Bank margins at the margin in Asia and Australia

As a cadet finance reporter, every time I rang a broker about the stock market I had to steel myself for the wonderful insight “the market went up/down because there were more/less buyers than sellers”.

The point is, that was right. Albeit the insight was typically not enough to fill a 600 word market report.

" Banks – particularly European banks – are more circumspect in lending to Asia, Australia is a safe haven."
Andrew Cornell, Managing Editor

So it is with the seemingly inexorable contraction of margins in corporate banking, particularly in Asia. There are relatively more sellers (of credit) than buyers (borrowers). That's because there's relatively more money (liquidity) available than businesses wanting to invest thanks to central bank money printing and continued below trend economic growth.

The latest Bank for International Settlements Quarterly Review contained an analysis of the bare numbers in cross-border lending and while the reasons are not explored, the impact is clear. Cross-border lending remains limp.

“Cross-border bank lending contracted between end-March and end-June 2015,” the BIS said. “The decline was mainly driven by a fall in lending to advanced economies (AEs). By contrast, claims on emerging market economies (EMEs) increased modestly during the same period.

“Data from earlier in the year point to a slowdown in international financial flows. Cross-border banking contracted in the second quarter, for the first time since mid-2013. International debt securities issuance slowed in the third quarter, particularly for emerging market economies.”

So, given banks have plenty of liquidity, that is the contraction is not a supply issue, the conclusion is that demand for lending is low.

The trail of those forces is evident in margins, a clear gauge of the supply/demand environment.

For example, ANZ provided these slides with the bank's 2015 September year result:

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While margins generally remain under pressure, the NIM pressure chart shows – and ANZ is not alone in this – that while Asian margins are an order of magnitude lower, they are starting to pick up. Margins in Australia, on the other hand, continue to track down.

According to market players, supported by data from the Australian Prudential Regulation Authority, that's because while banks – particularly European banks – are more circumspect in lending to Asia, Australia is a safe haven.

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It is AAA-rated, GDP growth remains robust and margins – as per the graph – are higher.

This is clear in the latest quarterly data from APRA which saw the big four Australian banks cede market share in business lending to foreign banks.

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Credit Suisse noted “among foreign banks, our review of APRA monthly banking statistics data suggests that Asian banks in particular among the foreign banks appear to be increasing their presence in the Australian corporate lending markets”.

For example, Bank of China increased market share from 1.55 per cent in October 2014 to 1.88 per cent and China Construction Bank from 0.2 per cent to 0.37 per cent. Japan's Mizuho lifted share from 1.03 per cent to 1.28 per cent and Singapore's DBS Bank from “virtually no share in October 2014”, according to Credit Suisse, to 0.07 per cent.

While the Chinese banks provide the headlines, it is the Japanese banks, well capitalised and relatively cheaply funded, which are a major market force. Added to the desirability of some growth and higher margins in steady Australia compared with moribund Japan, the market for swapping Japanese yen into Aussie dollars is also favourable.

The Japanese banks have been a growing force in Australia and the region for at least 18 months but recently have been even more aggressive, not just with their balance sheets but also poaching Australian bankers.

Meanwhile DBS launched a branch in Sydney in September with chief executive Piyush Gupta flagging an ambition to grow its corporate loan book to $5 billion over the next few years.

Gupta explicitly said one of the attractions for the bank, one third owned by the Singaporean government, was Australia's relatively higher margins.

While market share is still small for these banks, prices are set at the margins.

The role of China's mega-banks in the region is potentially even more significant.

Just last week India's largest conglomerate, Tata Group, announced a strategic partnership with China's Industrial & Commercial Bank of China (ICBC), the world's largest bank by assets.

ICBC will provide financing products, global cash management and consulting to Tata, including international trade finance, investment banking, foreign exchange, derivatives trading and other global financial services.

However, Asian bankers argue this deal is more significant for its structure than its size or what it might say about the role of Chinese banks in the region.

“For the moment, Chinese banks are supporting their commercial interests, they are working with existing relationships,” one Hong Kong-based banker told BlueNotes.

That may change. But as of today the dynamic is while European and to a degree American banks withdraw from lending in Asia, domestic banks in each market are stepping up.

For example, according to the BIS “cross-border claims on China rose by $US38 billion during the second quarter of 2015 (but) despite this moderate quarterly increase, international bank lending to China has lost significant momentum and contracted by 3 per cent in the year to end-June 2015”.

The caution by advanced economy banks, including those based in Asia, over the last two months then has been absorbed by local willingness to lend – lending within borders.

For banks then, the story is not great for margins. In Australia, bearing in mind the superior sovereign credit rating and robust economy, more foreign money will chase the (relatively) higher margins available.

Until either those margins contract to an extent comparable to Asia or aggregate demand in Asia for funding picks up, margin pressure will remain thanks to excess supply.

Again the APRA data confirmed this dynamic: according to Credit Suisse, Citi increased market share from 0.44 per cent a year to 1.12 per cent. Bank of America added 12 basis points of market share to 0.54 per cent.

One of the key themes from the latest Australian bank reporting season was sustained pressure on business lending margins due to strong competition.

More broadly in Asia, the BIS Quarterly didn't suggest a strong increase in demand.

“After two consecutive periods of contraction, cross-border lending to emerging markets expanded moderately in Q2 2015,” the BIS said. “The $US46 billion rise in such lending (after adjustment for exchange rate fluctuations and breaks in series) was not enough to offset earlier contractions, and consequently the year-on-year change declined to -1 per cent, down from its most recent peak of 14 per cent in Q4 2013.

“Cross-border lending to emerging Asia in general, and China in particular, continued to lose momentum. Claims on emerging Asia went up by $US42 billion during Q2 2015. Nevertheless, despite the latest quarterly increase, the year-on-year growth rate has turned negative (-2%).”

The question is whether these trends are short to mid-term or mid-term. No one thinks they are long term but the timing depends on the money printing operations of central banks and economic recovery.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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