Asia no longer a panacea for banks

As recently as the middle of last year, banks like HSBC and Standard Chartered were being touted as better investments than some of their global counterparts because emerging markets were slowing less than others. But it is now generally agreed that Asia has been hard-hit by the global recession and the myth of decoupling has been exposed as just that û a myth.

ôThe slowdown in Asia has exacerbated an already bleak situation for the commercial banking business of a number of global banks,ö says a banking source. öNo-one had predicted how bad the domino effect in the region would be.ö

Recent announcements by Asian firms are indicative of the pain being faced by businesses.

On January 5, Hong Kong-based export trading company Li & Fung said it was one of the largest creditors, with an exposure of around $5 million, to KB Toys, the US toy store chain which declared bankruptcy in December.

In Korea, Ssangyong Motor Company, a unit of ChinaÆs largest automaker SAIC Motor Corporation, filed for bankruptcy on January 9 because of a ôserious liquidity crisisö following four consecutive quarters of losses on the back of weak demand for its vehicles.

The weakening business environment is having a damaging affect on the business of banking. In its recent downgrade of HSBC to a sell recommendation, Goldman Sachs cited the global recession as causing a ôgreater than expected revenue erosion for [HSBCÆs] core businesses in Hong Kong, Asia, UK, North America and Latin America and greater than expected increases in credit costs for these same core businessesö.

Other concerns are cropping up.

In a report issued on Monday, Moody's Investors Service says the ôintrinsic liquidity profiles of rated non-financial corporates in Asia-Pacific (ex-Japan) have deteriorated as a result of the worse than expected deterioration in the banking and capital marketsö. MoodyÆs says 47% of the investment grade issuers they cover will not be able to meet their funding gap over the next 12 months, up from just 34% for the same period one year ago.

A more cautious approach to lending by global banks is contributing to the situation. Some global banks are in ôwait and seeö mode as they struggle with risk assessment and capital costing. Others are conserving capital because the terms of their bailout packages require them to focus more on their home markets, rather than on geographical diversification.

But equally, local banks are unable to pick up the slack. Fitch commented recently that slower growth or outright recession in Asian economies would result in ôa trend towards weaker revenues, higher NPLs (non-performing loans) and bad debt charges at [Asian] banks across the regionö.

The result is that even Asian companies which have not been hit by diminished demand or customer delinquencies are having difficulty raising capital to meet their business needs. And in a classic case of a vicious cycle, this will impact their performance and could mean that even the better assets on bank balance sheets will start to underperform.