The overall theme from Standard & Poor's half-year credit quality outlook report card for the Asia-Pacific region's 266 financial institutions is that the sector "remains broadly stable".
Just over 80 per cent of rated financial institutions across 19 jurisdictions in the region had stable outlooks.
Japanese banks account for about one-half of the remainder (those with negative ratings and outlooks).
S&P said "most other international risks - including eurozone risks - appear manageable at current rating levels" and that direct exposures to Greece were low for Asia-Pacific's financial institutions.
Of more concern was the impact of Chinese developments on regional credit quality. A "major disorderly property adjustment in China, though not our base-case scenario, would have a significant negative impact on many of the region's banking sectors, including China itself," S&P said.
"We believe that contagion risks from the sharp fall in China's equity market to the rest of the Chinese financial system remain manageable, at least for the time being. Contagion risks for China may increase significantly, however, if the correction in the equity market turns into a collapse."
"We further note that Chinese banks' direct exposure to the equity market remains insignificant as banks are prohibited from making direct investments in the equity market and making margin loans to finance stock purchases."
That said, S&P will continue to monitor the effect on credit quality of banks' indirect credit exposures to the Chinese equity market, such as:
- banks' financing Chinese securities firms' margin lending businesses, or investing in senior tranches of trust products that banks use in turn to finance unregulated leveraged equity investments;
- declining collateral valuations, noting that Chinese banks accept stocks as collateral for making corporate loans for general purposes;
- an anticipated deterioration in Chinese banks' consumer lending books given that some retail investors took out personal loans to invest in the equities market.
S&P also noted that, because of the greater ratings uplift it assigns to "systemically important" banks in "highly supportive" jurisdictions, Asia-Pacific bank ratings have greater scope for downgrades if assessment of governments as "highly supportive" were to change.
"This could occur if concepts such as senior creditor bail-in, which apply in a number of jurisdictions in Western Europe, were embraced by jurisdictions in the region," said S&P. The agency added that "potential counterbalancing positive trends," such as banks' build-up of [Additional Loss-Absorbing Capacity] is sufficient enough only to partly offset the loss of ratings uplift" if the agency's view of the level of government support was downgraded.