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Corona virus targets debts, causing a crisis for Asian banks

Corona virus targets debts, causing a crisis for Asian banks

Monday 24, 02 2020
“We can see the risk of companies exploiting this loosened standards to withdraw their debt-paying money in several years”, Ryan Tsang, an S&P’s expert, said.

The deadly Corona virus has started attacking banks all over Asia.

​Loaners, such as HSBC Holding Plc and 3 major Singaporean banks, have warned that the Corona virus and the downfall of the economy could force them to spend more money on debts this year. The S&P Global Ratings credit organization estimates that in China alone the level of bad debts may triple, increasing by 800 billion USD.

“With the stormy clouds lurking, we need to take caution”, said Wee Ee Cheong, Managing Director of the United Overseas Bank headquartered in Singapore, on 21st February, after the bank estimate the increase in the cost of credit because of the virus. The ability to control the Corona virus “storm” of Asian loaners affect immensely the global economic system.

The profit-before-tax of Asian loaners accounts for a higher proportion than that of loaners in other regions, according to McKinsey & Co. Inc’s report. While Chinese banks suffer from the epidemic, foreign loaners operating regionally also have to face the damage of higher loans and lower revenue.

HSBC, whose half of revenue is in Asia, said that in the worst-case scenario of the virus continuing to cause damage until the final half of 2020, this bank may lose 600 million USD. Banks in Hong Kong, which is the major market of HSBC, have temporarily closed nearly 30% of their branches in the context of the Covid-19 virus killing more than 2,200 people in China. Other foreign banks operating moderately in Asia are Standard Chartered Plc. And Citigroup Inc.

Corona virus targets debts, causing a crisis for Asian banks

Cost of credit

Bank of East Asia Ltd., Hong Kong loaners with the tightest relation with Mainland China, has forecasted a decrease of 10-20 basis points in the cost of credit in Hong Kong because of Covid-19, according to Managing Director Adrian Li on 19th February.

This forecast is based on the estimation that the virus will peak from April to Summer, and the economy will recover in the final half of 2020. “There will be pressure on our investment categories, especially for medium and small enterprises, as well as unsecured loans, but we think we will be able to handle it”, Li said. “We are confident that the bank is well-prepared to overcome these short-term challenges”. Meanwhile, 3 most major banks in Singapore have warned that the epidemic may affect revenue and regulations. DBS Group Holdings Ltd. estimates that its revenue may reduce by 1%-2% because of the virus.

UOB, the third-most-major bank, estimates that the cost of credit will increase slightly in current conditions. Oversea-Chinese Banking Corp, the 2nd biggest loaner, said that their recent credit quality improvement will partly cover the cost of credit relevant to the epidemic. Investors are going to know how much Chinese loaners are affected when the report result is published next month. This will destroy the banking system of 41,000 billion USD in China.

This number is doubled that of America and includes a high amount of bad debts. With last year's tensions, it is estimated the economic growth of China will be at the low level of 4.15%, and the bad debt ratio at 30 biggest banks in China may increase by 5 times, according to The People’s Bank of China. Some uncertain debt tensions will appear in economic reports as China promotes industrial protection from the epidemic. The negative consequences of the virus will not include bad debts in the preferential period, according to Li Junfeng, an official at China Banking and Insurance Regulatory Commission. He did not clarify the time frame of this period.

Governmental promotion

Asian governments tend to support consumers and enterprises after natural disasters and this may reduce pressure on banks’ property quality, as suggested by S7 P in a report on 19th February. It may take years to recover the standards in bad debt recording and the quality of the financial statements, it said. “We can see the risk of companies exploiting this loosened standards to withdraw their debt-paying money in several years”, Ryan Tsang, an S&P’s expert, said.

He also cited the example of Japan and Taiwan after natural disasters. Chinese policymakers have asked banks not to withdraw, cut, or tighten loans of small enterprises while supplying enterprises affected by the epidemic with operating capital. Managers have also allowed banks to increase the bad debt tolerance level. This support from the government and the optimistic idea about the Chinese economy's ability to recover in the final part of the year are reflected in the Chinese bank’s stocks.

The CSI financial index of Shanghai’s banks and insurance companies has increased by 7% from the lowest level on 3rd February, recovering half of the yearly loss.

“The main aim is to supply affected enterprises with a preferential period to recover their usual operation and prevent impacts from further damaging the economy, and we believe that there will not be a rapid increase of bad debts”, Judy Zhang, Citigroup’s analyst, said. Meanwhile, foreign banks are facing more difficulties in a short period as the number of virus-affected cases is increasing regionally, reducing all spending, including shopping, food, and travel.

“The global economic prospect is expected to be worse than before. We need to be prepared for the impacts of the continuing trade tension, geo-political risks, and the Covid-19 epidemic on our enterprises and customers”, OCBC’s CEO Samuel Tsien estimated.

​>> Vietnam is suffering from debt overload

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