021 we see strong travel and tourism numbers strong retail sales strong movement as far as credit growth is concerned so china is stepping into 2021 with a great deal of momentum unless the very recent news on some incipient covenant infection here and there in china creates a systemic risk i think we can safely say that china will be growing very rapidly in the first quarter our dbs now casting model is flagging china to grow by between 11 and 12 on a year-on-year basis which is of course understandable given that in four quarters of what they contracted but also there is strong sequential momentum and on the back of that we will see regional economies pick up now this is a critical point uh that i need to stress bunping because if this was happening 10 years ago 15 years ago a strong growth out there in china did not really matter that much for the region china on growth accounting basis was a large source of global growth in 2008 and 2005 but in those days the growth beta of asia if china grows by one percent how much does asia grow by it was not very large we still depend largely on western demand particularly u.s and eu and also the global economic cycle if you look at the econometric evidence over the last 15 years you see an emerging increase in that beta meaning asia now depends more than ever for china's economic performance so if china grows by 11 in the first quarter of 2021 it'll be a very strong uh galvanizing factor for factories to start humming sentiments to start improving investment plans to get reignited all across asia so to me that is the key story as you have noticed i've talked to you about for 10 minutes without mentioning the outlook for the us or europe whatsoever i think that is very well understood that on the back of huge amount of policy support measures they will uh you know grow us probably will grow by five percent this year after contracting sharpie last year and by the end of this year maybe if things go right u.s may have recovered all the loss output of 2020 but in the case of europe it's more like a 2022 perhaps even 2023 story because the recovery there is far more muted so as far as asia's overlap overall output is concerned the big hope lies on china and second big hope is their own domestic demand and own domestic success or failure as far as the pandemic management is concerned thank you tamu and with china's expected recovery and this year the impact on the region as you mentioned would be much more than 10 15 years ago right and in the last global financial crisis china was quite a different engine of growth with the rest of the western economy in you know uh in recession what uh what the economy supported we see that china continue to be the only large economy that has managed to maintain positive growth even through 2020 uh with his focus on domestic consumption um now alicia do you see uh china playing the same road this time around uh lifting you know the rest of uh of uh asia growth as tamil has kind of pointed out too and how are you about the national debt and uh in china you know especially not so much the national debt but with corporate and soe debts it's been fascinating i think the the story of you know china's dominance in asia is is obvious in the data but it takes us long to actually acknowledge it and i think that's a good start of the conversation um we were relatively optimistic maybe slightly less than consensus on asia's recovery in 2021 because i mean the basic effect is just smashing it all yeah i mean hardly impossible although not impossible because we have hong kong yeah hong kong 2019 and and 2020 so you can actually do even worse than 19 if you if you really push it but the whole point is that why did it happen because of lack of mobility meaning if for whatever reason and i think the main reason is a global wave and i think we're not fully out of the woods on this global wave we have japan we have malaysia we have some signs in china and we have signs everywhere because i was just looking at the data thailand for example cases have increased the silver bullet which was the vaccines you know the the magic roll out of vaccines which can't even happen in developed economies how on earth sorry to say can we still think it's going to happen just like that before the end of the second quarter i think we need to review this this this idea you look at you know cursor look at where we are with vaccines we have major economies china included for which we don't even have the plan so we don't really even know when they plan to finish the rollout of the vaccines and it's not a minor issue interestingly india is ahead so you know it started in in january with a big push but then it's already coming down i mean it's like like impossible to keep that pace so i think we all need to rethink you know are we sure we can do this by the end of the second quarter and if we can't and this way which of course is much more contagious and how much it will come all the way to asia i think frankly unavoidable the question is how can we restrain it it's going to bring mobility down so i i dare say that again although we were slightly less optimistic that in consensus we probably pushed it too far even ourselves i mean i'm talking about texas research team and i'm i'm saying this a lot as we as as you know as we speak because we don't have new projections but i'm just fearing as that the silver bullet is not as silver as we thought it would be certainly not as quick as we thought it would be and we also probably didn't know that we would have a wave coming you know much much more contagious than we thought it would be so all of this brings me to the point of what about china because if china manages to avoid everything i just said then you know the spillover effects even if we have less mobility in malaysia something will come out out of imports from china well i have to note just a minor note those imports haven't been there in the whole of 2020. i mean on average some countries have benefited more we have agricultural products