Bank of China Ltd. and Sumitomo Mitsui Banking Corp. are leading a surge in loans to Australian companies by lenders from Asia’s two biggest economies.
The amount owed to the four biggest Chinese banks in Australia by non-financial corporations jumped 50 percent in the year through April to A$11.9 billion ($11.2 billion), while the equivalent for the three largest Japanese creditors rose 18 percent to A$28.1 billion, data from the prudential regulator compiled by Bloomberg show. The Asian lenders are filling some of the void left by European peers, whose volumes in Australia have not regained levels seen since before the 2008 crisis.
China’s banks, expanding overseas to gain the experience they need to compete with global lenders in their domestic market, have boosted loans in Australia by more than 20-fold over six years. Japanese finance providers, flush with low-cost money from the Bank of Japan’s stimulus program, have helped fund companies including Sydney Airport and Newcastle Coal Infrastructure Group Pty.
“Japanese and Chinese lenders will be inspired by the stable asset quality of Australian banks to deploy their funds in the country,” Brett Le Mesurier, a Sydney-based analyst at BBY Ltd., said by phone. “Clearly, the Chinese are deposit funded and want to diversify their loan book. Japanese are looking for growth.”
Sumitomo Mitsui increased its outstanding loans by A$2.49 billion to A$10.5 billion in the 12 months through April, the biggest gain among the Chinese and Japanese banks, the data show. Bank of China lifted its Australian lending by A$2 billion to A$8 billion over the same period.
Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of Communications Co. have all increased their lending by at least 79 percent, while Bank of Tokyo-Mitsubishi UFJ Ltd. and Mizuho Bank Ltd. each recorded gains of more than 10 percent, the Australian Prudential Regulation Authority figures show.
“Business credit in Australia had recorded modest growth over the past year, with business credit extended by Japanese and Chinese banks operating in Australia rising considerably faster than the total,” the Reserve Bank of Australia said in minutes of its June 3 meeting, released June 17.
Australian banks’ asset performance has improved gradually over recent years, according to the central bank’s most recent Financial Stability Review, published in March. The ratio of non-performing to total loans was 1.2 percent at December 2013, down from a peak of 1.9 percent in the middle of 2010.
Loans to non-financial corporations by Australia’s four largest domestic lenders climbed 5 percent to A$403 billion over the year. Credit from European banks including Switzerland’s UBS AG and France’s BNP Paribas SA fell 3 percent to A$32.5 billion and is 42 percent below its level six years ago.
“Foreign branch banks have begun expanding lending again, but they remain short of their pre-global financial crisis peak,” John Buonaccorsi, a Sydney-based banking analyst at CIMB Group Holdings Bhd., said by phone. “Japanese and Chinese bank interest in Australian corporate loans certainly adds to competition for the big four banks in the country.”
Chinese loan volumes have exploded since the global credit squeeze from less than A$500 million in April 2008, APRA data show. Since then, economic ties have deepened between the two nations, with Australia ramping up mining exports following a once-in-a-century resources-investment boom and China emerging as the world’s biggest consumer of raw materials.
The Chinese government has been encouraging companies to buy assets overseas via a “going out” strategy to secure energy and commodity resources, buy technology and build internationally competitive businesses.
Japan too imports commodities such as iron ore from Australia, and some investors in the east Asian nation favor assets denominated in Aussie dollars to take advantage of the country’s higher yields. While Japan’s central bank has kept its benchmark near zero amid record levels of unconventional monetary easing, the RBA’s cash target is at 2.5 percent.
The Australian 10-year yield was 3.59 percent as of 12 p.m. today in Sydney, compared with 0.57 percent for comparable Japanese paper.
Banks led by Australia & New Zealand Banking Group Ltd. have syndicated $39.7 billion of Australian loans this year, a 22 percent gain on the same period of 2013, Bloomberg-compiled data show. Sumitomo Mitsui and Mitsubishi UFJ Financial Group Inc. helped to arrange the most after Australia’s four largest domestic banks.
Japanese and Chinese lenders were among the 19 banks and five export credit agencies involved with this year’s biggest Australian syndicated loan, a $7.2 billion facility to enable the development of an iron ore project by billionaire Gina Rinehart’s Roy Hill Holding Pty.
Japan’s biggest banks may be attracted by the higher margins available in Australia even as they come under pressure from increased competition. The average net interest margin for Australia’s largest lenders was 2 percent in the 12 months through March, versus 1.2 percent for Japanese banks and 3.1 percent for China’s, Bloomberg data show.
In Australia, the average margin on business lending fell at a faster pace in the six months through March than group level margins for both Westpac Banking Corp. and National Australia Bank Ltd., according to earnings statements.
“Margins are already very thin in corporate lending and growth is limited,” CIMB’s Buonaccorsi said. “Additional competition will only add to the pressure.”