An employee arranges genuine bundles of U.S. one-hundred dollar banknotes and Chinese one-hundred yuan in an arranged photograph. (Photographer: SeongJoon Cho/Bloomberg)

Asian Banks' Loan Strength Should Alarm Western Rivals

(Bloomberg Gadfly) -- For international banks, Asia is becoming an increasingly uncomfortable place.

Already facing pressure from regulators in their home countries to conserve capital and stay away from risk, they're now having to cope with a newly sophisticated breed of Asian lender.

Due to a boom in domestic and cross-border loans, bank advances in the region outside of Japan reached $26 trillion in June, up from $7.8 trillion a decade ago. Chinese banks were the busiest, increasing loans at a compound annual rate of 17 percent to $17.6 trillion. The market share of foreign players has declined significantly.

Asian Banks' Loan Strength Should Alarm Western Rivals

Some of it has to do with the global financial crisis, which saw banks including HSBC Holdings Plc cut their retail presence and others like Goldman Sachs Group Inc. exit costly minority stakes in local lenders. European institutions retreated the most, with their share of cross-border loans in the region sliding to 22 percent in 2017 from 36 percent in 2007.

But Asia's banks have also become a lot stronger, armed with healthy deposits and access to cheap U.S. dollar funding. That's helped them move beyond plain vanilla lending into more complex offerings.

Ten years ago in India, for example, foreign banks used to account for 17 percent of pre-provision profits despite having a loan-market share of only 6 percent. Many were stronger in areas such as credit cards and foreign-exchange derivatives. Last year, their loan-market share was 4 percent while their take of pre-provision earnings had fallen to 9 percent, according to Morgan Stanley head of financial research Anil Agarwal. 

Asian Banks' Loan Strength Should Alarm Western Rivals

Asian lenders are also willing to take on more risk at a time their Western counterparts aren't. They can be more generous on interest rates, charge lower upfront fees and offer more attractive covenants, according to Brett King, a Hong Kong-based partner at law firm Paul Hastings LLP.

Chinese banks are doing leveraged loans for private-equity firms at up to eight times Ebitda; many Western banks are subject to leverage limits of about four times, for a good credit risk. Asian lenders are also more flexible when private equity wants their target to embark on another deal soon after the first, or pay dividends, whereas their international counterparts often place limits on acquisitions and shareholder returns until the initial advance is repaid.

Of course, many lenders in the region are state-backed, so they know a bailout wouldn't be out of the question. They're also more familiar with local borrowers, so can probably afford to push the envelope.

Western banks' edge in Asia is possessing a global network that clients can tap into. Industrial & Commercial Bank of China Ltd., for example, remains largely China-focused while others are hoping to meet President Xi Jinping's Belt and Road ambitions rather than expand in Europe or the U.S.

One risk is that economies in the region sour, or favored clients hit a rough patch, as Standard Chartered Plc discovered. Still, the lead that Asian banks have in the loan market is growing. As China accelerates its financial opening, foreign players are right to feel uneasy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

To contact the author of this story: Nisha Gopalan in Hong Kong at

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