Banks See Fewer Loan Deals, Squeezed Margin in Greater China

(Bloomberg) -- Banks are under increased pressure to raise loan margins in the Greater China region as the coronavirus pandemic weakens lending and a global dollar liquidity squeeze pushes up funding costs.

That’s a key takeaway from a Bloomberg survey of 15 major syndicated loan arrangers operating in the region, including international and Chinese banks. The survey was conducted between March 30 and April 1.

All but one surveyed bank expected syndicated loan volumes to fall this year as borrowing activity across the Greater China area may continue to wane despite signs of the Chinese economy slowly returning to some form of normality.

Offshore syndicated loan volumes for Greater China borrowers tumbled 40% to $20.3 billion in the first three months of 2020 from a year ago, marking the slowest quarter since the last quarter in 2016, according to data compiled by Bloomberg.

Funding costs have risen for all surveyed banks, ranging from 10 basis points to as much as 75 basis points, reflecting unabated concerns about tight dollar liquidity even as central banks worldwide have embarked on a wave of monetary easing.

According to Gavin Gunning, senior director at S&P Global Ratings, it will be difficult for Asia Pacific banks to pass potentially higher wholesale funding costs to borrowers. “This is putting heightened pressure on banks’ profitability, which we expect will be lower in 2020 compared with 2019,” he said.

For some lenders, the stress of rising funding costs is emerging. A lender of Anhui Zhongding Sealing Parts Co. sent a market disruption notification for a 2019 loan this week, but failed to trigger a market disruption event for the deal, according to people familiar with the matter.

Most banks are cautious about using such a clause, said Daniel Lau, partner at Ashurst LLP. “The point of the clause is to ensure that banks won’t make a loss when they provide loans,” he said. “Banks will not consider using the market disruption clause unless it is an extreme situation.”

Higher Pricing

Thirteen of the 15 banks surveyed say they think loan margins need to go up for both top-tier and non-investment-grade firms, with seven expecting an increase of 5-30 basis points for investment-grade borrowers. For riskier high-yield names, five lenders see a rise of 20-50 basis points and three said margins may jump by 75-100 basis points.

The surveyed banks said they will continue to underwrite loans but some said they may commit a smaller amount or to deals of shorter tenors. A few expressed caution against underwriting event-driven financing or deals for new clients at this time.

Other findings from the survey:

• The biggest risk that lenders are watching closely is default risks (87%), followed by international supply chain disruption and market liquidity (73% each)
• Major sectors that lenders are avoiding include travel, tourism and hospitality, retail, and commodities

©2020 Bloomberg L.P.