Asia loan bankers expect more increases in loan pricing
Hong KONG, Sept 16 (Reuters Basis Point) It has been more than a year that the loan market has been plagued by higher costs of funds, mostly experienced by Asian and European banks.
Today, these two groups of banks are still troubled by the issue and the problem has worsened. In July, immediately after Italy's debt crisis was exposed, Thomson Reuters Basis Point reported on how European banks were coping.
Many Europeans, based in Asia and the US, responded that their costs jumped to about 180200bp. And they were mostly Italian and Spanish banks that experienced the drastic hike in costs.
Many pointed out that the situation was not as bad as during the Lehman Brothers crisis, and that the French and Germans were still operating businesses pretty much as usual.
Asian banks were in the same boat high costs of funds but business as usual. However, a recent survey with Asian bankers including banks from China, Hong Kong, Indonesia and Taiwan in Asia and the US showed that many say business cannot be sustained as costs continue to rise.
SOARING COSTS
While some bankers saw costs doubled since the beginning of the year, others saw increases of over 100bp.
Basis Point surveyed over 20 Asian banks in Asia and the US, and more than half of the respondents saw costs jump by about 100bp since three months ago.
An Asiabased Taiwanese bank said its costs are at over 150bp now, compared to less than 100bp just two months ago.
"This situation was not seen in May," said a Taiwanese banker based in the US "But the costs gradually moved in late June and July, then soared in August and are still climbing this month."
Many bankers agreed that the issue worsened when Europe announced further debt concerns in July. And some blamed the drastic hike on tightened credit back home.
"Our costs are through the roof now as the central government is limiting lending capacity," said a USbased Chinese banker. "We have since stopped accepting new businesses."
The People's Bank of China has been tightening credit to rein in inflation in China.
"We are subject to the same tight credit situation as our head offices in China and Hong Kong," explained a second USbased Chinese banker.
"Chinese banks face more pressure from rising costs of funds than the American or Japanese banks."
MINIMUM PRICING REQUIREMENT
All Asian bankers that were surveyed are asking for at least 150bp over Libor on any new syndicated deals, and a few even asked for 200300bp over Libor.
An Asiabased Indonesian banker revealed that they are asking for at least 200bp on any corporate loans. And an Asiabased Hong Kong banker said the minimum requirement is now at 180bp for Hong Kong corporates.
"We have been telling arrangers not to bother sending us invitations unless the deal offers at least 200bp allin," said a Hong Kong banker based in Asia.
"We need at least 300bp," added a USbased Chinese bank. In the US, many Asian banks will only look at investment grade deals and many of these loans are unfunded revolving credit facilities. As such, some said they may be able to join the unfunded facilities when the drawn margin will not be triggered.
"We have a better chance of joining an unfunded credit because of our capacity issue," added a USbased Chinese banker.
Meanwhile, a USbased Taiwanese source said they are pressured to go down the rating spectrum since they cannot renew existing loans that are offering less than their costs.
"Plus, we are suffering losses on deals that bring in less than our funding costs," the banker added. However, added a USbased Taiwanese banker, "our headquarters may not accept lowercredit companies."
CUTTING DOWN ON LENDING ACTIVITIES
As a result, many Asian banks have slowed down on their lending activities.
"We have been staying sidelined from joining any of the Hong Kong syndicated loans over the past three to four months," said a Hong Kong banker.
"The surging cost of funds in Hong Kong is likely to put brakes on Hong Kong's market this quarter, as lenders could not book deals that are priced below their internal return thresholds while borrowers would hesitate to come out to do their financing."
Meanwhile, USbased Asian bankers are worried that they may not meet their targets: "If we want to meet the targets," explained a source, "we need to lower credit criteria, meaning taking lowergrade deals from current investment grade to BB or BB, which headquarters is still not ready for that type of lowgrade deals."
Adds another USbased Taiwanese banker: "We will likely turn down new opportunities because of the high costs. The bank is also more selective towards new deals. So you will see lesser participation from many Asian banks, and some might see their portfolio reduced and could even impact on the bank's earnings."
As one banker put it, "No profit, no bonus."
