By Simon Miller

Asian banks are closing the ratings gap with western counterparts according to Moody's Investors Service.

At its annual Asian Banking & Sovereign Conference in Hong Kong today, the agency said that stability during the global financial crisis had helped improve Asian bank ratings.

"The ratings gap that had long separated banks in Asia from their western peers has now essentially been closed because the stable credit quality of Asian banks throughout the global financial crisis has resulted in a comparative improvement in their ratings," said Stephen Long, Hong Kong-based managing director, Moody's Investors Service.

"In contrast to Western banks that have experienced significant credit quality challenges since the outset of the global financial crisis, Asian banks are only moderately leveraged, largely deposit funded and generally conservative in their lending" he added.

However, Asian banks are not without risk. Moody's analysts pointed out that most banks have benefited from economic stimuli at the outset of the crisis and they have also taken advantage of the opportunities created by the retreat from Asia of European and other foreign banks, which Moody's credit analysts see as a double-edged sword in some banking systems.

"Rapid growth in new borrower segments and outside many of the banks' traditional markets has contributed to improved asset quality and profitability metrics to date, but it has also made Asian banks take on sizeable new risks," Long said.

He continued: "Given the evolving credit profile of Asian banks, it is important to continuously update stress tests to reflect these changes and assess their resilience in an economic downturn. The biggest risk to the banks is the contagion from the euro area through trade channels."

However, as indicated by Moody's stable outlooks on Asian banking systems, the analysis conducted by the rating agency concludes that the majority of banks in the region have built sufficient buffers to sustain a worse-than-expected economic scenario.

A lower probability but more damaging downside risk than euro area contagion for Asian banks is a hard landing in China.

"While a soft landing in China continues to be our central scenario justifying our stable outlook on the Chinese banking system, we view a hard landing as one that would be stressful for Chinese banks, requiring significant recapitalization needs," said Christine Kuo, vice-president, senior credit officer and manager of Moody's Greater China banking team.

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