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Asian banks see funding costs rise, making 2018 challenging

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Twenty-three respondents were from Taiwanese banks, 13 from Chinese or Hong Kong banks, seven from European banks, three from South Korean banks, three from South-east Asian banks and one Australian.

[SYDNEY] It's been a borrower's market for a long time, in Asian syndicated loans as in the rest of the dollar universe.  But Asia-Pacific lenders are facing increasing funding pressures, and a handful are aiming to pass those costs along - in another sign that the beginning of the end of ultra-easy money may be coming. Half of the 50 banks in a Bloomberg News survey have experienced an increase in funding cost of as much as 20 basis points over the past few months.

"Banks across the Asia-Pacific in many cases will be challenged to maintain momentum on net interest margin primarily from a competitive standpoint in 2018," said Gavin Gunning, senior director at S&P Global Ratings.

"The banking sector regionally is becoming more competitive and in general that means that there are more pressure in terms of banks' funding cost."

While loan pricing isn't likely to rise in the near-term, there are signs it could be bottoming: 26 per cent of respondents said they need higher rates on loan deals thanks to funding pressures. With strong growth in the Asia-Pacific region, and signs of a pick-up in global capital spending, the environment could turn more hospitable for lenders. Some 18 per cent in the survey said they've turned down deals that didn't pay enough.

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Syndicated loan volumes in the region excluding Japan have dropped 12 per cent from a year ago, to US$392.6 billion so far in 2017. Fewer mergers and acquisitions and a booming market for sales of dollar bonds contributed to the drop.  Average spreads on US dollar-denominated financial bonds in Asia excluding Japan have risen 11 basis points so far this year - while small, still on track for the biggest annual gain since 2011, according to JPMorgan indices. Margins on three-year dollar loans have averaged 210 basis points in 2017, the lowest for any year since 2010, according to data compiled by Bloomberg.

Fitch Ratings also cited higher funding costs as a pressure for banks in its 2018 outlook for the industry, published last month. Competition and the implementation of new accounting standards known as IFRS-9 pose additional challenges, the company wrote.

Bloomberg's survey incorporated 50 interviews with loan bankers from the Asia-Pacific branches across 39 banks by phone or email in October and November. Twenty-three respondents were from Taiwanese banks, 13 from Chinese or Hong Kong banks, seven from European banks, three from South Korean banks, three from South-east Asian banks and one Australian.

BLOOMBERG

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