Improving operating conditions and a more positive credit cycle led Moody's Investors Service to upgrade its outlook for Asia-Pacific (APAC) banks to "stable" from "negative" on Tuesday.
The ratings agency added that 77 percent of bank outlooks in the region are now "stable", an increase from 64 percent at the end of last year. Banks in China, Hong Kong, Singapore, Australia, New Zealand and Mongolia are mostly behind the increase in stable outlooks, Moody's said.
"Asset quality is stabilizing in most banking systems, as the negative credit cycle in many of these systems has proven to be shallow with a moderate economic upturn now evident in APAC, while commodities prices are relatively stable," said Stephen Long, Moody's managing director for financial institutions in the region.
Moody's said commodity-related problem loans have mostly peaked and it now expects "relatively stable" prices to support asset quality. Profitability will also recover in many markets because of lower credit costs and better net interest margins.
Other improvements highlighted by the agency include the return of foreign capital flows into emerging Asia. But it warned that corporate and household leverage remain elevated in some countries, and rising property prices could amplify credit risks in the case of a major market correction.
"Latent property-related risks are more pronounced in Australia, China, Hong Kong, New Zealand, Malaysia and India, based on property price appreciation, the banks' exposure level, or both," the statement said.