a few things here and there but overall imports in china have fallen in 2020 so we all appreciate the growth it's lovely but it's not for us i mean as mean in the rest of the world not yet so you know the the combination of the two is not as appealing china is huge and great but it's not important so and if the world falls down into less mobility maybe not all the way to you know the first half of 2020 but something in between what we thought it would be and what it really will be then um and and again this is not asia worse than the rest of the world forget about the rest of the world that's even worse but it might not be as good as it looks and and this will come for your debt dynamics and i will end here i don't think we have a debt issue there's many other places where we have that issues before asia or certainly for china but we will have to keep rates low low low very low and and that that in itself is creating pro is kind of protracted problems in terms of think about the actual rate of return think about the need for banks to cope with those low rates think about you know we'll move to banking without very soon but it's just not what you want to have in a dynamic region you don't want to have it anywhere but you know if you are elderly and if you're europe if you're japan but if you are a dynamic region with those low rates the degree of this location of credit can be humongous so in a way it's a pity we can't get out of this uh sooner your view of growth in at least this year is kind of more cautious in terms of us getting uh over kovite 19. uh back to tamu no you you painted quite an optimistic picture across the region uh globally as well with the u.s growth and and that is uh predicated on uh covalent uh being uh you know uh being addressed and being resolved um what if there's a protected um uh another re-escalation of cases and so on so forth so i think the way to think about that is the following that in april may last year we were hit by a shock that we were completely unprepared for and as a result we had to shut down manufacturing and travel and meat processing and even to some extent agriculture got affected but within a few months we sort of started getting a sense of you know how to maintain social distance and be safe while carrying out economic activity and hence um uh you know especially in the manufacturing hub of the world which is you know asia and east asia um factories started operating pretty quickly and regardless of the state of the pandemic which remained very poor uh in the fourth quarter of last year we saw demand for asia's products remain very very strong in asia end of the year with extremely strong exports we were uh seeing on a ppp weighted basis asia recorded about 15 growth on december 20 sorry november 2020 over november 2019. so that momentum in my view remains in place independent of the trajectory of the pandemic simply because people have cash in their hands the supply of paycheck support the supply of subsidies that is coming from the government in the west will continue unabated regardless of you know how bad or how good the disease is and therefore people's ability to order something through online means remain absolutely independent of what is happening with respect to the crisis so i think this is where the big difference between the 0809 crisis and this crisis is that at that time you had a spate of backing sector difficulties and a spate of corporate st ess which then spilled over into huge distressed in household balance sheets on people's income outlook and so on now for a few months last year all of those things were happening but since then we've seen a very sharp recovery in the employment picture in the u.s in particular but also in europe and same here in asia that we saw the worst we left the horse behind us and we started to recover not because we're back to traveling and hotels are full but because we're just sort of you know countries that can rely on some degree of domestic demand and are doing fine and some countries that are based on an expert engine are doing well there's an another very important crucial difference between the past crisis and this crisis which will again proceed independent of the course of the covet uh pandemic which is the role of banks augustine carson's who has bis said very articulately and sort of you know efficiently in april of last year that banks which were the problem in 0809 have to be part of the solution this time and you've seen that if you look at bank balance sheet delta of bank balance sheet um over the quarters after the pandemic they've been expanding in europe in the u.s in china compare that with 0w in the u.s bank balance sheet contracted in the quarters after the crisis compared that with the european crisis in 2011 2012 bank balance sheet contracted so if you have credit intermediation taking place because banks have good balance sheet and they're being encouraged by the authorities then cash on hand credit on hand will proceed independent of the trajectory of the pandemic of course as um alyssa pointed out if the pandemic were to worsen mobility will be affected it may not be affected as badly as certainly will not be affected as badly as it was in april may but it will be affected nonetheless and i think the country that is greatest at risk on that is china they have you know been growing like gangbusters and they're doing very well uh by the second quarter comes along some degree of gravity will catch up with china in any case nobody can grow by 11 right so it'll start coming down and with the slowdown and growth some of the normalization measures that the authorities are pursuing in china right now combined that there will be some credit risk manifesting now we want to get eugene into into the the discussion as well how do you see banks impacted in your earlier outlook i think in in december last year or october uh it was quite a negative outlook for the banking industry uh could you explain yeah indeed for uh banks in asia pacific for uh 2021 we have