Asian loans slumped to the lowest level in two quarters as Europe’s sovereign debt crisis pushed up banks’ funding costs and lenders under pressure in home markets retreated.
Syndicated loans in the Asia-Pacific region outside of Japan fell to $104.7 billion in the third quarter, the least since the three months ended March 31, when they totaled $96.8 billion, according to data compiled by Bloomberg. Lending climbed 12 percent from the same period a year ago, when it totaled $93.2 billion. European banks lost ground and Credit Agricole CIB dropped out of the top 20 arrangers for the first time since 2002, the data show.
“There’ll be a decline in participation from a number of banks, including some European lenders, at least for the next quarter until things start getting better and since many also have met their loan growth targets for the year,” Boey Yin Chong, DBS Bank Ltd.’s managing director of syndicated finance, said in a Sept. 30 phone interview in Singapore. “Everyone is watching the cost of U.S. dollars and U.S. dollar liquidity.’
Three years after the collapse of Lehman Brothers Holdings Inc. froze credit markets, borrowing costs for dollars are climbing as concern rises that Europe’s debt crisis will spread. The three-month London interbank offered rate for dollars, or Libor, while still close to 25-year lows, rose to a 13-month high of 0.37433 percent on Sept. 30, data from the British Bankers Association on the most widely used measure of bank lending costs show. Investors seeking safer assets made 30-year Treasuries the best-performing U.S. government debt last month, Bank of America Merrill Lynch data show.
Asian, Taiwanese Banks
“The syndicated loan market is mainly being supported by Asian and Taiwanese banks, but everyone is facing higher funding costs,” said Philip Cracknell, the deputy group head of capital markets at Standard Chartered Plc, the eighth-ranked lender in the third quarter. Some European banks may find it difficult to help arrange loans in Asia, “while in general syndication, banks are looking for higher returns,” he said in a Sept. 29 phone interview from Hong Kong.
Petron Corp., a unit of the Philippines’ biggest-listed company, San Miguel Corp., reduced a loan to $480 million from $500 million after Credit Agricole decided not to participate, three people familiar with the matter said on Sept. 27. The oil refiner is offering to pay interest of 293 basis points more than Libor, including fees. The facility is expected to be signed this month with nine banks instead of 10, the people said.
“It’s an opportunity for Asian banks to play a bigger role,” Phil Lipton, head of syndicated finance for Asia-Pacific debt-capital markets at HSBC Holdings Plc, said in a Sept. 30 phone interview from Hong Kong. “The challenge is that we also need as many active banks as possible to provide liquidity, and less banks will make that more difficult.”
HSBC, based in London, generates two-thirds of its revenue outside Europe, Bloomberg data show. It fell to sixth in the rankings last quarter, from fourth the same period a year ago.
The biggest arranger since June 30 is Mumbai-based State Bank of India, the same as last year. Australia & New Zealand Banking Group Ltd., based in Melbourne, climbed to second place from third and National Australia Bank Ltd. jumped to third from ninth the same quarter a year ago. India’s IDBI Bank Ltd. fell to 10th from second and Land Bank of Taiwan rose to 19th from 22nd.
Some European banks are losing market share amid rising concern Greece will default. Greece’s government has pledged to fire workers as part of a 6.6 billion-euro ($8.8 billion) austerity package designed to help secure a second European Union-led bailout.
French financial firms top the list of Greek creditors with $56.7 billion in overall exposure to private and public debt. Credit-default swaps insuring Credit Agricole’s debt against default climbed 122.5 basis points last quarter to 254.73, the biggest three-month increase in at least six years, prices from data provider CMA show. Swaps on BNP Paribas rose 143.5 basis points, also the biggest quarterly advance since 2005.
BNP ranked as the No. 20 arranger of loans in the Asia-Pacific region this year, from 16th in 2010 and 2009 and seventh in 2008, the data show. Hong Kong-based BNP spokeswoman Christina Chan didn’t respond to an e-mailed request for comment on the decline.
Credit Agricole dropped to No. 21 in the third quarter from 17 last year. Royal Bank of Scotland Group Plc, which sold assets in Asia after receiving the biggest bailout in banking history from the British government during the financial crisis, fell to No. 25 last quarter from 19.
Edinburgh-based RBS moved its head of loan market origination for U.K. clients, Peter Ellemann, to Hong Kong from London in August to increase its share of the Asian market. The role is a new one for the bank in the region.
“Of the larger loan market participants, French banks appear to be under the most pressure due to their exposure to Greece,” Ellemann said in a phone interview on Sept. 30. “U.S. money market funds have apparently significantly reduced their lending to these institutions. RBS isn’t immune, but we continue to lead and arrange deals with our clients.”
Local banks with deposit bases in their home currency are less vulnerable, Ellemann said. “There are certain local-currency markets where liquidity is phenomenally strong, such as the Thai baht and Singapore dollar, and any foreign bank without a meaningful local-currency retail deposit base, be they European or American, simply can’t compete,” he said.
The International Monetary Fund lowered its forecast for 2011 global economic growth to 4 percent from 4.3 percent on Sept. 20. Developing Asia will grow 8.2 percent this year and 8 percent in 2012, the IMF estimates.
As economies deteriorate and banks become more reluctant to lend, the cost of loans is rising. When Olam International Ltd. borrowed $625 million for five years last month it agreed to pay a margin of 300 basis points more than Libor, data compiled by Bloomberg show. The commodities supplier partly owned by Singapore’s Temasek Holdings Pte pays a margin of 275 basis points for a $350 million loan in August 2010, which matures in 2013, the data show.
Citic Pacific Ltd., which mines iron ore and develops properties in China, agreed to pay a margin of 153 basis points more than the Hong Kong interbank offered rate when it borrowed HK$4.5 billion ($577 million) in August in a loan that matures in August 2016. That compares with a margin of 120 basis points for a HK$5.73 billion five-year loan in September 2010.
“There’s been a lot of talk over the last few months about the rising cost of funds, but now we’re beginning to really see the effects of it,” HSBC’s Lipton said. “In the past, some banks had been able to avoid passing on rising funding costs, but now there’s pressure to increase returns.”
Looser Credit Advantage
Loan volumes in Asia will remain muted in the fourth quarter because borrowers took advantage of looser credit earlier this year, according to Atul Sodhi, the Asia-Pacific head of loan syndication at Credit Agricole.
“The first half saw very good liquidity and companies around the region took that as an opportunity to take care of a lot of their financing needs,” Sodhi said. “Today, when the market is a little tighter and liquidity is coming at a higher price, there’s no compelling need for borrowers to tap the market.”