RELYING ON AMERICANS AND JAPANESE?
The US loan market is primarily dominated by US banks and participation is mostly seen from European and Japanese banks. The Asian loan market, on the other hand, is more diverse with Australian, Chinese and Japanese banks at the top of league tables.
But even as some of these arrangers are not bothered by the rising costs of funds, they are concerned on their syndication strategies.
"A couple of borrowers had been targeting the Asian lenders, but we realised the pricing does not match those lenders' criteria," said a top arranger based in the US.
One USbased Taiwanese bank said his bank had to turn down three investment grade loans in the past month.
Meanwhile, an Asiabased top arranger noted that the bank is talking to borrowers on the situation, especially when many of these Asian banks (experiencing the problem) are active lenders in the Asian loan market.
According to Thomson Reuters LPC, Asian banks take up about 18% of investment grade lending volume in the US at the participation level, while Europeans take up 37%.
And for the Asian loan market, Taiwanese banks take up 33% of overall lending while Europeans take up 17% by deal count.
"So we should not ignore or neglect these banks' issues because of their active participation," said another Asiabased top arranger.
Some USbased arrangers think otherwise.
"Borrowers think they can still get funding from US banks and there are the Japanese which have strong deposits," a source said.
And how about the Europeans?
"European banks, even the big ones, are facing not only higher costs of funding," said a USbased Asian banker said.
"But some are purportedly unable to get US dollar funding at this point."
Added a Chinese banker based in the US: "We'll see how the dust settles in six to 12 months from now. My guess is that many European banks will exit or reduce their presence in the US syndicated loan market. With fewer players, pricing should go back up."
MARKET DISRUPTION CLAUSE
Sources said US banks are not affected by the higher costs of funds issue, which makes it difficult to invoke the market disruption clause in loan agreements.
"It will be impossible in the US market in the near term, because the US market still has very strong liquidity," said a USbased banker.
"The issue of high cost of fund is for Asian banks, not US banks."
Meanwhile, some Asian banks have been discussing invoking this clause, especially among the Taiwanese banks.
"We have been hearing many banks in Taiwan asking around to see the possibility of invoking the clause," said an Asianbased Taiwanese
Thursday, September 22, 2011
Banks loan pricing?
Bank of Scotland
A guide to lending pricing
Our SME Customer Charter commits us to be open and transparent across a range of fronts including lending pricing. Over the last two years the average interest cost of borrowing for our SME customers has fallen significantly from 7.5% in 2007 to 3.4% in the third quarter of 2009. This has been driven by a number of factors, including a significant reduction in base rates which has more than offset increases in our longer term funding costs and in our credit costs. This simple guide has been created to explain, in easy to understand terms, these different factors which determine the cost of your borrowing. It is part of our series of helpful guides. Other guides can be found on our website rbs.co.uk/business
Our funding costs
Like any business, a major determinant of our pricing is the cost of our raw materials. For a bank, that means how much it costs us to gather the money that funds our lending.
We raise the money we lend to you from a wide range of sources. One important source is the short term wholesale lending market, known as the London interbank market, where banks lend money to each other. In 2008 and the first half of 2009 interest rates on this market, known as Libor rates, rose far above the Bank of England’s official base rate (the Bank Rate), which is currently 0.5%. The difference between the two has reduced in recent months.
Short term wholesale rates (e.g. Libor), however, represent only a part of our funding costs. To be able to provide longer term loans to customers, we also need to borrow in longer term wholesale markets. The cost of borrowing in these markets is significantly higher than for short term funding at the moment. In addition, we must offer interest rates high enough to attract retail and commercial deposits to help fund our business. These can represent more stable sources of funding but currently cost us far more than Bank Rate, particularly for longer term funding.
Our credit costs
We carry out a credit assessment on every customer who wants to borrow from us. If we think there is a high probability that a customer will not be able to afford the loan, we may not be able to lend as much as a customer has requested or may refuse to lend, but in many cases we cannot predict the exact outcome.
We may know from past experience that out of every 100 loans we make to small businesses, between two and three are likely to default, but we cannot know in advance precisely which ones will do so. For loans where we believe the risk of default is greater, we will charge more to help cover the possible losses on that loan.
