By Vidya Ranganathan - Analysis
SINGAPORE (Reuters) - Asia may not have the last laugh on the global credit crisis after all.
For weeks, many in the region took perverse pleasure in the financial carnage that ripped apart U.S. financial markets and forced a string of bankruptcies and bailouts, secure in the belief that Asia’s relatively closed markets were safe.
But this week, as anxious customers of Hong Kong’s Bank of East Asia Ltd (0023.HK) rushed to withdraw their money after rumors the bank was unstable, the possibility that Asian banks will soon be sucked deep into the crisis is looking very real.
Several signs of banking system stress are there: extended balance sheets, the rising cost of funds, collapsing asset values and declining corporate earnings.
“It may not be as bad as the Asian crisis but we are clearly seeing the signs of a credit cycle in Asia,” said Matthew Wilson, a banking analyst and executive director at U.S. bank Morgan Stanley. “Asia cannot be immune in a globalize world.”
That crisis in 1997/98 was followed by a boom during which banks lent aggressively and at low spreads. “Liquidity was vast, growth infinite and optimism extreme,” says Wilson.
Those excesses could prove to be their undoing.
The credit crisis has eroded values of derivatives and property these banks had taken on as collateral, taken a toll on corporate profits and simultaneously driven up the cost of funds.
A look around the region shows loan-deposit ratios in Korea, India and Indonesia and elsewhere soared, meaning lending at these banks was far higher than the pace at which deposits grew -- leaving them reliant on the fickle short-term markets at the heart of the global credit crisis to balance their books.
In India, the funding crisis has led to an inversion of the yield curve. Banks might pay about 10 percent for short-term funds but lend them for longer periods at much lower rates.
There are other weak spots. Credit Suisse data shows Indonesian bank loans grew 14.8 percent in the first half of this year while deposits grew less than 3 percent.
PT Bank Niaga Tbk (BNGA.JK) has the highest loans-to-deposits ratio in Indonesia at 94 percent.
In Hong Kong, deposits fell 2.8 percent in the first half even as loans expanded 13 percent.
Bank of East Asia, which has denied rumors of financial stress, appears to be an isolated case.
Most banks in Asia have said they have very limited exposures, if any, to collapsed U.S. bank Lehman Brothers LEHMQ.PK or mortgage giants Fannie Mae FNM.P and Freddie Mac PRE.P.
That said, one year into the global credit crisis, investors are jittery and ready to sell at the slightest negative news.
South Korea is most vulnerable, analysts say, with a banking sector that is excessively leveraged, inadequately funded and exposed to a struggling property market.
Any signs of distress in the system could set off a chain of capital outflows, instability and brutal currency selling -- a mirror image of Wall Street’s crisis.
Construction company bankruptcies in Korea shot up to 254 in the first eight months of 2008, the number of unsold homes is rising and consumer debt is high. Last year, household debt hit 82 percent of GDP and was 148 percent of disposable income.
If the assets side of Korean bank balance-sheets is starting to look worrisome, the liabilities side offers little comfort.
The loans-to-deposits ratio is at an alarming 139 percent as banks lent money at a staggering pace during the boom years from 2002 to 2007, even as Koreans increasingly plowed their savings into property and stocks rather than bank deposits.
The loans-to-deposit ratio of the four biggest Korean banks -- Kookmin Bank 060000.KS, Woori Investment & Securities 006940.KS, Shinhan Financial Group (055550.KS) and Hana Financial Group (086790.KS) -- ranged between 135-177 percent in the first quarter of 2008, Moody’s Investors Service said.
Analysts suspect the past year must have been painful for banks as they became increasingly reliant on wholesale funding and overseas borrowings even as the crisis made dollar funds scarcer and costlier.
Korea’s total short-term debt is estimated to be around $210 billion, while it has currency reserves of $243 billion, so in theory Korea is more liquid than during the financial crisis.
But any parallels between Asia and the United States break at one point.
The United States is a debtor nation, while Asian central banks have $4.3 trillion of reserves to tap in times of stress.
“I don’t think you will have a credit event. They have the wherewithal to both contain the pressure on the currency and to repay what cannot be rolled over in the capital market,” said ING Bank economist Tim Condon.
Ratings agencies predict bank profitability will definitely be hit as they are forced to set aside more capital against bad loans.
Governments in Asia may be rich, but underwriting standards and other credit criteria are largely untested in most countries.
“The cycle has moved on, capital is now scarce and credit standards are being tightened. Loan loss charges will increase,” Wilson said.
Editing by Neil Fullick