KUALA LUMPUR (June 19): Fitch Ratings has maintained its “neutral” outlook on Malaysia’s banking sector for 2025 while adjusting the outlooks for several Asia-Pacific countries amid trade war exposures.

The rating agency said it has adjusted its outlooks for the banking sectors in South Korea, Taiwan, Thailand and Vietnam to reflect weaker prospects for banks in 2025 amid exposures related to the US trade policies, though the overall banking sector outlook for Asia-Pacific remains “neutral”.

It downgraded the outlooks for South Korea, Taiwan and Thailand to “deteriorating” from “neutral” at the start of 2025, while the outlook for Vietnam was revised to “neutral” from “improving” previously.

“We maintain the ‘deteriorating’ outlook on China’s banking sector, reflecting persistent challenges for banks, as government policies weigh on profitability and banks experience asset quality pressure from a weaker economy and property sector,” it said in a statement on Thursday.

Among the emerging markets, Fitch has kept a “neutral” outlook on banking sectors in India, Indonesia, the Philippines, and Mongolia.

On the “deteriorating” outlooks for banking sectors in South Korea, Taiwan and Thailand, Fitch said this is partly because banks’ loan growth, asset quality and profitability will likely weaken in these markets as tariffs rise, given their higher export exposure and sales to the US.

“There is great uncertainty around the ultimate trajectory of US tariffs, but Asia-Pacific’s high degree of trade openness and its exposure to US demand leave it particularly vulnerable to potential US tariff increases.

“For the most affected banking systems, lower profitability and weaker asset quality would be key channels for contagion from the tariffs,” it said.

However, it added, the ultimate effects of the trade war on regional bank sectors would depend on final tariff outcomes, their impact on local economic growth, banks’ exposure to vulnerable sectors, and the potential for changes in fiscal, monetary or credit policy.

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