a negative view what this means is that the the risks are still tilted to the downside for the financial services industry and there's a few reasons for that you know primarily the economic recovery uh we expect that to be uneven highly uneven in asia so some economies will do much better in uh in in in rebuilding their their lost output right so among the the winners i would echo what what my colleagues just mentioned you know china vietnam uh taiwan i mean those economies would do better and hence their banking system i think will do comparatively better on the other side of the spectrum we have economies like thailand for example where you know there's a lot of reliance on tourism banks have large exposures to those affected industries there's another round of infections in that country so my point is that of the you know various sovereigns and and subsoverence in in in asia the economy the recovery will be highly uneven and that's going to have a different impact on the bank's balance sheets the second point is that you know when you have such a huge economic stock as we have seen last year you know there has to be some pain on the bank's balance sheets but we haven't seen none of that last year pretty much right the npls were pretty flat just just maybe a few defaults here and there but overall they were flat and there was an obvious reason for that there was a lot of government and policy support a lot of forbearance a lot of moratoriums right so we expect that this year we're going to see some mild uh impairment on the bank's balance sheet we don't expect a huge uh flood of of npls we expect a mild increase again a lot of the support measures are are still in place they're they're not terminated uh and will continue we will continue to see a lot of uh credit restructurings in asia uh so it's again a bit of a bit of npls here and there uh and and third aspect of a negative view on banks is is their profitability right i think what alicia mentioned earlier uh ultra low interest rates will continue uh to wait on on on bank margins and again banks in asia make about 70 percent of their income from from um uh from from loans right so this is uh you know if you have a low margin and we and weakening margin it it's depresses your your primary source of income right uh on top of that credit costs will probably remain elevated we actually expect credit costs and these are the provisions right we expect that provisions will probably be lower this year compared to last year because what what the banks have been doing last year is creating provisions ahead of the expected pain right so if if the banks were correct in their models and and the provisions that they preemptively created are sufficient for uh for new nbls that we're going to see this year and next year then i think credit cost would moderate but but if if we're wrong and the banks are wrong and and there is a spike in credit cost then i think it's it's a it's a different uh outcome for the for the p l side of the story so again there's a lot of uh moving parts but but again the balance of risks is tilted to uh to the downside and then i have one one quick comment to wrap up my uh my overview what could uh change our view and you know in what circumstances we could see a more stable environment i i think we'll be watching how those uh loan moratorium what what are the exits from those loan moratorium rights so if if the vast majority of clients pay back and you know come back to the original payment terms i think that will be a very good sign right if banks are able to stabilize their margins so there's not not a lot of further decrease in margins and that credit costs normalized and then the profitability side of the story will gradually recover right i think those would be the the key aspects for us to watch this year uh and and maybe we'll see indeed some normalization of of banking conditions in asia okay great thank you eugene well going back to alicia the the the view is that the growth this year will be uneven right so even in some sectors uh it will not be even growth uh there are some part of the economy that is doing better there are some industry that will not come back for quite a while uh airlines uh tourism and so on so forth and those will have a profound impact on employment and so on so forth and this outlook that most of you have is kind of colored by how even uh or how uneven the growth will be um uh alicia what are your views in terms of the the unevenness of the growth uh in uh 2021 and its impact uh now on corporates especially at corporate and the impact on banks balance sheet sure so first of all um this very much depends on how far we are you know on a new wave in asia and kind of a delay beyond what we've already seen by the way on the rollout of vaccines because we were already seeing a rotation so december you know great news we are ending this horrible year and everybody's going to get fascinated in a month we already saw the old is doing better and even energy so you know it was like okay we're back and again the base effect yeah so so that back would mean hugely so but i think that rethinking that is going to take longer than we thought is already back in the market although there's still a very very positive vibe in the market uh especially in asia i wonder how long it's going to last because i think as we see this creeping in yeah from japan to malaysia to next i think thailand has uh big chances of being you know next that rotation so the bad sectors becoming the stars which is a little bit similar to the countries you know the bad countries becoming the stars my my might no longer be there um so the stars won't be the stars and then you go back to you know the digital the icts of the world so it very much depends on on again that that dual kind of situation are we finally out of this or not and if we aren't there won't be any rotation how do you see the u.s china trade with the incoming biden administration and how and also new the new trade pack uh reset right the the regional