Chennai, Feb 5 (.) Loan concentration is a major risk, and any large loan default by a large corporate could wipe out the full-year earnings of some banks in India, Malaysia and Indonesia, said S&P Global Ratings in a latest report titled “South and Southeast Asia Stress Tests Show Loan Concentration Could Blindside Banks”.
“Banks in Brunei, the Philippines, and Thailand are the most exposed to loan concentration risk,” said Geeta Chugh, a credit analyst at S&P Global Ratings.
“In these countries, banks could lose more than a full-year’s earnings before tax because of high concentration and, in some cases, due to relatively weak earnings. That said, extreme stress could wipe out the full-year earnings of some banks in Malaysia, India, and Indonesia, too,” Chugh said.
Any crash of a titan in South and Southeast Asia’s corporate sector could have deep repercussions for banks. Concentration risks are significant for a few banks but manageable for most others, S&P Global Ratings said.
The credit rating agency said its stress test assesses the impact of a default by the largest borrower on earnings and risk-adjusted capital at banks.
“We assume that loans to large corporations are either not backed by collateral (unsecured) or that the value recovered from these loans in the event of default is very low. While this likely overestimates direct losses–most corporate loans involve some level of recovery–it serves as a proxy for the unquantified risk of supply chain contagion,” S&P Global Ratings said.
In practice, major corporate defaults trigger domino effects. As the defaulted company halts payments, suppliers lose cash flow required to service their own debt, and a secondary wave of defaults occurs. By maintaining a zero-recovery assumption on the primary loan, we have built a cushion that accounts for these secondary systemic shocks, the credit rating agency said. . VJ SAS .