Lenders brace for more delinquent loans as economic woes mount

ASEAN assets are particularly risky.

Banks’ steep share price crash have hogged the headlines of late. However, investors should probably focus less on the stark headlines and worry more about how the devaluation will affect banks’ loan books.

A report by Macquarie highlighted that the weaker RMB will potentially impact ASEAN corporates, who will have greater difficulty competing with cheap Chinese products.

“With China joining the bandwagon of competitive devaluation, we think that potential negatives for Singapore banks relate to possible asset quality deterioration and negative spillover effects on ASEAN rather than a negative earnings impact from lower (China) business volumes or currency translation,” the report said.

A 10% depreciation of the RMB against the S$ would result only in a 1% earnings hit and a 1.5% hit on equity for the Singapore banks, the report noted.

“While the impact from currency translation and lower volumes would be manageable, the key tail risk relates to asset quality deterioration in our view. Particularly, lending exposures to commodity export dependent economies such as Indonesia, Thailand and to a lesser extent Malaysia and export oriented SMEs in ASEAN are at risk to experience higher default rates going forward,” the report warned.

Among the banks’ biggest customers are ASEAN companies that export to China, and stiffer competition from Chinese exporters will impact their repayment ability.

“Top-down a lower RMB will help China exporters but it is not helping ASEAN companies exporting into China, which are the main customers of the Singapore banks. In addition, the commodity complex – which accounts for 7-10% of total loans for Singapore banks – is suffering. As a result, asset quality issues may spill over on rest of ASEAN,” Macquarie said.