Asean credit crunch possible

European banks have large presence in the Association of Southeast Asian Nations, including the Philippines, which could affect the region’s credit market in case of a spillover from the European debt problem.

“As a share of local credit outstanding, the claims of European banks on the Asean-5 countries cannot be sneezed at, especially in the Philippines. Moreover, Indonesia, Malaysia, and Thailand have witnessed a relatively big increase in claims by European banks over the past three years,” according to a regional report released recently by Hongkong and Shanghai Banking Corp.

“A pull-back by European banks could, therefore, have an impact on funding costs and credit availability. In addition to a pull-back by European banks, capital could flow out of domestic equity and bond markets as global investors liquidate positions,” it said.

HSBC said all Asean-5 countries face this risk, with Indonesia and Malaysia having the largest risks, given the big and rising share of foreign ownership in their local bond markets.

“A forced scale-back of the operations of European banks in Asia could have an impact on the Asean-5 economies. However, their exposure to European banks has increased less dramatically than it has for other Asian peers such as Hong Kong and Singapore,” the bank said.

Asean-5 refers to the economies of Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The Bank of International Settlements earlier placed the total exposure of Philippine banks to foreign banks at $33 billion, including $15 billion to European banks and $8 billion to US banks.

HSBC, however, said that in the case of the Philippines, the spill-over risks were relatively limited and there was room to make policy adjustments.

“The Philippines also faces more limited spill-over risks and has some room to adjust policy, although the balance sheet ranking is not the best,” it said.

The World Bank said indirect exposures of Philippine banks through other European banks which comprise almost 70 percent of total Philippine claims (higher than exposures to US and Japanese banks combined), could have a significant impact on Philippine financial stability should the crisis escalate.

“At any rate, the Philippine banking system exhibits improving asset quality and healthier balance sheets through the first three quarters of 2011. Non-performing loans, non-performing assets, and distressed assets remain low. The non-performing loan coverage is currently above 100 percent while the past due and loan loss ratios are on a decline and currently below 5 percent. Finally, the capital adequacy ratio of over 15 percent remains well above regulatory requirements,” it said. –Roderick T. dela Cruz, Manila Standard Today