APAC banks can expect a more stable outlook despite persistent significant risks

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At the Asia Pacific Banking Industry 2022 Outlook virtual session, chief economists and industry experts discussed key challenges and risks confronting the banking sector in the region. The dialogue covered the state of the global economy and financial systems, impact of the COVID-19 pandemic resurgence, and how banks in APAC will perform in 2022.

Alicia Garcia Herrero of Natixis, Taimur Baig of DBS, Bert Hofman of National University of Singapore, Eugene Tarzimanov of Moody’s, and Oleg Patsianskiy of BPC shared their insights and analysis of the industry outlook in 2022. Foo Boon Ping, managing editor of The Asian Banker, was the session moderator.

The session began with an optimistic forecast from Herrero as she projected an economic recovery for Asia Pacific as the US eases off its fiscal and quantitative tapering. However, she also warned that the new COVID-19 variants may lead to more restrictions on domestic and international mobility and impact supply chains. In terms of credit risks, the banking industry in the region would see a moderate increase in 2022.

Meanwhile, Baig tackled the reopening dynamics in emerging markets, clouded by US monetary policy moves and reflected by high inflation rates and quantitative tightening. “We're beginning to see the dollar strengthens against emerging market currencies and around that narrative, we will see a broad range of implications for emerging markets… Asian central banks will not match one for one.”

Hofman delved into how China is taking a different track by signalling an increase in infrastructure spending and lowering banks' statutory reserves that will help stimulate the economy. Meanwhile, Tarzimanov, spoke about the downside risk of increasing private household debt impacting banks' asset quality. Patsianskiy discussed the growing competition between fintechs, digital banks and the traditional banks. Although the banking and economic outlook may be stable in 2022, the panellists emphasised that geopolitical risks persist and appear to be escalating and may result in significant unintended consequences. They also discussed the risk to financial markets and currencies should an over hawkish or misperceived inflation-induced rate hike materialised in the US, that will especially impact emerging markets and create a contagion in global markets.

The following key points were discussed:

The following is the edited transcript of the dialogue:

Foo Boon Ping (FBP): Hello and welcome to The Asian Banker Radio Finance. Today we’ll be turning to our expert panel of economists and industry experts to look at the key issues and factors that will affect the global economy, financial systems and specifically how banking system in Asia Pacific will perform over the next twelve months. We are happy to have as our guest today, Alicia Garcia Herrero, the chief economist for Asia Pacific at French investment bank, Natixis. Taimur Baig who heads economics as far as macro strategy for interest rate, credit, currency and equities at DBS group research. Bert Hofman is the director of the East Asian Institute and professor at the Lee Kuan Yew school at the National University of Singapore. He was formerly with the World Bank, as chief economist in East Asia and Pacific and country director for China. Next we have Eugene Tarzimanov, who is the senior credit officer responsible for the financial institution group at Moody's investor service. And finally, Oleg Patsianskiy, who leads BPC banking technologies, digital banking division, and he is responsible for designing future digital banks. We are going out live on Zoom, Facebook and LinkedIn. And we would like this to be an interactive sessions. If you have any questions for any of our guests, please use the chat or raise hand functions on Zoom and comment function on Facebook and LinkedIn. And we'll address them during the course of the discussion. The worst starts 2022. 

The third year in a row, it finds itself still in the throes of the COVID pandemic, and economic prospects appeared to be good near than before the prospect of a global coordinated stimulus and vaccination that rebound in 2021 was short lived, scattered by the emergence of new and more virulent variants of the virus and a full blown pandemic resurgence. In many instances, conditions at the end of 2021 were worse than at the start of the year, hospitalisation and death on Delta exceeded 2020’s tally. Social distancing, measures became more restrictive, trade and supply chains bottleneck persisted and domestic social and political order deteriorated as inequality in income and economic opportunities widen aggressive fiscal stimulus and easy monetary policies funded by government deficits have increased public debts and fuel asset prices and inflationary pressures. More significantly, it has limited government's policy room to do more to drive growth in 2022 and beyond, especially for less developed economies. Externally, geopolitical tensions between the United States and China, as well as Russia and the West escalated noticeably into 2021, weighing on global business confidence and investor sentiment, growth in developed and advanced economies, in particular, the US and European Union reverse trend in the second half of 2021, lowering demand for products from emerging and developing economies in Asia Pacific and the rest of the world. The world bank expects global growth to slow markedly from 5.5% in 2021 to 4.1% in 2022, as the buildup of demands evaporates, and fiscal and monetary support starts to unwind around the world. 

This slowdown is accompanied by increasing divergence in growth rates between advanced economies and emerging and developing economies. Growth in advanced economies is expected to slow from 5% in 2021 to 3.8% in 2022. Still sufficient to sustain output investments to pre pandemic level. However, in emerging and developing economies, growth is expected to fall more precipitously from 6.3% in 2021 to 4.6% in 2022. Growth in East Asia and Pacific is expected to slow to 5.1% in 2022, in tandem with the deceleration in China's growth. However, South Asian economies Bangladesh, India, Pakistan, in particular are expected to see a pickup in growth to 7.6%. Now turning to our panel expert, the World Bank has struck a gloomier tone in its 2022 global prospect report, citing many downside risks. It is obviously pessimistic about recovery and growth in 2022, especially for East Asia and Pacific. I'd like to get our guests’ views of how you see the pace of economic recovery in Asia Pacific, the prospect of bringing COVID-19 under control and possible financial market, a black swan event in 2022. Let's start with Alicia to give us an update of APEC growth and risk this year. Alicia, you're warning banks to exercise caution as we enter 2022? Could you elaborate?

Alicia Garcia Herrero (AGH): Well, it's always nice to be cautious. But you know, we've been through a pandemic for two years. So I'm going to bring a little bit of light to discussions. As much as I'm always rather negative on on issues. So but I'm going to try very hard to bring some light here. And the first thing to realise is that we're in a different cycle in Asia, as opposed to the developed world. And I'm going to exclude China for a second, because I think in that case, we are indeed in that very same deceleration mode, as the US at Natixis, we're actually quite non-constructive on the US because we have growth as low as 3% in 2022. And not as hawkish on the Fed, as the market, to the point of no rate increases this year, which is, you know, not my call. But it's the bank’s call. And it's quite a contrarian one, meaning and this is the key that from the US do not expect major demand or anything, and that's important for Asia, but I think Europe is less, you know, in this deceleration mode yet, because we have a lot of money coming from the next generation. And then we get to Asia, China decelerating. But clearly, the PBOC reminded us today, again, that the PBOC is ready to help. And I think we already heard about this magnificent, although already well known. Stimulus based on you know, high speed trains, and you name it so in. So I think China will decelerate but not massively. We still have 5.2% there. Yeah, I mean, the rest of our back, I think we need to realise that us and did poorly in the second half of 2021. 

