Fitch: Chinese Risk Limited for Most Banks Outside Asia

Sun Jun 8, 2014 10:13pm EDT

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(The following statement was released by the rating agency) HONG KONG/LONDON/SINGAPORE, June 08 (Fitch) Most banks outside Asia have a small direct exposure to China despite the recent growth, and so a slowdown in China would have only a limited direct risk for them, says Fitch Ratings. However, they may be vulnerable to any secondary effects from slower Chinese growth. Banks' exposure to China has been rising. International banks' direct exposures - loans and securities claims - on China almost doubled over the three years, to USD698bn at end-2013 in 24 countries reporting to the Bank of International Settlements (BIS) on an ultimate risk basis. Other claims, such as guarantees and derivatives, are not captured in this data. China risk concentration is low for the largest countries outside of Asia. UK banks have the largest direct exposure, according to the most recent BIS data, at USD200bn, but this is only 1.6% of banking system assets. Nevertheless, this is concentrated in two banks, HSBC and Standard Chartered, which have onshore activities. They operate the largest foreign subsidiaries in China despite having only very small market shares. The BIS data is a starting point for Fitch's analysis. We had already estimated HSBC's total China risk at USD148bn at end-2013, or about 1x Fitch Core Capital (FCC), and Standard Chartered's at USD82bn or about 2x FCC. Most of this is cross-border and trade-related, with a significant share to state-sponsored entities, but the two banks' onshore activities are significant and growing steadily. US banks had USD83bn of direct claims on China, a very small 0.6% for the sector. US investment banks may also have other potential claims, including derivative contracts. But these would still be small relative to assets. Citigroup has a Chinese subsidiary, so is the most exposed of the US banks, but its total China exposure was USD32bn at end-2013 according to FFIEC 009a regulatory data, so only around 20% of its FCC. Other countries with larger exposures to China also have manageable risk - with Japan at 0.6% of assets, France 0.4%, Germany 0.4% and Australia 1.2%. Australia's exposure has grown the most rapidly, as trade has increased between the two countries and Australian banks have pushed their expansion in Asia. Lending is related largely to short-term trade finance. Overall exposure is relatively modest compared with the five largest banks' FCC at 26%. Overall, much of the growth in China risk is influenced by Asian countries, even though these are only partly captured in the BIS series. The data includes Taiwan and Singapore, but not Macao and Hong Kong, although Hong Kong is partly captured as the local subsidiaries of HSBC and Standard Chartered are reported under the UK holding companies. China concentration in the region is most pronounced in Hong Kong, and we believe that the Hong Kong authorities' have one of the widest definitions for corporate China exposure. Based on a combination of their data series for non-bank mainland China exposure and claims on banks, Hong Kong's China-related exposure calculates as USD798bn or 34% of system assets at end-2013, having risen from 19% at end-2010. China risk has also grown in other countries in the region - reaching 20% of banking assets in Macao - and Fitch estimates 12% in Singapore and 7% in Taiwan. Downside risk is increasing in Hong Kong and in the region. But we believe there is a low probability of a "hard landing" for China's economy, and that a China-related expansion strategy offers growth opportunities in the long term. Contact: Sabine Bauer Senior Director Financial Institutions +852 2263 9966 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway Hong Kong Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: APAC Banks: Chart of the Month, June 2014 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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