Chart of the Day: Slowing China takes a bite out of banks’ loan books

Asset deterioration remains a key threat.

Singapore’s largest lenders are scaling back their regional expansion plans as China’s slowing economy takes its tolls on Asian loan demand. This chart from BMI Research shows that loan growth for Asian Currency Units (ACUs) at Singapore’s three largest banks has declined in tandem with China’s slowing economy.

“The foreign market into which Singaporean banks have expanded most aggressively over the past seven years is Greater China, where the total exposure of Singapore's big three banks as a proportion of their collective loan portfolio has risen to approximately 25.0%. As China struggles to unwind massive industrial overcapacity and the expensive national residential property market eventually experiences a reckoning, we expect Singaporean lenders to maintain a cautious approach to growing their loan books there,” BMI Research said.

BMI Research also cautioned that a substantial deterioration in asset quality within the Chinese financial sector will also pose a risk to Singaporean banks, though this risk is partly mitigated by the fact that their loan exposure is generally concentrated within the top echelon of China's state-owned banks.

“Singapore-based lenders assumed an aggressive overseas lending stance, with the goal of grabbing market share in fast-growing emerging markets, as Asia bounced back strongly from the global financial crisis (GFC). At the same time, a red-hot domestic property sector buoyed SGD lending, contributing to fast growth in both categories and keeping total domestic and foreign currency loan exposure well within their historical ranges. Both of these drivers of loan growth have receded over the past two years, and are unlikely to improve in the near future,” BMI Research said.