High inflation rates’ impact on stability of banking sector

So we should see a recovery if Omicron is a moderate risk, which I think it will be eventually I don't think we'll go back to full lock loans except Greater China. That's a different topic. So on in that regard. I'm constructive on growth for a pack. I think that's good news. I don't think the Fed will be as hawkish as the market is discounting already six rate hikes in between 2022 and three, four and two. But what does this mean for the banking sector? I want to get there and I stopped there? Well, first of all, as long as growth remains moderately in China, rather strong enough in ASEAN, we should not see a massive increase in credit risk, which is good news for banks. And at the same time, because inflation is not hugely important in Asia, compared to the US or even Europe. I think real rates will remain decent. I mean, maybe high, slightly higher. But what the biggest we have is 100 basis points in ASEAN and we saw 75 in South Korea. I mean, it's not massive, I don't think anybody's going to go beyond the Fed to be frank. So in that regard, I can't think of a terrible scenario for Asia, to be frank, and for the banking sector, not even for the banking sector, because credit risk should be moderate. And you will have a little bit of space with a higher interest rates that you didn't have in 2021. So that's my call except China. Remember that China is actually going in the other direction, on rates. And that's a little bit of a problem for China's banking sector, because the margin has been shrinking. But other than that, rather constructive. 

FBP: I guess that's rather optimistic for the sector in Asia, and well, on the rates, especially, not that hawkish on the US rates. Okay, let's hear from Taimur. Taimur is kind of spoken or written about specific risks in the asset market, in particular correction in China, and also about the the high public cost of the pandemic, increasing public debt burden of dealing with COVID. Tell us more, Taimur.

Taimur Baig (TB): Its great to be here with you again, good to see you and some of my colleagues on the screen right now. Welcome to the webinar participants. I'm really glad Alicia went first and gave her rather starkly counter consensus view, because I have to take the other side. Nobody wants to be part of consensus, but there's somebody in there right and I am one of those people. No, we are looking at a series of rate hikes in the US not just around the inflation dynamic which we think is actually a secondary concern, because that will fade in the second half of the year. But more about the Feds view on the employment picture, the wage picture, the output gap, where the real interest rates should be at a cycle phase like this. So based on that it is very clear from the Fed governor and they communicate a lot, right, we don't have to guess what they're saying. We know where they stand. They're not only thinking about three rate hikes this year, they're thinking about quantitative tightening, which entails selling assets, taking the cash into the bank, central banking ledger, banks ledger and retiring, right. 

So people don't realise that the opposite of QE is not just selling assets, as opposed to buying assets, because those assets were bought with money printing, and now that money will be actually electronically destroyed, if you will. So we think all of those things are on board. And this is a remarkable turnaround in the tone of Fed officials from even six months ago, when they were thinking about rate hikes, not till the end of 2022, perhaps even in 2023 later on thinking about quantitative tightening, they probably felt that they could just get away with very large balance sheet, staying there, maybe incrementally doesn't go up. But they would have think about quantitative tightening for a long time. All of those things are on board on the table now. Consequently, just the fact that they have put these things on the table, and the fact that they are talking about it already has started accomplishing their objective curves are steepening, we're beginning to see the dollar beginning to strength against emerging market currencies. And around that narrative, we will see a broad range of implication for emerging markets, including China, currency weakness, in my view with the RMB space, or in Singh dollar space is the order of the day, in a year when the Fed would be hiking, Asian central banks will not match one for one, the Feds moves, they will do a little bit reluctantly, nobody is in particular hurry to raise rates in Asia unless their currency is under threat. Unless their external stability is under threat, they will try to do as little as possible. Having said all that, just a couple of hours ago, we heard Bank Indonesia, as Alicia pointed out, China is going in one direction, rate cuts, reserve requirement cuts, Indonesia is following the global cue. 

 

Rising interest rates in US impacting currency and capital outflows in Asia

They're talking about becoming hawkish, they're talking about raising reserve requirements. And ultimately, they will talk about raising interest rates when the RBI meets in two weeks time, they'll do the same. When MS meets in two months time, they'll do the same, or three months time. So we are at a very interesting juncture, which is a year characterised by fairly high commodity prices, and rising interest rates in the United States ought to be a very, very difficult year for Asia. Typically, that means pressure on currency, pressure on capital inflows and so on. But it may not be the case. And that's my key point. The reason the Fed is hiking rates is because it is comfortable about the demand outlook. And if the US demand outlook is fine. And we think European demand outlook is decent. We think China's demand outlook would be okay, on the back of policy easing, then why are we so worried about Asia's outlook in general, think about the bank stocks around the world their rally, why? Because they feel that a high interest rate environment is only a normalisation, it entails a good kind of curve steepening, which allows banks to make money, keep giving up loans, and that itself would be a positive impulse for the overall economic dynamic. So that's my sort of, you know, vantage point. I mean, if you think about rest risks, of course, there are countries that are highly indebted, of course, there are corporations, which will see their spreads widen a post to compress. But as a system wide dynamic on narrative for 2022. We ought to think in terms of strong demand, causing rates to go up, not strong, higher rates, causing demand to go down.

FBP: Okay. And then the higher rates in the US itself, how does that impact demand in itself, it kind of will kind of have a counter effect on FX market.

TB: Well, as far as the equity market is concerned, given that they're characterised by extremely high valuation, I'm talking about the US at the tech space. I think the markets verdict is clear over the last four or five weeks, as we've seen expectations of interest rates rise, we've seen a massive sell off in tech stocks, and if the Fed keeps on communicating higher rates and quantitative tightening, that will be the par for the course of the rest of the year. That does not necessarily mean bad things for asset markets, particularly with respect to equities all over the world. valuations in Europe, valuation Asia are very attractive, and I'm beginning to hear portfolio managers start talking about how it is time to put on some risk in Asia. And therefore, on the equity side, you could see a bit of a bifurcation where you we see a value from growth rotation in the US. Whereas the rest of Asia, rest of Europe, we see overall pickup in investor sentiment. Housing is one area where higher interest rates are unambiguous. And we begin to see that play out all over the world, whether it's in Singapore, or the United States.

FBP: Okay, great. Okay, but we'll get well, I'm sure we'll get more into that. But you didn't touch on China, though, or you avoided that. But we'll get Bert to comment on that. Bert what worries you about China in the real estate sector is national debt, especially in the corporate  as we segment the financial stress in China, it is also focused more on building domestic resilience and addressing inequality issues, whether it's your circulation and common prosperity strategies, in that sense, is a slower growth by design just by needs, albeit with negative impacts on the region.

Bert Hofman (BH): Well, you're right, let me first make one remark on the global growth, yes, global growth is coming down. But mind you 4.1% is still a very decent growth rate. And it's about a percentage point higher than the average over the last 60 years. So and even higher than over the past 10 years. So it's a normalisation of growth, that is not a collapse in growth in any means. And China is a little different. And China came out last year, a little different than I think they expected, or many people expected 8.1, it wasn't the end. But some say it might even have been a bit lower, in part because China's had to do a lot of things. Indeed, they tried to introduce a major new policy concept, the cons, the common prosperity, and nobody quite knows what it is yet, but it's clearly going to be a very different direction. Second, they want to, they wanted to correct the, if you wanted the risks in the real estate sector more broadly in the banking system, or in the financial system, by exposit, targeting a lower leverage ratio on the macro side, but specifically on real estate, and that probably went a little bit too far, and a number of companies tripped over. And if you're one that's caused some of the major slowdowns in the real estate sector itself, but also a knock on effect on local government and local government investments simply because they rely a lot on land sales. And it's the real estate companies that buy the land, and they were in the final two quarters, they were almost absent. So I think the Chinese authorities are now a little bit less comfortable with the current level of growth, and they want to see it a bit more. And if sort of the signal. Alright, we're going to loosen up a little bit on the monetary side, no longer a target for de leveraging, if you want on the macro side, the end the reserve requirement a little bit lower. And now it has been interest rate moves as well. Not sure what that will mean a very, it's not all still relatively small. So it doesn't mean it's a massive increase in liquidity. But on the fiscal side, which was already supposed to be proactive, but it wasn't that proactive last year, I think we will see more. 

