US (Aaa negative) President Donald Trump announced on 2 April, significant increases in import tariffs for most of its trade partners. In Asia Pacific (APAC), the impact on banks is credit-negative albeit to different levels, leading to heightened uncertainty for investors and consumers.

The higher tariffs are more negative, on a relative basis, for banks in Vietnam (Ba2 stable), Thailand (Baa1 stable) and Bangladesh (B2 negative) because of their economies' higher reliance on exports to the US compared with other economies in the region. In these three countries, a moderation in exports to the US will hurt economic growth, straining loan growth for banks and hurting loan quality.

Elsewhere in APAC, despite significant increases in US import tariffs, the related impact on banks in China (A1 negative), Japan (A1 stable), Korea (Aa2 stable), India (Baa3 stable), Indonesia (Baa2 stable), Malaysia (A3 stable) and Taiwan, China (Aa3 stable), will be more manageable because of either economic diversification, low exports to the US, or both. However, some industries in these countries will be affected.

Within APAC, the lowest additional US tariffs are now in Australia (Aaa stable), New Zealand (Aaa stable), Hong Kong SAR, China (Aa3 negative), Singapore (Aaa stable), Mongolia (B2 stable) and Philippines (Baa2 stable), with these economies' banks experiencing the least damage from direct tariffs.

Although the total tariffs on most Chinese goods are now very high at 54%, we expect the negative impact on China’s growth and corporate creditworthiness to be relatively moderate, as China’s exports to the US were less than 3% of gross domestic product (GDP) in 2024. We expect further policy support to boost domestic consumer and business confidence and stabilise growth amid trade and geopolitical tensions.

To counter the strain from higher US tariffs, it is likely that some central banks in APAC will begin reducing interest rates sooner than when the markets expect, or moderate the pace of their rate hikes, as in the case of Japan. These measures, if implemented, will lead to lower bank margins. We also expect higher government support and other measures from the central banks, including interest rate reductions and loan restructurings for borrowers in the most affected industries.

US tariffs are now very high for exports from Vietnam, Thailand and Bangladesh and the first two are more dependent on exports to the US in terms of domestic value added in gross exports. Much higher US tariffs will lower their economic growth, with the resulting strain trickling down to banks. For Bangladesh, higher US tariffs will depress the already weak operating environment for banks amid a slowdown in the country's economic growth.

For banks in Vietnam, Thailand and Bangladesh, the main impact on loan quality will come from small and midsize enterprises (SMEs) because they have limited financial buffers to adjust to rapidly changing economic and trade conditions. Many SMEs are suppliers to global manufacturing companies which are now facing lower sales in the US. Banks in Thailand and Vietnam have the largest exposure to SMEs (around 20% of loans), while banks in Bangladesh are less exposed (less than 10%). Thai banks could be hit the most, as they have been grappling with the weak quality of SME loans for many years.

Bangladesh's economy is heavily reliant on ready-made garment (RMG) exports, which make up over 85% of the country's total exports. The high tariffs on US imports, including RMG, will harm its competitiveness compared to countries like India and Pakistan, which have lower additional tariffs. Bangladesh's RMG sector is already facing supply chain disruptions and labour issues since political and social unrest last year. The asset quality for RMG and related sectors, which account for around 20% of banks' loans, will deteriorate.

In terms of large corporate exposures, we do not expect significant deterioration in loan quality for APAC banks. Listed APAC nonfinancial firms, on average, typically generate around 10% of revenue from the US market, and the drop in sales because of US tariffs should not significantly reduce their debt-servicing capacity.

Still, some industries in APAC are more heavily dependent on US sales, which could lead to mildly higher asset quality risk for creditors, particularly in automobiles and parts, steel, chemicals, textiles and shipyards. To counter the risk, the Japanese government has already announced support measures to its automakers and suppliers, and we expect similar support measures could be adopted by other countries. Taiwanese firms have large sales in the US but the credit risk is low because chip producers are exempt from new US tariffs. Large Australian firms have significant onshore operations in the US, which means the relative direct impact from tariffs will be significantly lower than suggested by their share of US revenues.

Among the three banking systems most affected, banks in Bangladesh and Vietnam have the lowest capital and provisioning buffers against potentially higher problem loans. Banks in Thailand have good credit buffers, but the new trade barriers can amplify existing structural challenges related to high household debt and weak competitiveness, as well as aggravate the economic strain from the recent earthquake.

Moody's Ratings Report redisseminated by The Asian Banker