Banking profits in Asia are projected to remain under pressure throughout 2025, with analysts predicting only modest growth or manageable declines in earnings for many lenders. As interest rates decline, banks may seek higher-risk opportunities to bolster profits, which could further strain financial stability in certain markets.
In a recent report, Fitch Ratings highlighted key challenges facing banks across the region. In Thailand, small and medium-sized enterprises (SMEs) are expected to struggle with loan repayments, particularly in the aftermath of pandemic-era debt restructurings, which affected around 10% of total loans. The country’s slow economic recovery further exacerbates vulnerabilities in the SME and retail sectors.
Meanwhile, real estate exposure remains a significant concern in Malaysia, the Philippines, and Vietnam, with high vacancy rates in commercial properties dampening the outlook for lenders. Fitch’s analysis also pointed to Malaysia’s considerable exposure to the property sector, where about 8% of bank loans are tied to real estate development. Though Malaysian banks have reduced lending in this area, the property market remains fragile, and the outlook for credit growth is moderate.
S&P Global Ratings, in a separate report, warned that the real estate challenges faced by banks in the Philippines and Malaysia could lead to higher credit risks in 2025. The report also noted that Hong Kong banks might see profitability declines due to shrinking net interest margins, although any negative impact from the commercial real estate sector in Hong Kong and China is expected to remain manageable.
In China, banks are likely to face continued pressure on profitability, driven by the government’s economic stimulus measures. Analysts predict that loan growth will moderate to around 9%, as banks seek to conserve capital in the face of strained financial results.
The broader economic environment presents additional hurdles. The Asia-Pacific region is anticipated to experience more volatility in 2025, with uncertainty surrounding global trade policies under US President-elect Donald Trump. Countries such as Vietnam, Thailand, Malaysia, and India, which have large trade surpluses with the US, could be vulnerable to the potential impact of universal tariffs. A global trade slowdown would likely weigh on regional growth, further squeezing Asia-Pacific currencies and export revenues.
Rising Risk Appetite Amid Interest Rate Cuts
As interest rates continue to fall, banks across the region may turn to higher-risk assets to maintain profitability. Fitch Ratings identified a growing trend, particularly in India and the Philippines, where banks are increasingly exposed to unsecured retail lending. This shift toward riskier assets could also manifest in expanded overseas operations, as banks seek to grow their portfolios in higher-risk markets, with Thailand cited as an example.
In Bangladesh, banking sector profitability remains weak, but a slowdown in credit growth could help ease liquidity pressures. Despite this, the central bank’s focus on controlling inflation is likely to keep interest rates high in 2025, potentially stalling loan growth.
In Cambodia, reduced loan demand might ease funding strains, although covenant breaches could pose risks to financial stability. In Sri Lanka and Vietnam, banks are expected to see improved financial performance, with Sri Lanka recovering from political and economic crises and moving towards completing its foreign-currency debt restructuring. If successful, this restructuring could enhance the financial profile of Sri Lanka’s banks, providing a boost to business generation and profitability in 2025.
Vietnam’s banking sector is poised for continued growth, driven by higher loan demand and a reduction in credit costs. Fitch noted that most large banks in the country have already fully provisioned for restructured loans, which should limit risks to their balance sheets.
Outlook for Individual Markets
The Philippines faces a mixed outlook, with credit growth expected to remain moderate and costs potentially rising. While the share of higher-risk consumer loans is increasing, the country’s large corporate borrowers should help stabilize the sector.
In Singapore, banks are expected to experience slower profit growth in 2025, as net interest margins have already peaked in 2024. While higher loan volumes could help offset this slowdown, profitability will remain more sensitive to margin fluctuations.
Meanwhile, Indonesian banks are likely to benefit from the country’s strong economic growth, which is expected to support controlled credit costs and robust net interest margins, thereby sustaining profitability.
As Asian banks navigate the challenges of 2025, the regional banking landscape will remain marked by a delicate balance between cautious growth, rising credit risks, and the pursuit of higher yields to maintain profitability amidst declining interest rates.
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