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Commerzbank says it will pass up any new lending business that has no link to Germany or Poland; Société Générale says it is reviewing a host of products from acquisition finance to export finance in Asia. No wonder the likes of Japan’s MUFG, ANZ of Australia and DBS of Singapore have been pricking up their ears. One bank’s weakness is another bank’s opportunity.
As European lenders seek to reach a 9 per cent core tier one ratio by the European Union’s June deadline, their interests across Asia are looking particularly expendable. Bank for International Settlements data show the total on-balance sheet exposure of continental European banks to Asia is $522bn. That will have to fall. Liability management exercises, adjusting risk-weighted asset models and retaining earnings will go only so far in closing capital deficits. And the bigger the earnings downgrades between now and then, the greater the reliance on deleveraging to plug the gap.
The process will not be painless. The EU has warned retreating banks to “avoid undue pressure on credit extension in host countries.” But in Indonesia, Malaysia, Sri Lanka and the Philippines, claims by European banks amounted to at least a fifth of total local credit outstanding at the end of June. There, as in India and Korea, heavily-indebted companies may struggle to replace bank debt with bonds. As Barclays Capital notes, the most non-financial credit issued into Asian (ex-Japan) bond markets in a single year was $45bn (2010), so substituting even a fraction of the total of $264bn in non-financial loans will not be easy. Meantime, investors should expect more of the type of disclosure on Thursday from Standard Chartered, which said that average balances in its trade finance and cash management businesses were “growing strongly.” As June nears, the greater the likelihood it, and other liquid, cross-border lenders will pick up good assets at bad-asset prices.
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