Bad loan build-up clouds emerging market picture
Reuters reported that Non-performing loans have shot up to a global high of close to 10 percent of gross credit…
Reuters reported that Non-performing loans have shot up to a global high of close to 10 percent of gross credit exposures in India, and they are expected to edge up this year in China, Mexico, Indonesia, Russia, Turkey and Argentina, say analysts. In Turkey, bad loans shot up to 4.3% of the total, according to data provided by Central Bank, rising by 12% YTD.
Emerging equities markets have soared this year as investor sentiment towards them rebounds, but for some the enthusiasm is being tempered by worries about surging bad loans at many banks.
Non-performing loans have shot up to a global high of close to 10 percent of gross credit exposures in India, and they are expected to edge up this year in China, Mexico, Indonesia, Russia, Turkey and Argentina, say analysts.
A gloomy outlook on the final two issued by Standard & Poor’s undercuts the assumption that fallout from currency crises last year in both countries was already priced in.
As well as holding back financial sector growth and national economies, hefty levels of soured debt pose a particular risk for foreign investors, who have long favored retail lenders as picks for getting exposure to rising middle classes in emerging markets.
EM bank lending swelled to an average of 128 percent of GDP among the BRICS – Brazil, Russia, India, China and South Africa – in 2017, from 98 percent in 2007, according to World Bank data.
But such activity is vulnerable to swings in the credit cycle, and some fund managers are growing more cautious.
Asset manager Ashmore Group is negative on banks in seven emerging countries – China, Malaysia, South Korea, Taiwan, Turkey, Mexico and Russia – and positive on just Indonesia, India and Peru, said emerging markets equity portfolio manager Edward Evans.
There have been signs of policy softening by some emerging market central banks, and some commercial lenders have been cutting foreign exchange exposure and slashing risk on their balance sheet.
But broad financial conditions are tighter at the start of 2019 than they were a year ago after several interest rate rises in the United States and concerns about weaker global growth.
Asked which banking sectors he was bearish on, Eaton Vance emerging markets corporate strategist Akbar Causer cited risks if China’s economic slowdown continued.
The outlook for lenders in Turkey and Argentina was also “not so strong”, he added.
Turkey’s banks are vulnerable as the lira’s depreciation and its lurch into recession – data on Monday showed the economy slumped 3.0 percent year on year at the end of 2018 – hampers borrowers’ ability to meet debt obligations
S&P, in a note last month, said it expected Turkish NPLs to swell to around 6 percent this year, roughly double its earlier forecast. Official data showed it at 4 percent at the end of January.
FX DEBT RISK
High dependence on external funding is a source of risk in Turkey, South Africa, Indonesia and Mexico, said Tan Nguyen, senior research analyst at Oppenheimer Funds.
Their combined external debt stands at around $1.37 trillion. That and heightened financial stress among companies based there could lead to difficulties for them repaying their debt, pushing up non-performing loans, Nguyen warned.
S&P this month took ratings action on 22 Mexican financial institutions, cutting the outlook on several to “negative” from “stable”. They included Citigroup subsidiary Citibanamex and Banco Inbursa, controlled by the family of billionaire Carlos Slim.
S&P added, however, that cautious lending practices would help Mexican banks avoid a sharp rise in NPLs.
Pronounced risks in Turkey
Others see more immediate risks, particularly in Turkey, where the central bank last week held its base interest rate at an above-inflation 24 percent.
“The fact we have higher interest rates and a weaker currency means there’s a rising probability of corporate defaults and non-performing loans,” said Jon Harrison, managing director, emerging markets macro strategy at TS Lombard.
Even Garanti Bank, Turkey’s second-largest private bank and considered one of the best-run lenders across emerging markets, had a non-performing loan rate of 5.2 percent last year, above its forecast.
In India, banks had been under pressure to clean up a $190 billion pile of soured loans. But that pressure has eased since Shaktikanta Das – seen as closely aligned with Prime Minister Narendra Modi’s government – took over as central bank governor in December.
“What that means is they avoid a short-term potential crisis by enabling banks to avoid recognizing the problem, but at the cost of slower long-term credit growth,” said Harrison.
Turkish bank data review suggests credit crunch is not over
According to BRSA weekly data ended 8 March, analyzed by OYAK Securities Research team Turkish banking sector grew its loan book by 0.5% w/w (-0.2% currency-adjusted) and 1.7% ytd. State owned banks continued to shoulder the growth with 0.8% w/w and 5.2% ytd increases while private and foreign banks have been in the negative territory with 0.6% and 1.0% declines ytd. TL loan book was up by 0.2% (1.5% ytd) but FX book posted 0.6% decrease (-1.4% ytd) in real terms. There are significant concerns about the quality of state bnak loans, as these may have been directed by the Erdogan administration to bail out favored companies rather than being issues on a sound analysis of credit risks.
Despite strong contribution from general purpose consumer loans (0.8%), the rise in retail lending was pulled down to zero by the consecutive shrinkages in housing loans (-0.2%) and credit card loans (-1.2%). Banks’ increasing focus on commercial loans resulted in 0.6% growth (2.4% ytd).
Deposits were up by 0.4%, benefitting from TL depreciation as TL and FX deposits came down by 0.5% and 0.1% respectively. The composition have been changing in favor of FX deposits for a while, which translated into 6.2% growth ytd in real terms versus 3.2% contraction in TL deposits (FX deposits in state banks rose 12.4% ytd). Important to note, FX deposits nominally increased from USD189bn as of year-end to USD201bn on the back of USD7.6bn demand from retail depositors.
Non-deposit funds showed 1.1% increase, mainly driven by 4.3% rise in funds from local banks. Repos recorded an eye-catching 29% growth ytd, which might be led by higher returns versus deposits and/or other TL funding sources. The mismatch between TL loan demand and F/X deposit growth exacerbates the credit crunch and forces banks to keep TL deposit rate high. Efforts by the government to suppress TL interest rates have led to substantial dollarization of the monetary base since October which has in the past triggered currency shocks.
Non-performing loans increased by TL1.1bn nominally, out of which TL416mn stemmed from participation banks and TL225mn from private banks. NPL ratio and NPL coverage remained flat at 4.1% and 68% respectively. NPL ratio for retail loans including credit card was at 3.7% whereas commercial loans ended the week at 4.2%. SME NPL ratio inched up to 7.2%, which is worth monitoring because of declining sales and the government’s emphasis to reduce job losses in this segment.