Best-Ranked Bank OCBC Cautions on China Crunch: Southeast Asia

Oversea-Chinese Banking Corp., Southeast Asia’s second-largest lender, says banks doing business in China will have to be more prudent with liquidity to weather any future crises.

The credit crunch that started in mid-June is temporary and caught some lenders by surprise, OCBC Chief Executive Officer Samuel N. Tsien, 58, said in a Bloomberg Television interview with Haslinda Amin in Singapore yesterday.

A money-market liquidity squeeze in China will probably cut the country’s credit growth by about 750 billion yuan ($122 billion) as its central bank continues to crack down on excessive lending, a Bloomberg survey shows. Tsien has focused on expansion in China, Taiwan and Hong Kong to offset waning profitability in the lender’s home market of Singapore.

In China, “liquidity is something that cannot be counted on for certain,” said Tsien, who heads Asia’s strongest bank, according to rankings compiled by Bloomberg Markets in May. “You have to be prepared to have adequate liquidity to fund your assets.”

Shares of OCBC rose 0.5 percent to S$9.92 as of 9:48 a.m. in Singapore trading. The benchmark Straits Times Index gained 0.39 percent.

Money Supply

China’s State Council, headed by Premier Li Keqiang, pledged on July 5 to improve the effectiveness of financial support for the economy, saying a misallocation of capital is hampering the restructuring of the economy. It vowed to maintain a reasonable supply of money and credit and reiterated that it will follow a “prudent” monetary policy stance.

The country’s regulators are forcing trust funds and wealth management plans to shift assets into publicly traded securities, robbing property developers and local-government finance vehicles of so-called shadow banking funds.

These central bank measures are aimed at reining in companies that borrow from banks and then lend those funds in the shadow market, Tsien said. They do not target the banks or the economy, he said.

The country’s overnight repurchase rate, which measures mainland China’s interbank funding availability, dropped to 3.25 percent yesterday from a record 13.91 percent on June 20. It remains above the average 2.92 percent over the past year.

Banks, which earlier borrowed short-term and lent long-term to make profits from their excess liquidity, are now lending short-term, said Tsien, explaining they are doing this to have funds immediately available if required. That’s why overnight rates have remained higher than average, he said.

Good Liquidity

OCBC’s liquidity in China is “extremely good” because it mainly lends to state-owned enterprises, which depend on local lenders for most of their funding, said Tsien, who became CEO in April last year. That has helped his bank maintain yuan loans at less than 50 percent of deposits, below the 75 percent limit prescribed under commercial banking law in the country.

“We are more cautious,” said the Shanghai-born Tsien, who was president and chief executive officer of Hong Kong-based China Construction Bank Asia Corp. before joining OCBC in 2007. “But having said that, the sector that we’ve been focusing on in China has always been in the top end of the market.”

The greater China region, which includes the mainland, Taiwan and Hong Kong, accounted for 7.2 percent of OCBC’s profit before tax last year, compared with 6.7 percent in 2011, company filings show.

Shrinking Margins

Despite OCBC’s expansion abroad, more than 60 percent of its revenue comes from Singapore, the least-profitable lending market in Southeast Asia. The bank’s net interest margin, a measure of lending profitability, has shrunk for 15 consecutive quarters on a year-over-year basis, according to data compiled by Bloomberg.

Tsien also said Singapore’s banks had enough safeguards to limit excessive mortgages to any one individual, even without the latest round of measures introduced by the Monetary Authority of Singapore to cool the property loan market.

Starting June 29, the framework requires that lenders take the borrower’s total debt into consideration when granting property loans, the authority said. Home loans shouldn’t exceed a total debt servicing ratio of 60 percent and those that do will be considered “imprudent,” it said.

The exceptional cases where banks lent beyond that limit to individuals would be in “single-digit percentage points,” Tsien said.

OCBC was ranked the world’s strongest bank for two years until 2012, when it was overtaken by Qatar National Bank SAQ, according to Bloomberg Markets, which based its assessment on criteria including capital, non-performing assets and cost efficiency.

Before it's here, it's on the Bloomberg Terminal.