By way of introduction to our first report on Substack, our focus will be on banks, mostly in Asia-Pacific or the US. What matters to us most, is where we believe there is a gap between perception and reality. This is where Singapore’s banks and HSBC are of special interest at present.
There is a worsening of credit metrics in China and Hong Kong. The financial stresses of China Evergrande bring this to the fore. China Merchants Bank reveals a sharp rise in its property development NPLs from RMB1.2bn to RMB4.3bn, from 2H20 to 1H21. It also saw its expected credit losses (ECL) on financial guarantees and loan commitments rise from RMB1.9bn to RMB13.7bn, from 1H20 to 1H21. Bank of East Asia already showed meaningful deterioration in credit metrics, mostly associated with China property, during FY19 when its credit costs rose by 6x. This was before the current stresses which are likely not unique to China Evergrande.
We can identify USD752bn of debt held by the most indebted China property developers at FY20, and where average net debt/EBITDA is 7x. This is generally considered junk status for ratings agencies or the Fed. There are several companies where this ratio is well higher than 20x, and where total debt is USD84bn. Aside from the obvious risks for domestic banks from higher credit costs, higher bad loans, we believe the relative risks amongst Singapore’s banks may not be well understood.
The three banks in Singapore are often considered homogenous, but this is certainly not the case with respect to Greater China lending. And it is now when this matters. United Overseas Bank (UOB) has only 16% of its exposure in the Greater China region, which is mainly Hong Kong and Mainland China, as at 1H21. The comparable figure for Oversea-Chinese Banking Corp (OCBC) is 26% and 31% for DBS Group (DBS), as at the same period. This can be a meaningful relative positive for UOB in coming quarters compared with domestic peers, with respect to credit costs. But what is also important is the recent delta in Greater China lending; it's not only about a point in time.
Bankers often refer to new loans, done within 18-24 months as being unseasoned. These are loans that are not ‘tried and tested’ in a downturn. The change in lending to Greater China over the past two years may be just as important as the level of outstanding exposure. UOB ranks best, where 21% of its marginal credit volume from 1H19 to 1H21 was into the Greater China region. The figure was 36% for DBS, and 53% for OCBC. It will be interesting to see how UOB’s credit costs unfold relative to domestic peers during 3Q21 and 4Q21 - specifically due to these differences in Greater China exposure.
HSBC Holdings (HSBC) is also interesting in this analysis. The bank has 36% of its global loan exposure in Hong Kong and China as at 1H21, so a reasonable exposure, and more than Singapore’s banks. But what is more interesting is how these loans have grown over the past 18 months, with the bank’s much heralded ‘pivot’ into these regions.
HSBC saw its total loans rise USD27bn from FY19 to 1H21, a period also marked by ‘de-risking’ of the loan book. During this same period, its loans in Hong Kong and China rose by USD31bn - a figure higher than its total loan change. This puts HSBC’s marginal credit into these two regions at 116% of its total credit change. While UOB compares especially well to domestic peers, it also compares well to HSBC. We wonder if HSBC’s credit reversals during 1Q21 and 2Q21 narrow further in coming quarters, or rather turn into credit expenses? It may also be telling that its reversals during 2Q21 were down 35% in the quarter.
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