When Indonesian tanker operator B.L.T. froze payments on $2 billion of debt earlier this year, blaming a global economic slowdown, the default hit some of the world’s biggest banks.
PT Berlian Laju Tanker TBK B66.SG 0.00 percent counts among its creditors Britain’s Standard Chartered STAN.LN +0.10 percent PLC, France’s BNP Paribas SA BNP.FR -3.16 percent and Norway’s DnB DNB.OS +0.32 percent ASA.
Despite relatively strong economic growth, risks for banks are growing in Asia. Among the risks are a big increase in lending in recent years, rising individual debt levels in the region, headwinds from the European debt crisis and a slowdown in China. Investors and analysts are watching the numbers closely, and while only a few see a big spike in bad debts, many are worried profits may be squeezed, particularly if there are more hiccups in the global economy.
Bankers across Asia agree losses will rise but only modestly. “There will be a slight increase in defaults and bad debts within the region because of the cycle change,” said Australia & New Zealand Banking Group Ltd’s Chief Executive Mike Smith.
Credit-rating agency Standard & Poor’s says the turning point in the credit cycle will come this year after two to three years of steady loan growth. “In Asia the high growth of the economies has masked problems,” said Naoko Nemoto, a credit analyst at S&P. Nemoto met with Singaporean, Chinese and Japanese banks recently that told her they expect nonperforming loans to tick higher this year.
“Typically when loans are issued in a rapid manner, corners get cut,” said Mike Werner, a senior analyst at Bernstein Research who expects to see a significant jump in bad loans across the region in late 2012 and early 2013.
Distress is already showing – from India’s cash-strapped Kingfisher Airlines Ltd, to Chinese property developer Hangzhou Glory Real Estate Co., which is in bankruptcy protection, to chipmaker Elpida Memory Inc., Japan’s largest corporate failure among the nation’s manufacturers since the end of World War II.
B.L.T. has estimated that $418 million of payments were due this year on its bonds, loans and finance leases. It is working on a debt restructuring with banks. Standard Chartered participated in a $685 million loan taken out by B.L.T. in 2011. One person familiar with the matter said it committed about $115 million and that lenders generally have been unable to sell the loan.
Some loan bankers say that they are becoming pickier, screening out prospective borrowers in sectors where they think growth is slowing. Stiffer competition for the higher-quality borrowers could also start to squeeze margins, analysts say.
To be sure, Asian banks are adequately capitalised, economic growth remains faster than in the US and Europe, and nonperforming loans are rising from very low levels.
Nonperforming loan ratios are 73 percent below their long-term average in Asia, with some countries at 1 percent or lower, according to brokerage CLSA Asia Pacific Markets. CLSA has said it expects nonperforming loans to turn sharply higher this year.
At the same time, warning signs are showing up for some global banks that are big lenders in Asia, such as Standard Chartered, HSBC Holdings HBC -0.33 percent PLC and Citigroup Inc. C -0.64 percent
Standard Chartered saw an uptick in early warnings that loans might go bad across the Asia Pacific region in 2011 from a year earlier. In commentary on Wednesday on the first few months of this year, it noted loan impairments, the amount of the loan the lender may not recoup from the borrower, were above the level seen a year earlier as a result of a bigger loan book and a change in product mix. It did not provide numbers.
Responding to an analyst’s question on whether there had been deterioration in asset quality, Standard Chartered’s Group Finance director Richard Meddings said, “Overall the credit portfolio is behaving very well.”
Bernstein analysts say Standard Chartered’s rapid loan growth has masked the growth of possible problem loans. As loan growth slows, it expects impairments to double to around 0.70 percentage point this year from a year earlier, contributing to a fall in earnings per share of 25 percent-30 percent year-on-year.
Analysts see Standard Chartered as more vulnerable to market reaction than HSBC, which scaled back lending last year and whose shares trade at 1.1 times book value versus 1.4 times for Standard Chartered.
But even at HSBC,there were some warning signs. HSBC has reported that the amount set aside for loan losses fell $1.9 billion in 2011 to $12.1 billion from a year earlier as the group restructured. But it rose 36 percent year-on-year in Hong Kong to $156 million.
HSBC said in its annual report that in the rest of Asia outside Hong Kong: “We remain cautious on the outlook for credit quality.” Analysts will be looking closely when HSBC reports first-quarter results next week.
After a multiyear downward trend in the volume of nonperforming loans on its books at Citicorp, which comprises the company’s operating divisions, possible signs of stress emerged in Citi’s first-quarter results for Asia. The New York company’s loans in the region have swollen by a third over the year to institutions. But Citi’s loans to companies placed on watch by credit risk officers rose 49 percent to $499 million in the first quarter from the fourth quarter and loans to consumers on watch were up 5 percent to $474 million over the same period.