Asia's Missing Stink-o-Meter

The amount of bonds trading below 80% of par has soared to $17 billion.

Banks in Asia are beginning to test the limits of investors' credulity. They seem to be in no hurry to mark up their estimates of bad loans, even as high-yield bonds show a rapidly deteriorating perception of corporate creditworthiness. Either the fixed-income market has lost its marbles, or banks have misplaced their stink-o-meter. The latter seems more likely.

Collapsing Cushion

The average reserve that banks set aside to account for nonperforming assets has been decreasing

Source: Bloomberg

* Where 100% means that for every $1 of nonperforming assets, $1 is reserved for that loss

While the world lives in fear of a possible credit crisis in China, the reported nonperforming loan figure for major commercial banks on the mainland is just 1.5 percent, according to central bank figures. In neighboring Hong Kong, where a big chunk of the debt capital for China's spectacular credit-fueled growth was sourced, NPLs for locally listed banks are lower at 0.55 percent, Bloomberg data show. Meanwhile, even with manufacturing production slumping 5.2 percent in Singapore last year and home prices sliding, the average bad-loan ratio for the three homegrown lenders is about 1.05 percent. After a meltdown in its coal industry, no more than 3 percent of advances by Indonesian banks have soured.

With the exception of India, where it's well known that at least 11 percent of lenders' loan books are distressed, the rest of Asia is showing little urgency in acknowledging any strain. Reserves set aside by banks to absorb losses are thinning out. This sangfroid is unnerving considering exposure to the region has already played havoc with the balance sheets of global lenders -- analysts at JPMorgan expect HSBC's nonperforming loans in Asia to jump to $5.4 billion by the end of the year, up from $2.2 billion in June. How local lenders can hope for a dramatically superior outcome chasing broadly the same set of corporate borrowers is anyone's guess.  

In credit markets, there are already red flags. The amount of sub-investment grade corporate debt trading below the equivalent of 80 cents on the dollar has in the current quarter shot up to more than $17 billion versus about $1 billion in 2012. Maybe the bond market will calm down, just like it did after 2013's taper tantrums. But to the extent elevated stress proves to be enduring, it's hard to believe lenders will come out unscathed:

Stressing Out

Amount of bonds ranked via country of risk trading below 80% of par

Source: Bloomberg

A more rational expectation would be for Asian lenders to accelerate their loan-loss provisions. Shareholders are already turning less than sanguine about banks' loan books. Twelve months ago, about one third of publicly traded banks in major Asian economies were trading below their book value; now, that figure is more than half, including ICBC and China Construction Bank.

Extend-and-pretend practices are part of the region's standard toolkit: Japan carried on with a zombie banking system through the 1990s, refusing to recapitalize it. Investors are right to wonder if China will borrow from the same playbook and risk a deflationary credit crunch.

No Joy in Sight

Notes of coal miner Bumi Resources are among Indonesia's worst performing

Source: Bloomberg

For the rest of Asia, the danger is that if banks are seen to be falling behind on tackling bad debt, the equity market will be loath to supply them with fresh capital. There is, after all, a threshold to investors' disbelief. Crossing it won't do lenders any good.

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

    To contact the editor responsible for this story:
    Katrina Nicholas at

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