BackAsian banks’ generosity belies their weaker loss buffers
Loan volumes in Asia slumped 11.4% in the first quarter while in Europe, Middle East and Africa they tumbled 50% and 70% in Latin America
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Singapore: True to historical form, Asian banks are lending away even as their peers in other emerging markets have slowed advances. That wouldn’t be so alarming if they had the healthy balance sheets they did during the credit crisis, when they were viewed as something of a financial haven. But things are slightly different now.
Loan volumes in Asia excluding Japan, Australia and New Zealand dropped 11.4% in the first quarter, the biggest fall since 2013. In eastern Europe, Middle East and Africa, however, they tumbled almost 50% and about 70% in Latin America.
Bond issuance, meanwhile, increased 11% in eastern Europe and 6% in Latin America. In emerging Asia, it decreased 27.8%. A rise in note offerings is usually a sign companies are resorting to capital markets instead of banks. If lenders’ balance sheets aren’t available, then maybe bond funds are, as the thinking goes.
That bank lending in Asia is holding up better than in other parts of the world shows lenders from the region remain willing to make advances in spite of crippling regulation. It’s concerning considering Asian banks haven’t done as much to bolster their capital cushions versus lenders elsewhere. Large Asian banks’ Tier 1 capital ratios, a buffer against losses, average 10.8% compared with 9.4% at the end of 2009. For banks in western Europe, that figure has climbed to 15.8% from 11.5%.
When banks have less capital, they typically either retain earnings and raise equity, or slow lending, or both. That hasn’t been happening to the same degree in Asia, especially among Chinese lenders.
For companies, that’s good news, because it means they can find cheaper and easier money from their bank rather than capital markets, where volatility is making it more difficult to get bond sales away. But it also begs the question of whether Asian banks are becoming more lenient than their Western counterparts. You’d think banks in Asia would be working to recover bad loans and be a little more mindful about making new ones, given delinquent advances in Singapore are the highest since 2009 and the most in a decade in China.
So far, this determination to keep on lending hasn’t been a problem. However, a raft of additional regulations is coming into effect over the next two years that will further constrain financial institutions’ ability to lend. Asian banks should start pressing on the brakes a bit harder. If not, they risk crashing down the road. Bloomberg
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