uh comprehensive economic partnership so i'm going to make iris an aristotelian comment here for in the sense that i'm going to look at for a change because i tend to be as a person quite extreme but this time around i think we need to look at the center of the things i don't think there will be a reset uh you know that's the extreme uh wangy type approach to the issue let's restart i don't think there will be a reset also because politically speaking is just very hard for biden even if you know no matter the choice people focus on the choice of the administration the names the the obama you know type flavor but you just need to listen to obama himself to realize that you know that's not where he would have gone had he known etc so so no reset but no trumpism so it has to be in the middle now what my impression is that what we've seen so far is that biden has has announced lots of things he will be doing you know executive order one after the other not on china i i thought you would start by saying oh my god this crazy web of sanctions that are distorting uh our own u.s investors and you know even the wall street type flavor of his administration so far no nothing but he said lots of things so far so the re i think no reset no trumpism but if you ask me where in between close not as close to the reset as i thought he would have been based on the choices he has made i think the pressure to continue to push is clearly there okay uh pressure to push for for better relations with china and easing some of that great tension um in terms of your view on the regional comprehensive economic partnership uh how much of a lift do you think it will give regional economies okay so it is very interesting to see that rcp which was announced as you know the deal of the history of asia the minute that was done at the apec effect meeting president xi already said you know we aim at cpt tpp which basically means that this is just a step you know this is not really uh in my opinion um path breaking deal it might be actually quite a good theme for us and because at the end of the day there's a loser here very obviously taiwan three our four largest investors in asean are ideal so you know it's going to facilitate obviously a global value chain a an asean a more assent centric value chain which is a good thing for us but it's but it's not going to be the the path-breaking thing that i think was in principle um announced if not china would not pursue uh or at least say it is pursuing cptpp uh and i think the reason is that that deal is indeed of a different caliber in terms of you know much more deeper in terms of of the actual integration um and thus uh rcp will remain a purely trade you know um with some games for us and but not massively so not even for china in my opinion yeah okay thank you alicia and uh tamu your view on the how regional trade will evolve in in 2021 and uh especially between the us and china the end of 2020 marked you know massive diplomatic gains for china both with respect to rsf as well as cai the deal that they signed with the european union so just at a time when the narrative in the west is about de-globalization china is sort of saying well you know we like to trade with our like-minded partners and if you want to improve market access if you want to join our digital economy which has huge potential for making money for the whole world's you know service and manufacturer as well then you need to make as part of your deals and so for that perspective rcep works very well for china the cai is potentially very good because both europe and china have a massive degree of interdependence both with respect to trade and investment eu has 140 billion dollars worth of investments in china china has 120 billion dollars of investments in europe and all the machine tools that the chinese use to be made in europe and all the manufacturing parts that the europeans used to be made in china so from that perspective the cai is as important in development as the rcep and within ourselves i think that the remarkable thing about rsap is unless the european union deal or the nafta deal where there was some degree of convergence between mexico canada and the u.s or some degree of convergence among the eu members before the deal was signed this deal is very very clear the heterogeneity is stark you have countries like you know cambodia and laos and you have countries like japan and australia in this deal so there will be very very unlikely that there will be a quick fix quick level playing field among all these varying degrees of um uh development and market uh structure among these uh rsa members but at the same time just to you know take on from the point that alicia was making that for companies in asean this is a massive step forward because now within the rules of origin that rcep has within the various chapters on technology transfer on services movement that our sub has companies can start building even bigger factories in smaller countries in asia and take full advantage of the rsi related free tariff or low tariff access so this could be a beautiful shot in the arm for investment in the region for countries that are willing to absorb flows and you have within asia countries like china korea japan very very eager to move some of their investment footprint into asean and i think rsa is a very strong enabling factor now overall global trade has been stagnant or declining ever since the global financial crisis but i think we focus so much on trade-in goods that we forget that trade and services is actually the elixir of global growth these days and going forward that would be it and therein i think lies some degree of advantage of asia asia is very good at services not just you know it's outsourcing in india or philippines or tourism in indonesia and thailand but overall you know whether it is financial services or health tourism education tourism asia is the place to be in my view going forward and therefore the stipulations like rcep will improve cross-water movements will