And yes, we've heard this emphasis on big infrastructure, as being the driver of growth, it's not a return to a real estate driven growth if you want a doubling down on the infrastructure growth, I do think a number of things will need to happen before that actually works. And specifically, this whole mechanism of real estate, land sales, local revenues, local bonds, government bonds, sales, that has been a driving machine for infrastructure finance, including, by the way, high speed rail, a lot of the High Speed Rail is financed by local government, not by a central government, not even by railway. So there's this joint ventures made between the railways and local government. So you need a strong local government revenue base in order to pull that off from my assessment. And I'm not the only one. Some things need to happen in the fiscal sphere, the central government needs to be more generous in terms of giving a bit more taxpayers to the local government and a bit more transfers, and then it can leave which that money to get more infrastructure investment. So a number of policy steps would still need to find a place before I would be comfortable with the projected expected growth of around five a bit higher than five people say so it might go even below five.

FBP: Great, thank you. But do you see China's doing more on the fiscal side? It’s already starting to ease up on the monetary side, as opposed to what the rest of the world is doing. Any comment from what Taimur mentioned earlier about the Fed, tightening?

BH: So China doesn't need to be very nervous about increasing interest rate worldwide, they are a net provider of savings to the world. And clearly the actually the financial sector is in ok shape, I can't say it's doing great. But despite all the turbulence in real estate, they have enough reserves to cover any any potential losses that might come from that. China is going the other way indeed. And that would probably mean as time or said would probably mean that we see a bit of a weakening of the RMB, which helps China gaining out of net exports, frankly, that was a big driver last year, it sits uncomfortable with some of China's own objectives worried in a way they want to move away from this export dependency. I don't think this year is actually the year in which that is going to happen.

FBP: Okay, great. Thank you. And like to get Alicia back on China, but also to respond to what Taimur mentioned, is the consensus view that interest rates will go up in the US more aggressively and how would that impact Asia and also, your view on China in particular, the step is taken to decrease in real estate, financial services, and also in some emerging areas like DeFi cryptocurrency as well as the tech sector in general.

AGH: Well, higher rates in the US are factored in as far as you can see that from the long end of the curve. So even you know, whoever is right on how many hikes, you are still already seeing the market driving that. But let's not forget, real rates have never been as negative. Yeah, I mean, they're just literally collapsing because of the very high inflation in the US. And real rates are important for investors as well. They're important for foreign direct investors, you know, thinking ahead, and with, of course, their own inflation expectations down the road. So although they use may look more appealing nominally, it may not look so appealing in real terms. And I think that that might be the reason why we're seeing this strong renminbi. You know, while we were having the PBOC cutting, and then immediately after the 4% growth for the fourth quarter, well, how come? Well, because maybe, you know, people are thinking, Well, let's look at real rates and the differences is not, is not going in the same direction as we think. So in other words, although in principle, we should see less inflows into China, because of the narrow interest rate differential is now at 100 basis points rather than 260. 

So you know, it might not be as clear cut, we also have to think that the market is now discounting stimulus. So you people are cheering, whether it's in Hong Kong Stock Exchange today, or more generally. So that is a counter force, because we had very low equity prices in China and Hong Kong 2021. So, so maybe even need, we should be seeing less inflows and weaker renminbi might not happen. Yeah, because of the stimulus. And again, reiterate. And that in a way is, it could be also the case of the rest of the region, because China is such a supportive engine, as we've learned, especially in 2021 in terms of imports for us and I mean, again, that gets into the idea that yes, the US will be hiking and we're all scared but I think who should be scared is very hard. I mean, really high yield, especially US credit to be frank because again, Asia has plummeted especially US dollar high yield because of the real estate sector. So you know, we've already done our our bit. I think that's that's the reality. And I worry however, to put a little bit of a negative here about some frontier markets, many are not in Asia, some are emerging and big like Brazil, you know, for that matter Turkey, but in Asia, we have some frontier markets that we may need to you know, think about whether it's Sri Lanka, Pakistan, others I mean, I'm sure others know more than me about this, but I just want to say that I see that more of a I don't know how big the risk I'd like to hear from Taimur. I think Taimur wanted to add so I’m happy to hear from him.

TB: So Alicia I mean, I fully take your point on board on that I didn't, if I may just add two points, one to reinforce her point on the equity side. Look, we have seen a case of foreign investors not being interested in our stock market and doing very, very well. And that country is India, in 2021, India had a record runup its equity prices. And the entire rally was taking place whether foreign investors were a net seller of Indian equities, you may quite see a similar phenomenon on China this year, where domestic sentiment as well as South Asian sentiment with respect to Chinese stocks turn around and propped up prices where American investors either because they don't believe the China story, or because of geopolitical reasons, choose to remain somewhat reticent about investing in China, you could have a situation like that where you don't see massive inflows and still see a really, really good return on the Chinese markets. We've already seen that play out elsewhere.

FBP: Okay, great. I’d like to also ask about the Chinese tech stock, right. So that's kind of a draw of Chinese tech stocks that have earlier done their IPOs and in NASDAQ and all that kind of pullback from there. And when that stems on both ends, right on the US side, in terms of all the official announcement about Chinese tech, and also within China itself, the clamp down on the tech sector. How do you see that playing out? I thought that maybe Alicia, and then Oleg.

TB: Yes, I'd like to hear a Bert’s view on this issue. Okay, my two cents on this is the following. The tech regulations were draconian, they took the market back. And we have seen tremendous amount of value destroyed. And we also have this additional complication of listing in the US and having to delist and come back to China and so on. But some of the cleansing that we're seeing in the Chinese tech space, is under the guise of the kind of reforms that Western policy-makers have been dreaming about for years, and not having had the political capital to implement going after it oligopoly power, pushing hard on data privacy, trying to reduce the profitability of sectors that have huge unfair advantage on data and market scale. I mean, that's the kind of stuff you hear Lena Khan in the US, NEC talking about, but not being able to implement, the Chinese have gone out and done it. So in some ways, and I think Bert and I have had this conversation once before is that some of the liberal democratic ideals for how big tech should be dealt with the Chinese are basically go ahead and pursue their agenda. Of course, they did it in a very heavy handed manner, and probably could have been done in a more seamless market, supportive way, but maybe they don't care.

FBP: Okay, well, then break our bread into that, that discussion.

BH: I fully agree with Taimur but just one addition is that I now see the risk more coming from the US side. And the regulations that make it impossible for ADRs. To be used as a vehicle rather than further regulations on China. The way I read the tea leaves on the policy for announcement with regard to the internet sector, I think the storm is dying down. And there are lots of opportunities as well, and that there is a drive to create those world class players. And you can't do that by shackling the world class players completely at home. So I believe that there is some upside on the Chinese side. So the risk is now more on the regulatory sphere in the US.

