Kuala Lumpur: Fitch Ratings is maintaining its mostly neutral outlook for the banking sector across several Asia Pacific (APAC) economies, including Malaysia, noting that they are more resilient to a higher United States (US) tariff regime. In a statement, the rating agency said this is due to the economies’ generally lower direct export exposure to the US.

According to BERNAMA News Agency, although Fitch initially anticipated broadly stable operating conditions across most APAC banking systems this year, a surge in US tariffs could threaten this assumption in some markets. “The effect of the trade war on specific banking systems in the region will depend on final tariff outcomes, their impact on local economic growth, banks’ exposure to vulnerable sectors, and the potential for changes in fiscal, monetary or credit policy,” it said.

Fitch Ratings further cautioned that its current neutral outlook for the Korean, Taiwanese, and Thai banking sectors in 2025 could shift to a ‘deteriorating’ status. This could happen if there are substantial further increases in US tariffs beyond the 10 percent tariff imposed on all US trade partners on April 2, or if the hit to their economic growth is more severe than expected.

The rating agency noted that this potential shift could occur if the US proceeds with higher country-specific ‘reciprocal tariffs’ that are currently paused or imposes higher tariffs on sectors such as electronics, including semiconductors. It added that bank asset quality in specific sectors could be adversely affected by additional US tariff hikes or indirect trade effects.

“For example, banks’ performance could weaken if China’s economic growth slows due to the tariffs, hitting demand for exports from their home markets,” Fitch Ratings explained. The trade war could also prompt national authorities to cut policy interest rates faster than anticipated, which would lower banking sector net interest margins (NIM) in most markets.

Fitch Ratings concluded that any changes in sector outlooks should have little impact on its banking system operating environment scores, which remain relatively stable. However, it acknowledged that China’s banking system would potentially face the most downward pressure.