improve cross-water payments and that would be in my view you know a positive contribution to growth prospects in the coming decade ourselves it's also notable that is it's kind of in terms of the countries which are not the kind of uh involved india for example the alicia mentioned taiwan uh how how would that impact those respective uh countries and uh how do you see uh you know trade multilateralization uh in this region evolving in the years we've you know uh rival partners being set up one thing this is the beauty of asia that you know these agreements are not related to ideological stances and they're not like you know set in stone uh as you can see in the case of you know very deep integration like the european union how difficult it is for the uk to get out of it right rsip is not going to be that deep and on the flip side therefore it will not be as stringent or as inflexible uh it was very clearly stated by the rsa members when the deal was signed that as we sort of ratify it through the course of 2021 and beyond the door remains open for any like-minded country to come back or join so therefore they are not closing the door on india india had its own national security domestic political consideration particularly with respect to agriculture and sort of import substitution based manufacturing policies that they're pursuing and therefore they were nervous about you know getting into a deal with china which they felt was going to be unfair to them things can change minds can be changed especially if you see this deal turning out to be very good for non-china part cipants in rsap india could very well come back um so i think that you know many rcep members will continue pursuing various levels of fta with india and and therefore you know you can still have some degree of participation in the supply chain by indian manufacturers independent of rsap to me the biggest gainer for ourselves is japan because japan did not have ftas with korea and china and under ourselves they sort of get this entry into low terry for no tariff movement of manufactured inputs um so yeah japan would be the biggest winner india is not the biggest loser because the door remains open and rsif remains what they have the members have said repeatedly a living document it could be augmented it could be modified in light of reality of global trade and global geopolitical movements okay now earlier we discussed a lot of the growth or relief from i know that there's enabling of of precipitating growth or recovery to take place is state and government relief stimulus and so on so forth how sustained do you see that in the year ahead with stronger sign of recovery and and the the impact of tapering of those uh stimulus and relief i think we are still scarred by the policy mistakes of 2008 2009. at the beginning we were too sanguine and then we got too confident about the recovery so we reacted to the crisis late particularly europe but also u.s to some extent china did not get that wrong they actually saw the crisis coming by late 2007 and were easing policy when europe was busy raising interest rates um so early detection was poor and then the prescription the the stimulus measures were withdrawn prematurely uh and and that held back growth both in eu and the us through the course of the 2010s that mistake will not be repeated by policymakers in europe and us and also asian policymakers have learned from that uh they're so so enabled by the lesson of that crisis i can think of you know many directions that the authorities will pursue the same like keeping fiscal stimulus in place like tolerating higher inflation than their target like enabling banks to continue extending credit which will mark a strong contrast from the post gfc recovery and which is why you've seen the expectations you know whether it is you know five cross five inflation expectations whether you see the shape of the yield curve uh around us dollar assets everything is suggesting expectations of prolonged accommodation to stay in place i don't think the policymakers are going to disappoint us this time eugene one impact of those policy is in terms of credit moratorium and keeping low interest rate low uh how would the tapering of those measure impact banks we talked to uh a few hundred banks in asia right and some clearly say we don't know what is the exit some say it's going to be 30 of those loans on the moratorium will will require some additional help some say it's going to be a few percentage points so you know the the the gap is very large so again it could be pretty bad or it could be really really really good in terms of exits what we've seen so far seen so far uh uh in the last few quarters is that exits are relatively smooth and on top of that exit from moratorium right and on top of that uh banks are providing uh additional uh targeted assistance to clients right so i think what we're gonna see is that a lot of those uh system-wide moratoria will be probably terminated this year but banks would still actively restructure loans uh over over the medium term right it could be you know two or three four or even more years right so we're going to see a you know potential for for a hidden mpl situation in asia and not only in asia but also globally right so i think that that kind of remains remains a risk because you know banks would probably you know might in some form of or never just kick the uh kick the can down the road and and try to uh to avoid recognition of npls right there are markets whereas equality already you know in terms of bad debt like in the indonesia which market do you think are more susceptible to a lifting of monetarium that will impact on yeah you know uh loan portfolios i think you know to answer this question you have to look at the historical credit costs in many of those systems right and in asia credit costs are traditionally pretty high in countries like indonesia india vietnam right but but once you dig into those systems in more detail you see that you know for vietnam for example credit