Finance

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Commercial bankers in Asia have got their long-pending wish: U.S. interest rates have started normalizing. But they're in for a rude shock if they equate "normal" with some variant of the 3-6-3 rule -- borrow at 3 percent, lend at 6 percent, and be off to the golf course by 3 p.m.  

The cheap-money era has undoubtedly been strenuous for the region's lenders. The glut of funds globally made it hard for them to charge a decent margin on loans. Hence they ended up chasing ambitious corporate borrowers with grandiose plans that have since gone wrong. Standard Chartered, for instance, has had to put about $5 billion of its loans in India on an internal watch list.

Bank shareholders have paid a price for managers' desperation to put money to work:

Worsening Profitability
Return-on-equity for large banks in Asia has fallen in a low-interest environment
Source: Bloomberg
Note: Average for 69 Asian banks with market value of at least $5 billion

And yet, just because addiction to cheap money has backfired for Asian banks, it doesn't mean a Fed-sponsored detox program will make them any healthier. There are at least four good reasons why.

First, the weakening economic cycle in Asia is pointing to lower -- not higher -- lending rates. Monetary authorities in China, India, Indonesia and South Korea will probably pare their short-term policy interest rates in 2016, and maybe even Bank of Thailand and the Reserve Bank of Australia will follow suit. Or at least that's what economists currently forecast. Lenders will be expected to pass on the benefit to corporate and individual borrowers.

At the same time, it may be difficult for bankers to squeeze depositors. That's because Asian corporates, which are an important source of banking-system deposits, have a time-honored strategy of jumping over capital controls and earning higher interest rates where they can find them. That technique is called trade misinvoicing. Washington-based Global Financial Integrity recently estimated that the annual pace of such illicit outflows from developing countries jumped by almost $200 billion between 2004 and 2007, just as U.S. interbank rates went from 1 percent to almost 6 percent. As the Fed raises rates further, bankers in Asia should expect turbulence on the deposit side.

Illicit Financial Flows From Developing Countries
Trade misinvoicing is the biggest culprit
Source: Global Financial Integrity

The second big problem for Asian banks is credit costs, which will rise almost everywhere in the region because of the ongoing distress in energy, shipping, metals and minerals. The commodity crisis is closely linked to a sharp slowdown in Chinese demand, which may take time to stabilize. Meanwhile, raising capital to write off bad loans and meet Basel III requirements will be a third crucial challenge.

But the final -- and most significant -- problem Asian banks will face is the debt overhang that they themselves helped create. The 500 lenders in the region tracked by Bloomberg had $8 trillion in outstanding loans in 2006. Last year, that figure was more than $29 trillion. Without some painful deleveraging, it's not clear just what those banks can do to whip up customers' appetite for fresh borrowing. 

It's curious that just as the world's biggest economy is signaling a return to business as usual, export-led South Korea, seen as a bellwether for U.S. demand, has decided to pare the official inflation target as well as the GDP growth estimate for next year. Before the Fed ends up making an already-abnormal situation in the region more stressful, Asian bankers need to pick up the phone and cancel that golf game.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net