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Foreign banks maintain exposure to emerging Asia
By CICC Research |
July 23, 2012, Monday
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Print Edition
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STUART Gulliver, chief executive of HSBC, warned in November 2011 that emerging Asia was facing a potential credit squeeze due to the withdrawal of European banks from overseas markets. To shed light on this important issue, we examined the most recently released consolidated foreign claims of the banking system in four major developed economies (the UK, the US, Japan and Germany).
Contrary to expectations, major developed market banks have kept their exposure to emerging Asia relatively stable over the past two years through the first quarter of 2012.
In US-dollar terms, UK and US banks' claims on the 10 emerging Asian economies fell slightly in the fourth quarter of 2011, but have since rebounded.
Total foreign claims of Japanese banks inched up steadily during the past six quarters, while German banks' claims were broadly flat. Based on this evidence, we argue that European banks did not reduce their exposure to Asia during the fourth quarter of 2011 and the first quarter of 2012. There was only a slight hint of Japanese banks expanding their presence in emerging Asia. The stability of foreign banks' claims on Asia was observed across both public and private sector lending.
In fact, if we incorporate the currency effect - there was sharp depreciation in Asian currencies against the US dollar in the fourth quarter of 2011 before a rebound the following quarter - the "actual" changes in foreign banks' claims on these Asian economies would be exaggerated in the fourth quarter of last year. In other words, the sequential rebound in claims on Asia in the first quarter of this year could have been larger on an underlying basis (i.e. excluding foreign currency effect).
In contrast, major developed market banks have cut their exposure to the euro area periphery over the past year. The extent and pace at which developed countries' bank claims have declined vary. Perhaps reflecting their political and geographical affinities, the decrease in German banks' claims on Greece, Ireland, Italy, Portugal and Spain was most acute, falling by almost US$100 billion between end-2010 and the first quarter of 2012.
Also, UK and US banks cut their claims on these countries by US$50 billion each during the second half of 2011, but that has appeared to be stabilized recently. To a certain extent, there is a limitation on how much exposure banks can cut.
Flows among developed markets have been volatile and sometimes difficult to account for. This could be due to the complexity and interconnectedness of their banking systems.
The lack of flows out of Asia by European banks, despite Europe's difficult macro environment, suggests the region remains banks' focused area for future growth. This may partially explain why Asian banks' asset quality remains relatively resilient, despite strong credit growth in recent years.
The positive credit outlook for Asian banks also helps to lower their funding cost and enhance liquidity (particularly in US dollar). We believe Singapore banks are the primary beneficiaries of this structural trend.
The article was based on a note issued by China International Capital Corp on July 19.
Contrary to expectations, major developed market banks have kept their exposure to emerging Asia relatively stable over the past two years through the first quarter of 2012.
In US-dollar terms, UK and US banks' claims on the 10 emerging Asian economies fell slightly in the fourth quarter of 2011, but have since rebounded.
Total foreign claims of Japanese banks inched up steadily during the past six quarters, while German banks' claims were broadly flat. Based on this evidence, we argue that European banks did not reduce their exposure to Asia during the fourth quarter of 2011 and the first quarter of 2012. There was only a slight hint of Japanese banks expanding their presence in emerging Asia. The stability of foreign banks' claims on Asia was observed across both public and private sector lending.
In fact, if we incorporate the currency effect - there was sharp depreciation in Asian currencies against the US dollar in the fourth quarter of 2011 before a rebound the following quarter - the "actual" changes in foreign banks' claims on these Asian economies would be exaggerated in the fourth quarter of last year. In other words, the sequential rebound in claims on Asia in the first quarter of this year could have been larger on an underlying basis (i.e. excluding foreign currency effect).
In contrast, major developed market banks have cut their exposure to the euro area periphery over the past year. The extent and pace at which developed countries' bank claims have declined vary. Perhaps reflecting their political and geographical affinities, the decrease in German banks' claims on Greece, Ireland, Italy, Portugal and Spain was most acute, falling by almost US$100 billion between end-2010 and the first quarter of 2012.
Also, UK and US banks cut their claims on these countries by US$50 billion each during the second half of 2011, but that has appeared to be stabilized recently. To a certain extent, there is a limitation on how much exposure banks can cut.
Flows among developed markets have been volatile and sometimes difficult to account for. This could be due to the complexity and interconnectedness of their banking systems.
The lack of flows out of Asia by European banks, despite Europe's difficult macro environment, suggests the region remains banks' focused area for future growth. This may partially explain why Asian banks' asset quality remains relatively resilient, despite strong credit growth in recent years.
The positive credit outlook for Asian banks also helps to lower their funding cost and enhance liquidity (particularly in US dollar). We believe Singapore banks are the primary beneficiaries of this structural trend.
The article was based on a note issued by China International Capital Corp on July 19.
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