Government support drives bank ratings in APAC and the Gulf markets: report

Sovereign capacity to support banks is also strong across APAC developed markets and the GCC.

Government support remains a central pillar of bank credit ratings in the Asia Pacific, the Gulf, and parts of Latin America, according to Fitch Ratings.

The agency said nearly half of long-term Issuer Default Ratings in APAC and the Middle East & Africa are driven or backstopped by Government Support Ratings (GSR), far above the levels in Western Europe and North America, where resolution regimes mean most large banks are effectively rated at “no support.”

Fitch said links between banks and their sovereigns remain tight in many emerging markets. In Oman, China, Thailand, Indonesia, the Philippines, India, Vietnam, and Brazil, major banks’ support ratings are aligned with their sovereign ratings.

In Saudi Arabia, Chile, Peru, Mexico, and Colombia, domestic systemically important banks typically carry the same support ratings as major banks.

Even in APAC developed markets, Fitch sees a high willingness to support large banks because of their systemic importance. Using combined asset and deposit shares as a proxy, the agency highlighted Australia at 70%, Singapore and South Korea at 62%, and Japan at 46%.

Sovereign capacity to support banks is also strong across APAC developed markets and the GCC.

Fitch pointed to high foreign-exchange reserves and relatively low debt-to-GDP ratios in Australia, Singapore, Taiwan, South Korea, Japan, and the major Gulf sovereigns, which bolster governments’ ability to extend extraordinary support if needed.

Fitch explained how this feeds into its rating mechanics. A bank’s long-term IDR is typically the higher of its Viability Rating, Government Support Rating, or Shareholder Support Rating.

GSRs capture the likelihood of extraordinary state support, whilst the VR reflects standalone financial strength based on business profile, risk profile, asset quality, earnings, capital, funding, and liquidity, as well as the operating environment.

Potential downside risks to support ratings include sovereign downgrades, reduced systemic importance or weaker government links, diminished policy roles or state guarantees, and the introduction of senior-debt bail-in regimes.

Fitch said that in much of APAC, including Singapore, and in the GCC, both sovereign capacity and policy willingness to support systemically important banks remain comparatively high.