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Moment of reckoning for top banks
Banks in Asia mostly dodged the ravages of the subprime mortgage meltdown, but now must contend with depressed markets and a darkening economic picture resulting from the financial crisis plaguing the West.
- By Tony Munroe And Saeed Azhar, Reuters
- Published: 23:41 October 3, 2008
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Banks in Asia mostly dodged the ravages of the subprime mortgage meltdown, but now must contend with depressed markets and a darkening economic picture resulting from the financial crisis plaguing the West.
Earnings for many lenders in the region will come under pressure as loan growth slows, asset quality deteriorates, and the cost of credit increases as interest rates rise.
Lenders that generated a big chunk of profits from trading activity could also suffer. "Anyone who has been growing faster prior to an economic downturn will be most exposed," said Peter Tebbutt, senior director at Fitch Ratings.
Still, banks in Asia managed to stay away from aggressive mortgage lending that brought down Washington Mutual in the largest US bank failure last week, and did not binge on collateralised debt obligations (CDOs) that have gone sour.
Most Asian banks are in strong shape, at least for now, and bigger players are poised to take advantage of weakness elsewhere to make acquisitions and gain market share.
"The situation in Asia is completely different," said Elan Cohen, who is based in Singapore and advises clients of JPMorgan Private Bank, which manages $400 billion (Dh1.5 trillion) globally. "Banks in Asia are generally very well capitalised, they have stringent loan underwriting and they haven't been plagued by the downturn in housing markets."
The main risk to Asia is mounting economic gloom. Last month, Merrill Lynch downgraded its Asia ex-Japan economic growth forecast for 2008 to 7.7 per cent from 8 per cent and for 2009 to 7.3 per cent from 7.8 per cent, citing slowing exports.
Lenders in countries that saw rapid loan growth, such as Australia, India and South Korea, are most vulnerable to a slowdown, analysts said.
Despite the current health of Asian banks, markets are jittery. Chris Esson, analyst at Credit Suisse, said Hong Kong banks are well-capitalised but the credit cycle will deteriorate.
Market share
"In terms of an increase in credit costs sufficient to destroy earnings or equity, you'd have to be factoring in some very extreme scenarios which we don't see as happening," given the strength of household and corporate balance sheets, he said.
David Threadgold, banking analyst at Fox-Pitt Kelton Cochran Caronia Waller in Tokyo, said Japan's banking system is healthy. "That is of course a very long way away from saying there aren't going to be earnings downgrades. You can be in good health and find yourself with lower earnings," he said.
In China, profit growth at big banks is forecast to slow after a robust couple of years as Beijing curbs lending growth and bad loans rise as some exporters struggle due to higher costs, a stronger yuan currency, and weaker US demand. Chinese property developers are also suffering as sales and prices fall.
"The US financial storm will have some impact on our foreign-currency assets. Our profit this year and next year will be impacted," Chen Xiaoxian, CEO of China CITIC Bank said last week.
One upside for healthy banks in Asia is the opportunity to grow market share. In addition to acquisition opportunities of the type exploited by MUFG, the downturn elsewhere means strong Asian banks can expand their share of global lending.
"What it starts to do is it gives pricing power to banks in Asia," said Sunil Garg, banking analyst at JPMorgan in Hong Kong.
Morgan Stanley said in a report last month the banks that are most leveraged to a bull market, and thus exposed to a downturn, include India's ICICI Bank, Axis Bank, and State Bank of India, as well as Bank of East Asia and Singapore's DBS Group Holdings.
Those least exposed to a downturn include Hang Seng Bank in Hong Kong; China's big three state lenders including Industrial and Commercial Bank of China, Bank of China and China Construction Bank, and Indonesian lenders including Bank Mandiri, Morgan Stanley wrote.
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