In setting the price of your loan, we have to take into account the credit costs we incur when customers default on their loans. In today’s more difficult economic environment, these credit costs have risen. In many instances we will ask you to provide some form of security or guarantee for the loans we provide. The stronger that security, the lower the interest rate we will charge as this helps protect us from any potential losses.
Our capital costs
From the margin that remains after our funding and credit costs, we must, like any business, cover our operating costs and make a return for our shareholders.
Bank regulators require us to set aside a certain amount of equity capital for every loan we make, and that capital requirement has almost doubled over the last 18 months, as regulators are justifiably keen to ensure that banks maintain much stronger capital bases than in the past. The more capital we have to hold, the greater the return we need to make to pay back our investors - including our largest shareholder, the UK Government.
All of the above factors influence the cost of borrowing to our SME customers. While the reduction in Bank Rate has helped us to halve the rates we charge our customers over the last two years, we also had to absorb significant increases in the overall costs of longer term wholesale and retail funding, as well as in credit costs. At RBS, our focus is, and will continue to be, providing competitively priced lending to our customers.
A guide to lending pricing
Our SME Customer Charter commits us to be open and transparent across a range of fronts including lending pricing. Over the last two years the average interest cost of borrowing for our SME customers has fallen significantly from 7.5% in 2007 to 3.4% in the third quarter of 2009. This has been driven by a number of factors, including a significant reduction in base rates which has more than offset increases in our longer term funding costs and in our credit costs. This simple guide has been created to explain, in easy to understand terms, these different factors which determine the cost of your borrowing. It is part of our series of helpful guides. Other guides can be found on our website rbs.co.uk/business
Our funding costs
Like any business, a major determinant of our pricing is the cost of our raw materials. For a bank, that means how much it costs us to gather the money that funds our lending.
We raise the money we lend to you from a wide range of sources. One important source is the short term wholesale lending market, known as the London interbank market, where banks lend money to each other. In 2008 and the first half of 2009 interest rates on this market, known as Libor rates, rose far above the Bank of England’s official base rate (the Bank Rate), which is currently 0.5%. The difference between the two has reduced in recent months.
Short term wholesale rates (e.g. Libor), however, represent only a part of our funding costs. To be able to provide longer term loans to customers, we also need to borrow in longer term wholesale markets. The cost of borrowing in these markets is significantly higher than for short term funding at the moment. In addition, we must offer interest rates high enough to attract retail and commercial deposits to help fund our business. These can represent more stable sources of funding but currently cost us far more than Bank Rate, particularly for longer term funding.
Our credit costs
We carry out a credit assessment on every customer who wants to borrow from us. If we think there is a high probability that a customer will not be able to afford the loan, we may not be able to lend as much as a customer has requested or may refuse to lend, but in many cases we cannot predict the exact outcome.
We may know from past experience that out of every 100 loans we make to small businesses, between two and three are likely to default, but we cannot know in advance precisely which ones will do so. For loans where we believe the risk of default is greater, we will charge more to help cover the possible losses on that loan.
In setting the price of your loan, we have to take into account the credit costs we incur when customers default on their loans. In today’s more difficult economic environment, these credit costs have risen. In many instances we will ask you to provide some form of security or guarantee for the loans we provide. The stronger that security, the lower the interest rate we will charge as this helps protect us from any potential losses.
Our capital costs
From the margin that remains after our funding and credit costs, we must, like any business, cover our operating costs and make a return for our shareholders.
Bank regulators require us to set aside a certain amount of equity capital for every loan we make, and that capital requirement has almost doubled over the last 18 months, as regulators are justifiably keen to ensure that banks maintain much stronger capital bases than in the past. The more capital we have to hold, the greater the return we need to make to pay back our investors - including our largest shareholder, the UK Government.
All of the above factors influence the cost of borrowing to our SME customers. While the reduction in Bank Rate has helped us to halve the rates we charge our customers over the last two years, we also had to absorb significant increases in the overall costs of longer term wholesale and retail funding, as well as in credit costs. At RBS, our focus is, and will continue to be, providing competitively priced lending to our customers.
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