FBP: Okay, great. And Oleg, could you also share your perspective on China? China's increased scrutiny and regulation of the tech sector? And how is that impacting biotechnology around the world, for example, when a lot of Chinese tags are being used, not just in China, but increasingly in Southeast Asia in some of the emerging markets?

Digital banks vs traditional banking model

Oleg Patsianskiy (OP): Right. That's interesting, because I mentioned that there was a paper coming from Psalm 21, prepared by BCG, but the digital bank in Asia, and it appears to be that out of the more than 200 digital banking entities around the world, about 5% only being profitable, and most of them are coming from Asia. So they share something in  common. And it's not only about the technology, but how they approach the customer niches. And let's say that there's still have a strong brand, they still have a customer recognition and they have the ecosystem advantage. And probably this is the most visible one for the rest of the competition. Because most of the profitable players are actually backed by big, big tech. And this ecosystem advantage creates a wide reach with the customer base and the platform itself. Of course, also there is a couple of additions in terms of financial services. And if we talk about the competition from fintechs, and digital entities, it's always a question, what is the profitable model? And what is the sustainable model. And it appears to be that most of the profitable entities actually begin lending and financing services. And we think that pretty much similar to the traditional banking institution day, they still do the same thing, but it with a different package. 

And we also understand from a technology perspective, as long as we're technology company, that building this super app, that's a common term in the industry, when we you are able to extend your app with more partners with more services, not necessarily connected to the financial services per se, that will be the winning factor. And they're showing to the rest of the world that this model works. And, of course, also the technology plays a big part because they they started from the ground up, they haven't used anything ready. And out of the box, they build on the cells. And there is a general organisation there is a governance and also the scalable and flexible technology that we're using. So I would say, China, Japan, Korea, they show us a couple of examples how to build a proper, profitable business in digital banking. And if you ask me about the competition, then probably that's not the competitive scenario. But traditional financial institutions need to look at the experience how they achieve that, it's still, it's still more or less banking experience, or it's financing some lending products by now. But later, I'm connecting multiple partners, and creating an ecosystem for a customer to keep the customer to satisfy to meet the customer needs from the single app. And this is what they're doing. And I'd say that the Asian experience is that's the benchmark for the market. As coming from a technology perspective, they have everything that other players need to look at really, really seriously and take into account.

FBP: Okay, great. Thank you Oleg. And it's true in China, when they have been very innovative and world leading into the use of technology, for example, in AI, machine learning, and even in blockchain. But what the increased scrutiny and regulation has done is that it brought China tech more into parity with technology companies around the world in terms of now they are being scrutinised and being regulated in their use of data, for example, concerns over data privacy, and the use of technology like AI and ethical use of those. So and that is, I think, an interesting area to look at. But putting the focus back into the banking industry in Asia Pacific. I want to kind of bring Eugene into the discussion. Moody's issued in December and stable outlook for the industry. Now, how do you see the outlook given the continuing, volatile COVID-19 environment, despite increasing vaccination rates, but and also the emergence of new variants? Has anything changed in terms of your outlook? Eugene? 

Eugene Tarzimanov (ET): Thank you so much for being and again, pleasure to be on this forum. And thank you for having me. So you're right. In December last year, we published so called outlook for banking, banks in Asia Pacific. And it was a stable outlook, meaning that we expected credit conditions, fundamental credit conditions for banks in Asia Pacific to be fairly stable, right? And there's a number of factors underpinning that view. And a lot of them are holding and holding as of now. So the first one is the more entrenched economic recovery in Asia Pacific. Right. So following again, as you mentioned, higher vaccination rates, you know, a lot of the countries will be on the on the more firm recovery rates in Asia Pacific, right. The second one is fairly stable loan quality that we expect in Asia. I mean, we all know that there wasn't a lot of NPLs recognised during COVID by the banks, because there's a lot of forbearance. There's a lot of restructurings. But our view is that most of such loans will be performing and won't bring a lot of new risks to the bank. So NPLs will increase just a bit. And the credit reserves that the banks already created during COVID as part of IFRS nine, for example, which is the accounting standard, applied in most systems. So that's provisioning buffer is already very significant. So that covers any future and deals that might materialise. So that's another supporting factor. 

Another factor we look at is profitability. So if banks less, you know, if the loan quality is fairly okay, we would expect credit costs for the banks to normalise or go down really, in the next couple of years. And by credit cost, I mean new provisions as a share of loans that the banks have. So also, we expect the credit cost, again, will return to pre COVID levels. So that will support bottom line profitability of the banks. Now, another important or key driver for profitability is obviously policy rates. Right. And on that front, you know, even in December, we were not really expecting any hikes in the US for 2022. But but now that has changed. So we expect three hikes this year in the US. We also expect, I guess, more hikes in select markets in Asia Pacific. So that in itself might have further positive implications for bank net interest margins, right. And ultimately, if we also see a steepening of yield curves, further progress on that so that will further support bank profitability, because, again, banks are sensitive to short term rates, but they're also far more sensitive to longer term rates, right. So if the yield curve is steep, there you go. That's an ideal scenario for your profitability as a bank. So overall, I guess you know, our view hasn't materially changed inflation should come down a bit. But again, the interest rate hikes, particularly in Asia, will progress and that will support bank profitability. 

FBP: So your hike will support profitability in terms of increasing margins with the impact on credit quality itself? NPLs increase, you don't think is that material nor in terms of impacting demand for credit, for example, given higher rates?

ET: I think every time there's an expectation of frame rate hikes. The view okay, that's a positive for margins, but what is going to happen to those marginal borrowers? Will they be able to service their debt? And I think, certainly, they might some pain for the marginal borrowers, but don't expect that to be excessive, right. And also, I mean, in Asia, you have systems, some emerging markets, where household debt or corporate debt is very, very high as a share of GDP. So I mean, that's not a new development. So, I mean, there will be some marginal borrowers who might not service their debt, but again, any rate hikes will come from a low level right? And if and else materialised banks have already have pretty good buffers in terms of already created provisions. So that is a strength for Asia.

FBP: Okay. Now, in your report, you also mentioned the competition for incumbent banks coming from digital players and also in that regard, and also risk that comes increasingly from having a bigger digital footprint, for example, cybersecurity and so on and so forth. And in Singapore, we see some, you know, some kind of notable incidents. Can you talk about how this will kind of reflect into 2022? Increasing digital services, digitisation, and how banks will kind of respond to the increased risk as well, and how big of a risk do you see?

ET: Yeah, I think we think there's a few kind of long term play around long term trends at play here. And one of them is the technology aspect and disruptions that are brought by new entrants, you know, you could be super ops, it could be the likes of, by now pay later companies, it is the payment space with a digital currency. So there's a lot of disruptions that are playing against the banks, right. So that, you know, we were I don't have a frank answer here. But this could mean that banks would not be able maybe to recover to their full profitability that we have seen in before COVID, really, because their margins will be kind of gradually eroded by competition, right. And on top of that, banks themselves have to innovate heavily, and invest in technology and talent to keep, you know, their competitive edge here. So there's a number of factors that play that will, I guess, limit bank profitability in the long term? 

