Increases in loan pricing

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