Asian banks exposed to economic gloom, markets

By Tony Munroe and Saeed Azhar - Analysis

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.