The other secular trend I wanted to mention, that we haven't really touched on.is ESG. Right. So what's happening is there’s a lot of scrutiny, from investors and regulators alike, around greeting the economies and, you know, softly or even hardly pushing banks, you know, to get out of certain industries. So, I think there's an interesting development in Asia, where we seeing, you know, advanced economies, obviously doing a bit more on that, including the regulators in advanced economies, as opposed to emerging markets. So they could be a case where advanced economy banks in Asia are kind of perceived as greener in the coming years, as opposed to emerging market banks that continue to originate a lot of this business. I mean, it can take think of coal in Indonesia, and similar lending exposures, right. So there might be a growing gap between em banks and advanced economy banks, in terms of kind of ESG perception. And that could drive up a bit of credit differentiation, to be fair.

FBP: Okay great. And I like to bring also maybe Bert into this discussion on sustainable finance, and this whole issue of climate change, risk, right, the transition to green finance and in China, for example, during COP26 was singled out for not doing enough to, you know, to kind of bring down emission levels and stuff. And although the pronouncement in China itself is that they are doing a lot to kind of break finance greener is now being done in China, and how do you see that space developing? For example, in green steel, for example, right, yeah. I mean, they are one of the leaders and, and it's not just lower, lower a call or ingredient, but also the manager factor. Processes are becoming greener.

BH: So that's still one of the bottlenecks in China if you want, but the commitments are very clear, it is the beginning of co2 before 2030, net zero by 2060. There are by and large cast in stone, in terms of catching up on green finance, China has a long way to go. But at the same time, China's also big there is one of the largest green bond markets in the world, the green standards of the People's Bank are really quite high. But of course, there's been a bit of a bark of some evergreening of some of the financing in the past, I think going forward that is increasingly more difficult. The space is very, very big. I mean, if you look at there's been estimates by Ching Hua University, on what would it take to go to net zero by 2060. And you come to an amount of something like 100 trillion RMB, which is sort of more than one GDP over the next 40 years. That's an interesting first of all, it's a big number. Second, it's an interesting number. So it means that a lot more green financing will have to be developed. 

There's a number of technological bottlenecks that need to be solved. So as you say, some of the manufacturing still runs right now on coal, there needs to be an alternative. There needs to be some leapfrogging and technology but and infrastructure, and more from a macroeconomic point of view, you I would say this is rather than building more houses or building more high speed rail, this is a perfect macroeconomic tool for China, ie you can accelerate or decelerate a little bit, the investments needed in the green economy. And I see maybe not this year, but in the next couple of years, I do see that transition happening. I mean, it's all high speed rails great. But if you already have 440,000 kilometres of it, another 20,000 is probably less useful than the first 40,000. But that's the logic of of investment there. So alternative means of having big infrastructure, finance on tap, to stabilise the economy is going to be big. So I actually think that there's going to be a real growth industry. Green finance. Thanks.

FBP: Okay, thank you Bert. And Taimur for more perspective, for the rest of Asia, in particular, Southeast Asia is a bit behind in terms of greening the economy, for example, but think, for example, DBS bank, in terms of your support for green finance, and the place that the bank has been in terms of target and has said, set for sustainable finances with increase over time. Tell us a bit about how you see that greening the economy, opportunity for Asia.

TB: There's a lot going on in that space. I mean, the intersection of technology and climate change, I suppose, is the area where a bank like DBS is particularly excited about because then you have green finance and green technology all coming together. One example would be a country like Indonesia, that is interested in nature based solutions, meaning they sequester millions of acres of forest for weeks they receive compensation, and then this becomes a source of carbon credit. Well, you can conceive of an NFT, that contains all the information of that nature resolution that gets traded on CIX, which is the carbon impact exchange, that DBS has to participate in the formation of, and then you all of a sudden have this beautiful marriage of cutting edge technology, and cutting edge climate finance. So the area is very exciting. And as Bert pointed out, whether it is China or Singapore, there is a limit to growth through the fossil part of the economy, where there seems to be just the beginning of the growth that can be realised through green transition. But herein lies one important issue. 

And this is where the one thing that Eugene was talking about in terms of profitability of banks, when you tie it together, which is the only way that the E part of ESG works, if the relative price of carbon emitting products go up short of that the consumers are not going to just you know out of their good nature start you know, recycling and doing things, they will do it because it is in their economic interest to do so, because there is a tax and the polluting stuff is more expensive. So any sort of carbon pricing any sort of carbon tax that one can envisage, whether it is a corporation, or it's a bank, from a societal welfare perspective, they should pass it on 100% to the consumer, because that's the way changes will happen. And so we because, you know, at the end of the day, the environment related aspects are at the retail level, of course, company should also become responsible, but the demand for their products is driven by the retail sector. So therefore, I think the government has a role to play in making sure that actually the relative price adjustment happens at the retail level. So I wouldn't worry too much about profitability of banks and the financial sector in general, because I would expect 100% faster.

FBP: Okay. The biggest challenge, obviously, is a big part of the economy is currently still brown, right? Still fossil fuel, and coal and so on is that transition, you still need to support your existing client, even as they move towards that and know, and possibly some of the expectation of that transition is how real is that in terms of 2060 years, so on so forth?

TB: Well, I mean, 2060s, I think easy for most politicians, because they're not around. But hopefully some of us will be around to see you know, what it is live up to their promises or not. But on the issue of climate transition, and the cost and arrangements associated with them. I think we saw it play out very, very vividly in China last year, the year began with very strong strict targets on electricity production by provinces. And these provinces completely, totally were incapable of living up to those requests on one hand and living down their expectation of growth. And as a result, we had these blackout issues and massive disruption. So you have to have redundancies built in you have to have a bridge otherwise, you know, you just cannot jump from fossil to renewables.

FBP: Okay. So, Alicia, earlier in some of our questions on supply chain, for example, you see some of the risk in supply chain persisting and one of that risk itself is will come from this transition as some of the supply chain players as they move to more sustainable alternatives.

AGH: Yes, indeed, I mean, supply chains are actually producing 50% of total emissions. So we keep on talking about electric vehicles, but that might be story in Europe in the sense that transportation is more important in Europe as a source of emissions than it is for China, where most the biggest bulk of it is actually the industrial sector. So, but so two things are happening to answer your question and chip into what was discussed before the value chain will be probably untouchable carbon emissions related because there's so many other things that are happening that are making the whole thing very difficult. Yeah, we still have COVID policies and what it entails for shipping costs and air cargo etc. To you know, that the whole reshuffling that was happening even before so in terms of import ties from the US and companies on appreciation of adult risk, which could be flats in Thailand, as opposed to you know, so all of that plus the need to decarbonise value chains. 

