Finance

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

The run on European banks that hit Asia in earnest on Thursday may be helping to bring some sanity to the market. On a comparative basis, the stocks and bonds of lenders in this part of the world are overvalued versus their Western counterparts. Even after this week's drubbing they still are, which suggests the pain isn't over.

Wide Gap
Yields on subordinated perpetual bonds in Asia are still far lower than notes in Europe
Source: Bloomberg-compiled prices

Perpetual subordinated dollar bonds of Industrial & Commercial Bank of China fell 4.5 cents on Thursday pushing yields to 5.65 percent, their worst one-day performance on record. Compare that to similar notes from Standard Chartered, which yield 8.1 percent after a 4.7-cent plunge Thursday, bringing declines for the month to 17.2 cents. To those who would argue that Standard Chartered is more exposed to commodities, remember ICBC is the biggest shareholder of South Africa's Standard Bank, and on top of that has its fair share of loans to miners in Africa and Latin America as well.

Analogous trends can be seen elsewhere in the region. Bank of East Asia's perpetual notes are still yielding 5.9 percent even after an unprecedented 8-cent tumble Thursday while BNP Paribas securities pay 7.9 percent. The French lender has a market capitalization of 46.6 billion euros ($52.7 billion), almost seven times that of Bank of East Asia, which is being targeted by activist hedge fund Elliot Management.

A similar logic, or lack thereof, applies to stocks.

Eastern Promise
Stock valuations of banks in Asia look lofty versus Europe
Source: Bloomberg

The Hong Kong-listed shares of Bank of China, Asia's fourth-largest lender, are trading at a price equivalent to 0.62 times its book value while Deutsche Bank, Europe's fourth-biggest, is at a multiple of 0.29.

Other measures of bank health are hardly more flattering. The average Tier 1 capital ratio -- a key gauge of a lender's ability to survive in times of stress --  of the 10 biggest banks in Asia excluding Japan and Australia is 10.6 percent, compared with 14.1 percent for the 10 largest lenders in Europe.

Nonperforming loans over there are running at 4.3 percent on average, but in Asia, all the top 10 banks are from China. So while their average soured debt comes in at a reported 1.2 percent, investors such as Kyle Bass have warned banking-system losses may be a lot larger. Even excluding lenders in China and Hong Kong, the balance continues to tilt in Europe's favor; the 10 biggest banks in the rest of the Asia have a mean Tier 1 capital ratio of 11.9 percent.

Investors may argue that authorities in Asia are more likely to bail out lenders than they are in Europe, where social pressure has already led to senior creditors being called upon to revive one financial institution. In reality, there's little precedent for that. Plenty of banks in the region were left to die a natural death during the Asian crisis and considering the financial duress some governments may be facing amid record capital outflows last year, it would be naive to expect they'll step up to ensure international investors aren't out of pocket.

Relative Safety
The average capital buffer of Asia's 10 biggest lenders is smaller than in Europe
Source: Bloomberg data

Whichever way you cut it, banks in Asia still aren't cheap even after Thursday's significant sell-off. Investors should brace for a great deal more pain before they hit rock bottom.

 

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

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

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