Singapore’s worst souring loans in six years are adding to signs Southeast Asian borrowers are buckling under pressure from slowing Chinese economic growth and rising U.S. interest rates.
Banks in Southeast Asia’s biggest finance center have placed 2.3 percent of their lending books in a “special mention” category, the first signal that a company may struggle to repay, the highest since 2009. Thai banks have allocated 2.8 percent, the worst in four-and-a-half years, while Indonesia has the most non-performing loans since the start of 2012.
“We’re coming out of a period when credit conditions were quite favorable for Asean and the cycle is beginning to turn,” said Gene Fang, an associate managing director at Moody’s Investors Service in Singapore. “The two big macro economic drivers are the slowdown in China and rising interest rates.”
The emergence of overdue debt concerns may restrain record lending just as it’s most needed. Indonesia’s economy grew at the slowest pace since 2009 last year and Singapore expanded the least in two years as prices of commodities from palm oil to natural gas slumped. The International Monetary Fund warned in April shocks from U.S. monetary tightening and a stronger greenback could be amplified in Asia by rising personal and corporate liabilities.
Bank lending in Indonesia, Singapore and Thailand reached $1.15 trillion at the end of December, according to data compiled by Bloomberg. That’s about three-quarters of the nations’ combined economies. Singapore banks have lent the equivalent of 1.5 times the country’s gross domestic product, the data show.
The boom may be peaking. China, the biggest consumer of products from Southeast Asia, grew at its slowest pace in a quarter of a century in 2014. The U.S. is expected to raise its benchmark interest rate to 0.45 percent by the third quarter, according to analysts surveyed by Bloomberg, prompting other central banks to follow suit.
“The scenario of a ‘double whammy’ posed by a rise in U.S. interest rates and a strong U.S. dollar could expose vulnerabilities among some Asian borrowers,” Ravi Menon, the governor of the Monetary Authority of Singapore said in a May 28 speech. As a result, “banks in emerging Asia could face higher non-performing loans.”
As fiscal pressures cause loans to fail, some banks may start to retrench their lending activity, said Ambreesh Srivastava, a senior director at Fitch Ratings Ltd. in Singapore. That shouldn’t necessarily be viewed as a negative.
“If this results in a more conservative stance, that may actually arrest the growth in non-performing loans over time,” Srivastava said. “And that’s a good thing.”
Costs are already up for the region’s corporate bond issuers. The yield on Thailand’s 10-year government notes, used as a gauge for company borrowing rates, has risen 23 basis points this year to 2.96 percent, even as the central bank cut interest rates to kickstart growth. Singapore’s benchmark rose 38 basis points to 2.66 percent and Indonesia’s five-year yardstick bond has increased 59 basis points.
Thailand’s Thanachart Bank Pcl classified 3.95 percent of its loans as non-performing in the first quarter, according to the bank. It’s the worst ratio among major lenders in Singapore, Indonesia, Malaysia and Thailand, Bloomberg-compiled data show.
The Indonesian unit of Malaysia’s CIMB Group Holdings Bhd. ranked sixth in regional ratios. A large portion of provisions against bad debts have been from the coal industry and related sectors, Group Chief Executive Zafrul Tengku Abdul Aziz said in an e-mailed reply to questions. The bank has substantially reduced its exposure to Indonesian miners, he said.
Moody’s this week labeled the move by Krung Thai Bank Pcl, Thailand’s largest state-owned lender, to boost bad loan provisions by 3.6 billion baht ($106.7 million) as credit negative. The lender has the region’s 12th highest non-performing loan ratio.
“We will be more selective with tightening credit approval and focus more resources into the collection and management of non-performing loans,” Vorapak Tanyawong, Krung Thai Bank president, said in a reply to Bloomberg questions.
Investors in the region aren’t panicking just yet. While the slowing pace of economic growth raises the odds for an increase in non-performing loans, banks are still well funded, according to Singapore-based Swee Ching Lim, a credit research analyst at Western Asset Management Co.
“The capital levels of banks in the region are respectable, with profitability in positive territory,” he said by phone June 3. “Banks are in a decent position to tackle upticks in troubled loans.”