And on that, I want to add the fact that the way we've designed our carbon pricing is such that it's not very clear. I mean, there's a consumption side of it, but there's also a production side of it, and Asia happens to be on the production side. So the question is, who pays the consumer, the producer? How do we bridge that? And for that, of course, and I fully agree with the fact that we need a carbon pricing and if not the same, at least, a carbon pricing somewhere, and then we can breach it. And that's, of course, the European proposal of CBAM this carbon border adjustment tax, or mechanism that could be others. I'm not claiming that's the best one. But I think we need to think through the cross border consequences. But let me finish with Bert’s point on maybe next year, we have green investment. Why not this year? But I mean, like, like I'm thinking, I mean, why are we pushing this thing when we have the fund supposedly yet to do this fiscal stimulus? Are we going to wait to the point where there's no money for fiscal stimulus? Because I just don't understand. If we're taking this 2030 target for peaking emissions, why we are not starting as of now. I mean, I just can't stand it. You may have a good reason that I'm missing.

FBP: That is a global conundrum right? When China wants to start it, the US wants to start it but couldn't get started.

BH: It was not a policy recommendation, Alicia, I'm just trying to be the realist here, I don't see that much emphasis or not, I see much more emphasis on traditional structure, and to some extent, also back to some support for real estate, rather than quite a radical redirection. And in part, I understand because that radical redirection would also have implications for the industrial structure that supports those investments and that you just cannot invent overnight. So it's, by necessity will have to be a bit of a gradual process.

FBP: Okay. Great. And okay, so, back to a question I asked earlier, which I don't think any of you kind of attempted to answer which asset bubbles, especially in the equity market, right, especially reaching unprecedented levels. Do you see a major kind of collapse or not a correction but a major risk event in 2022? And how big of a risk to the financial systems, what steps you see regulators in the industry taking to mitigate it? Some quarters, some contrarian investors, they said, “We're gonna have equities lose 80% of its value in the coming months because of inflationary worries increase in interest rates” and so on and so forth. Our guests seem to be quite sanguine about it.

TB: Let's, you know, think about which part of the equity market we're talking about. So as I said earlier that clearly, growth stocks, particularly in the US are vulnerable, given the exceptionally high valuation. It's not a bubble the way a bubble was in 2000 2001. Because at that time, companies were largely pre revenue. And they were really driven by speculation this time, you could argue that big tech is, of course, serious and substantive. And there's no question of, you know, bubble type, you know, risks as far as big tech is concerned, but there is a lot of small tech, there's a lot of action in the startup scene. There's a lot of action in the private deal making scene where we see silly valuation, we see exceptionally compressed spreads. And those things have room to widen, to sell off without any question. Would that leave collateral damage? Well, it probably will not leave as big a collateral damage as it did in 2007 2008. Simply because corporate and household balance sheets are much held here. Again, I'm talking in the context of the US. 

Increase in credits risk in Asia Pacific

And but really, that's the main concern that you know, the largest equity market in the world is at risk of a major dislocation, which would then lead to substantial stress on corporate and household balance sheets. And the answer is a qualified no. But at the same time, higher interest rates come with two risks. One is you see pressure on currencies in emerging markets, you see debt sustainability problems for countries that borrow in hard currency, and so on. And the second is an self goal or own goal by the Fed, where it goes a bit too trigger happy, it talks a bit too much about QT and higher rates. And it's succeeded a little too much and brings down the road dynamic all together in the second half of this year, and undermines that labour market that is so keen on protecting and nurturing. So that's the risk that if you end up taking neutral rates at a point where it starts to undermine growth dynamic, undermine expectation, then of course, you have a problem. 

Of course, right now the market is on the other end of the spectrum, which is the Fed is behind the curve, that we have, you know, massive amount of inflation year after year ahead of us. But that's not the super savvy part of the market, the super savvy part of the market, which is the tips market, which is the US 10 year treasury market, is basically saying normalisation, no more than that. So I would focus on that risk, which is excessive tightening, too much hawkish talk, which then brings this edifice down of this nascent recovery that we have, mind you six months ago, we were looking at dire straits. And we think that awkward gap is closed, and we need to have significantly higher rates. Probably not the most cohesive transition.

ET: If I just add on the banking side, you know, I guess the banks in Asia don't really invest a lot in equities. Right. So that's, that's the good thing. They don't have big exposure, but they do have huge holdings of bonds, as you would expect. So high yields would definitely lead to lower valuations fair value valuations of, of bonds. And banks in Asia, I mean, typically invest maybe 10% of their total assets, something like that in fixed income security. So, you know, to what extent those exposures are hedged. That's a very mixed bag. So we would expect a negative repricing of securities that could affect banks as yields go up.

FBP: Okay. Great. Alicia, would you have a perspective not just for the US, but say, for in China as well? And so we talked about the correction, the real estate market buy, and there were some concerns that it will kind of ripple into other sectors as well. I mean, to the wider not just saw the major players, but, you know, a more financial stress in China?

AGH: Well, I think we are on the other side of the story. Now, as we had the China I think Shanghai Pudong Development Bank, already buying developer secretaries and I think other policy banks. It's not going to happen. I think they're going to support developers blindly. Now, I think, I mean, like, whoever fell, there you go, but whoever didn't just like, you know, like drawing a line because the contagion was real. I think we started to see even investment grade developers, you know, suffering, and I think that was beyond what could be accepted. So and by the way, banks would not have been the main casualties anyway, and I'm sure Eugene has the data. That's actually loans to developers are rather limited. I think it's 1.5. That's what we calculated of the portfolio so it was more about really pre sales and you know, like suppliers that were screaming, let alone dollar bond holders, I think those might still probably, you know, go to restructure Evergrande and beyond Fantasia others, but this is systemic risk. I don't see it. We're in a party mode now is stimulus, you know, and how nerve would you couple the restructuring without stimulus is no, I maybe in the future maybe like the green all together possibly, but not now.

FBP: Okay, great. So now we talk about some of the competitive strength like in terms of increasing competition from digital players, fintech, defi players that both Oleg and Eugene talked about. What other key transformative trends and risk should major industry players be watching out for? I like Oleg can maybe to kind of speak on this and then Eugene to follow. Before we go to our last question.

OP: Okay. Yeah, there are some distinctive trends going on right now. And we see that there is a substantial amount of interest in the area of cryptocurrency, defi, and all sorts of but let me just remind you, that during the second term confirmation hearing Congress, Mr. Powell said that the cryptocurrency report is coming in next two weeks, next coming weeks, and the digital dollar may coexist with stable coins. So this opens up the discussion about what defi will look like. But at the same time, he added that, well, it's more going to be an exercise in the asking questions to seeking input from the public, rather than taking a lot of positions on various issues. Although we do take some position, that's a quote. So it seems like there is a lot of uncertainty still, in terms of defi and how it will shape the industry. 

And also there is a common opinion in the industry that the coming Olympics event in China will be something like a real life test scenario for the CBDC initiative. But I would say that for the traditional banking industry players, it's not actually a threat, it's an opportunity. And we also hear about the lot of things going on with the booming NFT, the main and also meta versus coming in, there will be lots of opportunities there because these are new niches and, of course, for the every other upcoming niche, the transaction fees will be high in the beginning. So banks really need to look into this direction. But I will also probably stress the audience attention on something different because as long as we talk about defi and CBDC there is one scenario that's considerably interesting for the governments all over the planet. And it's not one country. It's a set of countries that talking about creating the stored value cards in central bank infrastructures that will have this digital currency. So it means that these accounts will be stored in a central bank and will be manageable by commercial banks. By some estimates, this will be substantial amount of money moved into central bank infrastructure for that reason. 

