| On October 3rd 2016 Natixis published a research note called "Not Gain! Accessing Asia's exposure on European Banks," that looks into European banks' cross-border lending into Asia using BIS data. This article looks into the key parts of the research note and how it will help your bank and institution. We are not there. But it is hard to ignore the clouds hanging over European banks, especially with the Brexit shock felt only recently. To do this, we look at the potential contagion to Asia by analyzing European banks’ cross-border lending into Asia using BIS data. |  |
Asian banks are already under pressures from sluggish loan demand, asset deterioration, and lower NIM. Within Asia, Hong Kong and Singapore are most exposed as they are more dependent on European lending as a share of total private credit.
But the good news is that exposure to European banks has actually declined over the years on an absolute basis and even more astounding if we consider as a share of private credit. Thus, this time, although the region is affected, it is likely one of the safer places to be given its reduced exposure to European banks since 2009.
But the good news is that exposure to European banks has actually declined over the years on an absolute basis and even more astounding if we consider as a share of private credit. Thus, this time, although the region is affected, it is likely one of the safer places to be given its reduced exposure to European banks since 2009.
A what if
It is hard to ignore the clouds hanging over European banks, especially as Deutsche Bank (DB) remains under significant market pressure. Given that DB is at the center of the European banking system and the “greatest contributor to the systemic risk in the world’s biggest lenders”, according to the IMF, it is worth pondering of what consequence is the contagion impact to Asia as a whole. To do this, we look at the financial channels through Asia’s exposure to European banks through Bank for International Settlements (BIS) cross-border consolidated and location banking statistics1.
First, a look at Asian banks’ performance
European banks are not alone in being squeezed by low interest rates and weak demand for credit. A downturn of the credit cycle in most of the Asian countries, with the exception of places such as the Philippines, Korea, and Vietnam, have squeezed banks’ traditional income generating method. The trends have clearly been negative, putting pressures on banks’ asset quality and performance. Chart 1 compares the net interest margin (NIM) of the key banks between Q2 2016 and Q2 2015. With the exception of two banks, NIM has fallen due to low interest policy and lackluster demand for credit – forcing banks to lower lending rates. This has eaten into banks’ profits, without considering the impact of slower investment activity in the region.
And considering the financial contagion
We are primarily interested in the real stress on the financial system, and ultimately the economy, should the black swan event occur, which is not our base case scenario. Obviously, there are many ways for this to spillover but we take a look at the contagion through cross-border lending in this note.
But the good news is that exposure to European banks has significantly reduced over the years, suggesting that the impact will likely be less severe than previous episodes where vulnerability was much higher. Chart 6 and Chart 7 show the evolution of exposure for Hong Kong and Singapore as a share of total credit. For all these countries, the exposure to European bank lending has declined. Even when combining EU and UK lending, the vulnerability has significantly reduced since 2009.
In short, while Asian banks are already under pressures from sluggish loan demand, asset quality deterioration, and lower NIM, the financial system as a whole is more resilient to a shock coming from Europe as exposure to European banks is reduced.
It is hard to ignore the clouds hanging over European banks, especially as Deutsche Bank (DB) remains under significant market pressure. Given that DB is at the center of the European banking system and the “greatest contributor to the systemic risk in the world’s biggest lenders”, according to the IMF, it is worth pondering of what consequence is the contagion impact to Asia as a whole. To do this, we look at the financial channels through Asia’s exposure to European banks through Bank for International Settlements (BIS) cross-border consolidated and location banking statistics1.
First, a look at Asian banks’ performance
European banks are not alone in being squeezed by low interest rates and weak demand for credit. A downturn of the credit cycle in most of the Asian countries, with the exception of places such as the Philippines, Korea, and Vietnam, have squeezed banks’ traditional income generating method. The trends have clearly been negative, putting pressures on banks’ asset quality and performance. Chart 1 compares the net interest margin (NIM) of the key banks between Q2 2016 and Q2 2015. With the exception of two banks, NIM has fallen due to low interest policy and lackluster demand for credit – forcing banks to lower lending rates. This has eaten into banks’ profits, without considering the impact of slower investment activity in the region.
And considering the financial contagion
We are primarily interested in the real stress on the financial system, and ultimately the economy, should the black swan event occur, which is not our base case scenario. Obviously, there are many ways for this to spillover but we take a look at the contagion through cross-border lending in this note.
But the good news is that exposure to European banks has significantly reduced over the years, suggesting that the impact will likely be less severe than previous episodes where vulnerability was much higher. Chart 6 and Chart 7 show the evolution of exposure for Hong Kong and Singapore as a share of total credit. For all these countries, the exposure to European bank lending has declined. Even when combining EU and UK lending, the vulnerability has significantly reduced since 2009.
In short, while Asian banks are already under pressures from sluggish loan demand, asset quality deterioration, and lower NIM, the financial system as a whole is more resilient to a shock coming from Europe as exposure to European banks is reduced.
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