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.

Asia's lenders have dug themselves into a $60 billion hole, which they'll have trouble climbing out of without pulling shareholders down with them. 

That sum is the ``missing" bad loan provisions, or the difference between the amount earmarked to deal with souring debt and what banks would need if 2016 turned into a repeat of 2008.

Do the math. Asia's top 200 publicly traded banks had $16.7 trillion in assets last year, on which they had set aside about $296 billion, or 1.78 percent, for loan losses. Ratchet that up to the 2008 rate of 2.14 percent, and they would require an extra $60 billion or so.

Unsurprisingly, as much as one-third of the shortfall is in just one economy: China. But the mainland's lenders aren't the only ones in denial. Most banks in Asia are busy pretending it's business as usual and future profits are safe.

Wearing Thin
Asian lenders' loan loss reserves are too skinny to absorb crisis-scale losses
Source: Bloomberg
*Assuming loss reserves to total loan ratio of 2008 Based on financial data of 200 publicly traded Asian banks

The illusions of solidity aren't fooling many. Despite HSBC bravely holding on to its dividend, the stock fell after the bank reported first-quarter earnings on Tuesday, bringing its one-year decline to more than 30 percent. Charges for bad loans doubled from 12 months earlier but are still a fraction of what they were in 2011 and 2012. Should China experience a full-blown credit crisis, or a sharper slowdown in economic growth, the cover against bad loans may suddenly start feeling too thin for comfort.

Mind That Gap
HSBC's quest for double-digit return on equity has left it vulnerable to a bad loan surge
Source: Bloomberg

Those risks aren't even beginning to get counted. Take BOC Hong Kong. In December, the Hong Kong arm of China's fourth-largest lender by assets reported a bad-loan ratio of just 0.2 percent. Granted, BOC Hong Kong is selling a big chunk of its mainland exposure to China Cinda Asset Management. But with HK$523 billion ($67 billion) of advances to borrowers across the border, credit risk will still be far from negligible.

As former CLSA bank analyst Daniel Tabbush noted recently on research web site Smartkarma, BOC Hong Kong ended up booking HK$12.6 billion of provisions for loan losses in 2008, almost 13 times what the lender set aside last year. ``The year 2008 is a good reminder of how high and suddenly impairment costs can rise," Tabbush says.

If banks believe investors are oblivious to that risk, they're digging themselves into an even bigger hole.

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:
Matthew Brooker at mbrooker1@bloomberg.net