And of course, these accounts will be also used to distribute some social benefits support and you call it helicopter money or universal basic income. It's actually the same thing during the pandemic times. It's really huge. And if you support the population on a massive scale, and you don't charge for it, so there is a substantial amount of money and income will be distributed and managed without commercial banks’ participation. So this  could be kind of a fret, but in it’s one of the scenarios that's been conceded. So, I would say that the glass is half full. So there is a lot of opportunities coming in terms of entertainment industry and the recent acquisition by Microsoft, also may happen very soon and it will shake the industry. And it will create also lots of opportunities by building this specifically prepared payment rails, for metaverse and NFT. So I would say that the competition, of course, there is in place, but from a technology perspective, we see that technology is more or less ready to support the traditional banking players. And from our perspective, the only thing that traditional banking institution lack these days is political power, political will to do something. So it was a common opinion, just a couple of years back that you can't really transform the traditional banking institution, you just need to create the Greenfield. But it's not anymore the technology is there. And you can do that for the traditional bank, if they really want to do that. So okay, this is the common front, I would say for the industry.

FBP: This emerging kind of competition from the decentralised space in Singapore is very interesting because the MAS seems to be encouraging a lot of that innovation in this decentralised finance or digital finance, I would say is set out, you know, even Temasek has invested in digital exchanges. DBSS also, how big of a competition? Is it complementary to traditional banking Taimur? Maybe ask you first. And then Bert maybe to give us a perspective from China, because China is pushing out its own, you know, e-yuan, possibly working with the commercial banks to push that out. But at the same time, it's also clamping down on any form of cryptocurrency. And yeah, kind of initiative. Taimur, to you first.

TB: I don’t know it's a fair question for me to be asked because I will be forced to answer in a complimentary. I think DBS’ journey in the last 10 years shows very clearly that banks cannot sit on the side, banks don't. If they don't invest heavily on the tech transition, they will lose out to their competitors, which is why you hear JP Morgan investing $12 billion over the next three, four years to sort of, you know, ramp up its take capabilities. DBS, starting from a very small scale has also spent over a billion in sort of taking it into the cloud space and supporting a series of initiatives, whether it is a party or which is a blockchain based trade credit facility, or the CIX that we just talked about, or a variety of other approaches, including the digital exchange. So of course, the bank wants to be on the side of all the disruptive innovation so it is not left behind. I think that is the motivation of all bank CEOs out in the world. Some are just more ahead of the others and some are more visionary than the others. 

But on the easy and why issue, I will let Bert talk over the China aspect. I just want to share with you one insight that I derive from a regional central bank of recently, which was they had great degree of discomfort with respect to stable coins. Because the view was that if you have large tech companies introducing stable coins, and that are operating across borders, that would start running risk of dollarisation in various emerging market economies that don't have the exorbitant privilege of printing hard currencies. And that makes sense. If it is easy in a country like India or Nigeria to send money across the world and do transactions using a stable coin. Everybody will start circumventing their rupee and the naira or whatever currency they operate in. And that would be a huge headache for the central banks of these countries which pursue capital controls. So I think that this one issue with respect to stable coin, the regulators are going to have a very, very strong, difficult time tolerating. 

BH: Well, I'm not necessarily expert in this field. But first one footnote on what time were said I mean, there is still something like sovereignty. And even though there is a digital RMB or a digital dollar out ever doesn't mean that you have to accept that as a payment inside a sovereign state or even with actors that are based in a sovereign state. So I think these are two decisions. The digital RMB is pretty much ahead. It's the one of the major countries that has a digital currency now in pilots after the Olympics, we will know more. There is this international aspect to that. And I do believe that China sees this as a conduit for the internationalisation of the RMB. Not the most decisive factor. But it's a nice to have that if you have easier transactions, cheaper transactions, I just made my payment through DBS internationally time more, so I know what it cost. So if you can do that with a digital RMB, that's definitely an advantage. But if there is a digital dollar, that would also be, of course, acceptable currency. China has said, look we don't want private actors to reap the rents of that. And clearly, the domestic actress Alipay and Tencent wishing of the world up till now they've had quite a bit of rands from the digital payment system, I think they're going to lose some of that. 

But I’m with Oleg to say that look, that whole ecosystem that Alibaba and Tencent have created is far bigger than just payment. So I don't think they will lose all their market, they'll just lose a little bit, a little bit of the crumbs in the payment system. But I think that, you know, there is a certain advantage for being first or being one of the first and in that sense, the Chinese RMB is ahead. I think the banks inside China are behind, but they're behind in a number of ways. So maybe at first they were happy. That would be a competitor for Alipay and for  rushing. But now they may say well, actually, this could also cost us our margins in the payment traffic for companies. And so I think it's a very dynamic field a very interesting field. I appreciate that Chinese authorities don't want to have anything to do with crypto. Given the negative connotation that I see in the use of crypto, they want to know or be able to know what transactions were made with digital currency. And again, I think as a sovereign nation, that is a fair wish to have so and a central bank currency is a means of getting there. Thanks.

FBP: Okay. And then at the demo point is kind of a real guard against what some of the stable coins are doing allowing individuals to transact, circumventing central banks. And Eugene, I was wanting to ask you that, to pitch in on that question as well. 

ET: I mean we covered a lot of, you know, tech themes that are disruptive for banks. I certainly agree with everything that has been said, but let's not forget about the traditional credit themes that has been going on in Asia for banks for  many years. And, you know, one of them is high leverage, right? In the economy, private sector leverage in particular, right, so as rates go up, marginal borrowers might be at risk of default. The other one is high property prices in easy money or cheap, cheap rates, low rates have propelled property prices. I mean, not only in Asia, but globally. I mean, on the one side is good, because you're, as a bank, your LTVs go down, right. But also, the higher it goes, the bigger the risk, the potential risk of a correction. And that correction could be abrupt. So, I mean, those are the things we watch as well, on top of the traditional risk on top of the new risks, if you will relate it to technology space, as well. 

FBP: And I think what we discuss in terms of going forward in terms of overall, because inflationary pressure, asset price increases this whole impetus to manage that through rate highs to quantitative tightening. And from the different perspective, we hear it seems that the different economies and different governments tend to have that factored in and are preparing the industry for that. The risk is always at the top of this policies kind of overreaching, like, kind of creating unintended consequences. Final question, right. So in terms of any miscalculation, the risk of a hard landing, right, you know, we want everything to kind of land softly, what's the risk of some of this going awry in 2022? If I can just ask everyone for your perspective. From Eugene’s perspective, everything is stable, right when everything is factored in provisioned against credit loss is very strong within the banking industry, and so on and so forth. Maybe, again to start with Eugene, and then we'll just go around. Yeah, I guess. Closing comment.

ET: Right. So very quickly, I know, we're kind of out of time. But the, you know, this more material increase in interest rates that creates, I guess, problems, potential problems for emerging markets in Asia with kind of weak external positions, right. So those markets might economies might have to jack up rates more meaningfully. Right. So I think that is a scenario where we're a bit concerned, again, that could lead to capital outflows and put pressure on the domestic currencies and lead to, I guess, some pressure for effects loans as well. So I think this is one aspect, I would be watching carefully. 

