The commodity price rout has hammered the profits of mining and
energy companies across Asia - and bankers are wary.
As lenders of large licks of capital to companies that built new
mines and wells approved during the glory days of the commodities
boom, the punishment meted out to metals and energy prices has
sharpened worries about corporate cash flows and the ability to
meet loan repayments. The S&P GSCI, a broad based index of
commodity prices, has slumped 21% from its June highs, underscoring
the hit that many dirt diggers and oil drillers have taken to their
bottom lines.
The fallout from weaker commodity prices has begun to
reverberate across the banking industry. Malaysian bank CIMB Group
(1023.MY) revealed in its third quarter earnings that profit from
its Indonesian business had fallen 28% year-on-year in part due to
weak commodity prices. Standard Chartered (2888.HK/STAN.LN), which
is one of the more prominent international banks across Asia,
attributed a rise in its loan impairments in the third quarter to
the slump in commodity prices.
To be clear, the decline in commodity prices is not expected to
lead to a 'Lehman moment' for Asia banks. Some mining and energy
companies in Asia are state-backed and that means the prospect of
their loans going sour is negligible. However, the exposure of some
bank's balance sheets to financially stretched commodity producers
adds to investor concerns about slower economic growth, like in
China, and the flow-on effects as the Federal Reserve possibly
starts raising U.S. interest rates in 2015.
It's probably no surprise that Chinese banks are a top of mind
concerns for investors. The bankruptcy of Haixin Iron & Steel
Group earlier this month, making it the largest steel mill to go
under, underscores the potentially fatal combination of too much
debt and overcapacity haunting many industries in the world's
second largest economy. According to Standard Chartered analyst
John Caparusso, solvency conditions - leverage, cash flows and
liquidity - are "the weakest and deteriorating the fastest in
China".
China Minsheng (1988.HK) tops the list of Chinese banks with
commodity exposure. About 9% of the Beijing-based bank's loan book
is exposed to mining companies, according to Standard Chartered.
That doesn't mean all those loans will go awry, but investors will
want to be certain the bank's management have adequately
provisioned for loans that may become non-performing. While China
Minsheng's non-performing loan ratio was a low 1.04% in the third
quarter, it has climbed from 0.85% at the end of 2013. The bank's
provision coverage ratio fell to 200% in the third quarter, down
from about 260% at the end of last year.
Exposure to commodity producers is also an issue for banks in
India and Indonesia. While there are cause for concerns about the
impact of lower prices on cash flows, Standard Chartered believes
companies in these two countries may be better positioned to handle
the tough times. While Indian commodity firms have high debts, they
also enjoy better cash flows on average than companies in China.
Meanwhile, natural resource companies in Indonesia enjoy better
profits and cash flows on average than competitors in China.
Indonesian lenders Bank Negara Indonesia (BBNI.ID) and Bank
Mandiri (BMRI.ID) have a sizeable exposure to commodity producers.
Banks in the world's fourth most populous nation also confront
threats posed by the recent decision to hike fuel prices, after the
new government cut subsidies, and raised interest rates. The
combination of these two challenges, combined with weaker commodity
prices, could lead to a rise in non-performing loans.
Bank Negara Indonesia has about 8% of its business lending book
exposed to the oil, gas and mining industries, according to its
third quarter results. This ranks as the bank's third largest
industry exposure behind retailing and wholesaling, and
agriculture. While the bank's non-performing loan ratio of 2.2% in
the third quarter is around half what it was in 2010, the
non-performing loan ratio among corporate borrowers has inched
higher over the past year. However, the bank's coverage ratio -
which measures a bank's ability to absorb losses from
non-performing loans - has increased to 129% from 123% in 2012.
Meanwhile, Bank Mandiri expanded its corporate lending to the
mining, oil and gas by nearly 18% in the third quarter compared to
the same time last year. This was the fastest pace of lending to an
industry in the corporate book, followed by 16% growth in loans to
the electricity sector. Loans to the mining, oil and gas industries
accounted for about 5 % of its business lending book. However, Bank
Mandiri appears to be strongly positioned with a low non-performing
loan ratio of around 2.2% and a coverage ratio of 157%.
Among India's banks, Allahabad Bank (532480.IN) was identified
by Standard Chartered as having a large exposure to commodity
producers, with around 6% of its lending to companies in the
sector. The bank reported a 49% slump in second quarter profits as
higher taxes bit hard. There have been concerns about Allahabad's
asset quality, which may be reflected in the fact the stock trades
at 0.5 times book value, yet the bank has shown signs of
improvement. Provisions for bad loans were cut, while net
non-performing assets fell to about 3.5% from approximately 3.8% at
the same time last year.
All four banks do share one positive attribute. They all have
access to a large slab of fairly stable funding. The banks have the
advantage of having loan-to-deposit ratios of less than 100%. That
means retail deposits, which are low cost and not likely to be
moved quickly, are greater than the value of loans made to
borrowers. That's important because in times of liquidity squeezes,
often caused by an outflow of capital from the country, funding can
become difficult to access and expensive.
While commodity exposure should not make or break a bank, it's
another issue that investors in Asia's banks should take into
consideration.
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Email: thomas.streater@barrons.com
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