Asian banks exposed to economic gloom, markets

HONG KONG/SINGAPORE (Reuters) - 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 is going to 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 (WM.N) in the largest U.S. bank failure last week, and did not binge on collateralized 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 globally. "Banks in Asia are generally very well capitalized, they have stringent loan underwriting and they haven't been plagued by the downturn in housing markets."

In a sign of Asia's relative strength, top Japanese lender Mitsubishi UFJ Financial Group (MUFG) (8306.T) agreed last week to pay as much as $8.5 billion for a 20 percent stake in battered Wall Street giant Morgan Stanley (MS.N).

NOT IMMUNE

The main risk to Asia is mounting economic gloom. Earlier this month, Merrill Lynch downgraded its Asia ex-Japan economic growth forecast for 2008 to 7.7 percent from 8 percent and for 2009 to 7.3 percent from 7.8 percent, 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. Last week, thousands of depositors rushed to withdraw savings from Hong Kong's Bank of East Asia (0023.HK) after an unfounded rumor questioned its stability.

Chris Esson, analyst at Credit Suisse, said Hong Kong banks are well-capitalized but the credit cycle will deteriorate, with rising credit costs and non-performing loans, given the economic outlook.

"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 U.S. demand. Chinese property developers are also suffering as sales and prices fall.

"The U.S. financial storm will have some impact on our foreign-currency assets. Our profit this year and next year will be impacted. We need to set aside more provisions against assets related to the financial crisis," Chen Xiaoxian, CEO of No.7 lender China CITIC Bank (601988.SS)(0998.HK), said last week.

SILVER LINING

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.

Fox-Pitt's Threadgold said Japanese lenders have been growing their overseas lending at faster than 30 percent a year.

"Certainly they are finding ready borrowers and I think probably, yes, there are probably opportunities on the strategic side as well," he said.

Morgan Stanley said in a report early this month the banks that are most leveraged to a bull market, and thus exposed to a downturn, include India's ICICI Bank (ICBK.BO), Axis Bank (AXBK.BO), and State Bank of India (SBI.BO), as well as Bank of East Asia and Singapore's DBS Group Holdings (DBSM.SI).

Those least exposed to a downturn include Hang Seng Bank (0011.HK) in Hong Kong; China's big three state lenders including Industrial and Commercial Bank of China (1398.HK), Bank of China (3988.HK) and China Construction Bank (0939.HK), and Indonesian lenders including Bank Mandiri (BMRI.JK), Morgan Stanley wrote.

In Australia, bad debt charges for top banks are expected to triple to over A$7 billion ($5.78 billion) this year as borrowers struggle to repay and asset values fall as the economy slows.

Top lender National Australia Bank (NAB.AX) and No. 3 Australia and New Zealand Banking Group (ANZ.AX) are considered most vulnerable, analysts said; NAB because of its structured debt and UK holdings, and ANZ for its exposure to commercial lending and to the slowing New Zealand economy.

"Banks face a material number of headwinds that previously haven't been there, at least not in the last 10 years in terms of bad debts," said Jarrod Martin, Australia banking analyst at ABN AMRO.

($1=106.32 yuan)

(Additional reporting by David Dolan in TOKYO, Samuel Shen in SHANGHAI, Kim Yeon-hee in SEOUL, and Mette Fraende in SYDNEY; Editing by Jean Yoon)