Potential geopolitical risks

TB: We haven't talked too much about geopolitics, and I'm sitting here with a geopolitical expert. So but I would say that, you know, we have a lot of tension between nuclear powers around the world. And you know, the sort of jaw-boning that's going on, you know, you so worried that, you know, sometimes you know, whether mistakes will be made or not. So we have issues between Russia and the West and China and the US and India and China. And then, of course, the perennial uncertainty around Iran's nuclear deal, which seems to be going in the wrong direction as well. So, you know, I think we're so busy with the pandemic, the last couple of years, we haven't worried about these things, but they're very much clear and present. With respect to hard lending, I think we already sort of talked about the one serious risk is that fed sort of, you know, over time, either actually, or tightens or conveys to the market that it is likely to over tighten. And that alone does the trick of undermining confidence and brings the market crashing down, with the economy to follow. 

The third thing is, of course, China. You know, we live in Asia, we feel that China, sort of, you know, knows what it's doing, which is not a feeling that is at all shared by our friends in the West who think the Chinese don't know anything. Truth is probably somewhere in between. But China has its work cut out. We are talking about the year where we have the pandemic still not sorted out. They have to capitulate on the zero tolerance policy, sooner or later, they have to allow Hong Kong to breath because it is imploding as we speak right now, given the very, very tough measures that are in place, and it has unresolved issues visibly, the West is Taiwan, the quad, all sorts of stuff, right. So economic issues, and geopolitical issue makes China's life complicated. And again, things going wrong here and there, which creates convulsions, political or economic is non trivial, in my view. And then, as you heard from Alicia earlier, that beyond Asia, there are a bunch of very fragile, emerging market economies out there, from Lebanon, to Ukraine to Turkey to Brazil, Argentina, things can go wrong in any of these economies. And that can create contagion, which then, you know, hits our shores in the form of currency volatility in the form of capital. So volatility. Typically, in the last 40 years, every Fed hiking cycle has been associated with some degree of crisis in emerging markets or developed markets, or both. How can it be any different this time? 

FBP: Great. Thank you. Alicia.

AGH: Well, I just know that Blinken is in Berlin, and that says it all. So, you know, we could have an event we had troops from Canada sitting already in Ukraine. I mean, it's like, I think this is a major issue for the global economy. It also has a spin off, I mean, potential. Let's have this word potential spin off in Asia, which people like to compare, which is Taiwan. So if nothing happened, rain, you know, that opens the door. We've heard this many times. So, you know, frankly, I cannot agree more that your geopolitical risks are extremely high this year, we had North Korea, you know, like, just, you know, why not? They're trying to, I mean, everywhere, but I think the key is starting with Ukraine, because that by now looks real. And I think you can sense I mean, Europe is really faltering in this idea of what are where are we, you know, is strategic autonomy, should we do this, should we not? And that hesitance adds to the complication. So, and that's not far from Asia, because there's many ways in which this can affect Asia, in my view, just by the mere fact that the reaction to that could be extreme in China. Now I you know, we don't agree with this. And then that could really create what we usually call two ecosystems for tech. But it could be two ecosystems for politics, it could be you know, and that has impacts on banks. Because at the end of the day, by now, we're all interrelated. So, how that will affect Asia's banking sector is to be seen, but I don't think it's to be taken lightly.

FBP: Okay, geopolitical risk would be the kind of long tail risks that you can't really put your finger on in terms of the exact impact, but it definitely will have economic impact and financial fallout. Bert. China, Hong Kong, Taiwan are bit of a risk.

BH: Well, so the geopolitical risk is already referred to and I just think we need to think more about it, then, of course, yet right now Ukraine is at the very short list, but in the longer term, the US China tensions, they're not going to go away. Until  the US has a domestic policy agenda, more coherence, and more agreement among the two sides of the aisles, I see the US continuing to, in a way take China as a believing a common enemy of both Democrats and conservative Republicans. So that is a bit of a tension, there's been quite some action on the military for not on the economic front. So and we don't know the exact implications yet, but quarter stronger orcas is now something new with nuclear submarines in Australia, it's going to take 20 years, but nevertheless there's some big actions going on there. The second, and that is a much more short term, I don't think we should forget about COVID. And it's not just China clamping down on cities that have to people with a sneeze, but it's also that because of the low vaccination rate in a lot of developing countries, there will be no variants coming up. And the next variant may not be as benign as the Omicron variant that we have just seen. And of course, in the longer term, you see others as well. It's not over, we need a lot more policy actions to get the risk minimise there. Thanks.

FBP: Okay, great. Thanks, Bert. And yeah, the COVID risk is still there. And the last one to Oleg.

OP: Working working out of Europe being to very close to the centre for that tension. I would say and I would mention one specific subject because it's related to financial industry and payments in general. And it's not about Ukraine, it's about the possible threat of disconnecting Russia from Swift. And this is what's being discussed really seriously in the industry. That if it happens, it creates completely in global in common distrust in the payment rails, not only in Swift, but in other payment rails that connect countries together, connect the world together. And we were talking about the defi and some people even say that if it happens, then probably the next year we'll live in a different reality and everything will be decentralised from a financial perspective. So it's not really the existential threat, but it's these world changing events that may happen and from the payments perspective, from the financial industry perspective, we may be living in a different world after that so summarising everything that overwrites that. There is a number of geopolitical tensions and scenarios that we could face this year. But hopefully, most of them will never materialise because it will create lots of threats. It will create lots of challenges, lots of issues, and everybody's on the same page that they don't want that.

FBP: Okay, great. Thank you, Oleg. That is a kind of a development that is quite concerning as well, in terms of a global kind of utility excluding of a country out of disuse. Now, we talked about various areas, some of the known risk there I know you've all been looking at in terms of COVID in terms of inflation or inflationary risk, increasing, you know, debt on both public as well as household debt and measures to mitigate them to quantitative tightening interest rate hikes in the US, in emerging markets, China taking a different track, really starting to stimulate its economy and reducing statutory reserve requirements and so on and so forth. All this kind of factor into a lot of the bank's you know, calculation. But still, there are a lot of risk that is kind of hard to quantify around geopolitical risk, as we discussed. So in the coming year, even as the banking and economic outlook are relatively stable, as Bert mentioned, even at 4%, they know historically, healthy economic growth rate. But still, there are significant risks that can persist and will take a miscalculation or a wrong, misconstrued perception of the intention to cause a significant outcome. So those are the risks that we can expect to see more of in 2022 as it plays out. 

For now, I'd like to thank Alicia, Taimur, Bert, Eugene and Oleg for your insights and your analysis. And we hope the audiences found this session insightful, I certainly find it very insightful and useful. And if any of our audiences missed any part of the session and would like to play back to visit The Asian Banker Radio Finance website, and you can download a recording of this session, as well as some of the past sessions. To find out more about our upcoming session and to register for them, you can visit that site. And until the next event, we wish you all a great day. Thank you, and thank you to our panellists.

Keywords: Asset, Bank, Capital, Central Bank, Credit, Currency, Decentralised Finance, Digital, Disruption, Dollar, Economy, Ecosystem, Financial System, Fintech, Forecast, Geopolitical, Inflation, Interests, Market, Covid-19

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