costs were pretty high because banks were uh cleaning up like legacy problems and a lot of it a lot of the same explanation is for india right so banks have been cleaning up legacy corporate and pls right so but but nevertheless credit cycles can be more violent in these emerging markets hence we'll we'll be watching um carefully what what the banks report on top of that this is always uh uh the issue of transparency right so some regulators would in some banks would clearly say okay this is the restructured part this is the loans on the moratorium and this this is the movement over over the last few quarters right so you have a lot of clarity but but many banks don't give you that information so you have to to use additional data points and less orthodox analysis you know try to figure out where you might see more problems not only at the system level but also at the individual bank level so i think it's going to be an interesting year for us to try and figure out who who are the winners and who are the losers here okay mentioned earlier as compared to the previous global financial crisis in this crisis our banks are in a stronger position uh the longer this crisis were to go on um where do you see the weakness potentially of you know obviously as the asset quality comes down you know it will impact on reserve and profitability and and so on so forth where do you see uh the the uh the vulnerability yeah indeed i fully agree you know the the banking systems in asia are stronger than they were 10 years ago uh and the bank banks have been building capital uh so that's that's all good so capital acts as a as a shock absorber and and that's pretty good i think that the risk is whether we see again reinfections or renewed lockdowns and and this whole economic recovery story does not materialize or even reverses right that's that's a clear downside risk in that situation we're going to see probably more risks to the to the bank's balance sheets and and npls but again according to our simulations uh the vast vast majority of banks in asia have really good capital to withstand more stressed uh a more stressed situation hence we don't expect uh uh you know a lot of uh uh pain on the bank's balance sheet banks will be able to withstand those shocks okay and uh again if we were to draw parallel between this particular crisis and the global financial crisis where there is a lot of liquidity low interest rates um you know from quantitative easing um in 200 2007 and 2008 a lot of the liquidity actually ended up in in private equity investments and you know the formation of what was then the start of the gig uh economy and not the fintech startup and so on so forth do you see a equivalent in this pandemic where a lot of that that uh that uh that liquidity going into kind of new economy uh sectors we see that bifurcation in the economy driven by you know technology and innovation versus traditional sectors right one thing look it's inevitable if you have cheap leverage available and the yields are low people will want to use that leverage reduce up their returns this is the most basic you know structural approach toward you know money going to places that you know you don't expect and this unintended consequence of easy monetary policy right so the world is such that you know you have a lot of high net worth individuals you have a lot of corporations all with access to chief financing and comfortable cash cushion who are keen to juice up the returns that they orderly would have gotten from deposits or bonds and they're not getting that therefore they will go elsewhere now this has coincided with some degree of excitement about the world of financial technology and technology in general that these are companies that in the past have been more about eliminating competition and sort of maximizing their hold on the market so i have like the amazon model in mind and therefore if you pick the amazon stock you make a lot of money but the rest of the book sellers go out of business i think what we're seeing in this wave is that the companies themselves are trying to come up with better innovation because the foundation of technology the basic business model of trying to be very large and capturing gains i think that's sort of behind us uh it's hard to sort of you know unless you have some revolutionary new idea you can be the next amazon you cannot be the next alibaba so once that happens then companies have to become a little more creative and that's where i think a lot of excitement is you know areas like you know wealth management and insurance you know where we haven't seen sufficient development you with technology enabling and now that's happening and also mind you when one sector is dysfunctional some other sector will step up to pick up the slack classic example is india india's beleaguered banking system was so shy of lending that you would have had basically a an economic implosion in 2018-19 if non-banks did not step up of course non-bank financial corporations in india had their own issue of governance and and bad loans but the fact of the matter is there was a lot of investment going on there investors like the tech enabled model that many non-banks were pursuing in terms of assessing credit risk and as a result people stopped investing in banks and they went to non-banks and there were times in 1819 when on the marginal dollar basis majority of the credit intermediate in india was driven by non-banks over banks so you will see investment in alternative areas at times like this that's inevitable and unless the authorities worry about bubbles forming or you know regulatory arbitrage taking place or systemic risk building they will let these things continue on the beta for the time being but there is you know a swing of the pendulum time to time as you've seen in the case of china china has been a very big enabler of fintech and big tech for more than a decade and as of 2020 they're not that enamored anymore and they're trying to tighten the belt around the wide latitude that tech companies enjoy and i think this is the beginning of a global phenomenon we'll see it in europe or we're seeing already in europe we'll definitely see it in the u.s and therefore investment in those areas would have to take into account that likelihood of regulatory oversight becoming tighter and beyond that just as a general note you know we are seeing a lot of interest in alternative investment vehicles specs have become a big word these days where companies are listing themselves without going through the ipo route we are seeing you know the turret pace of crime in the cryptocurrency world so these are some other times if you keep rates at zero stuff like this will happen okay and uh finally my final question to both you and to eugene is what do you see as the focus and priorities of banks and the sector as a whole in 2021 i may make a start here i think that the banks would be busy uh trying to uh relax their their credit underwriting standards right so we've seen a lot of tightening last year so banks didn't want to really expand too much there was obviously credit growth but but a lot of it was slow uh and what what what the banks well they need to start grow growing again right so because they have a lot of excess liquidity on their balance sheets and at some point that becomes a structural challenge right it just kills your margin if you just have a lot of cash and you just invest in the govis you don't make any money so banks will have to start growing again and where exactly they're growing that's that's i think it's going to be an interesting area i i don't i also expect maybe a bit more m a activity in the banking space because if you're dealing doing business in in an advanced market you know you probably want to go in more em the em path particularly maybe some banks would be cheaper there and margins are higher as well and of course credit costs how do you control credit costs and how do you ensure that moratoria exits are are smooth and and don't uh lead to a spike in npls i think those would be the key areas for the banks to watch this year to me you know the banks will have to get closer to governments the governments around the region want green financing and they will demand that banks become a very strong player in that we are beginning to see that happen in china elsewhere including in my bank second is the issue of digital banking where banks will be facing competition whether it's in indonesia or singapore or elsewhere more and more branchless internet-based banking which will not only offer uh deposits and credit facilities they might offer a wide ranging of products including travel services and insurance and estate planning and wealth management and so on uh so banks have to sort of pull up their sleeves and get to work if they haven't already digitized themselves they're actually behind and they might struggle i think the banks who have sort of embraced digitalization are ready to deal with these challenges uh and going back to my earlier point that you know green financing issue it also has an overlay of digital banking because when you start lending in carbon neutral activities when you start lending in areas like you know leaving forest untouched and the carbon value of that uh sequestered value of that forest then gets traded in the carbon market banks would have to become participate in all of these things and without technology these things are very very hard to track and measure you need satellite imagery you need real-time assessment to to get seriously into green financing there's a massive amount of capital waiting on the wings whether it is from sovereign wealth funds or international multilateral organizations they all are nudging at banks you know help us issue green bonds help us issue you know deposits that are green compliant and help us get deeper into the activity related to greening of the economy and you know for a while this was something that europe was taking the lead america was sort of here and there i think asia is the next big frontier so to me that's the very exciting background for banks going forward i totally agree it's becoming more mainstream you know it used to be more niche activities but it's becoming more and more mainstream i fully agree yeah okay and then uh with uh with a regular free push as well in europe where there's very few requirements especially in the asset management space to kind of declare how you know sustainable investment portfolios are and that's kind of been propagated across the whole you know financial services lending business into um the capital markets board markets as well okay now on that note so i i think uh among our economists in this banner and uh great analyst in 2021 um a lot of the regional economies will start to rebound if not recover and is from the base uh the base effect uh china will be a a key market to watch and it's recover uh faster than the rest of of of the region and uh with the potential to leave the region uh up as well and uh not forgetting uh globally uh markets like the us will also start to recover but on the banking side the outlook continue to be uh more cautious uh dima uh the the impact on uh asset quality is substantial profitability may not come back for for for until 2022 so banks have to really keep their costs down in order to manage margins and as tamo mentioned watch out for new areas of growth in areas like sustainable finance green finance and thank you very much uh eugene and tamil for your input as well as to alicia who couldn't join us to the end of the session we thank you for your insights and your analysis we hope that our audience has also found this section insightful and useful and you will miss any part of this session and would like to listen to the playb ck of the session you may visit the asian banker radio finance website where you can download recording of past session including this one as well as sign up for our future sessions and on that note i wish everyone and our guest good day good afternoon thank you bye [Music] you