* European banks had $3.4 bln of EM loans at end Sept-BIS
* More than four times the exposure of U.S. banks
* Loans account for about 12 pct of European bank assets
* European bank shares down 7 pct in two weeks
By Steve Slater
LONDON, Feb 3 (Reuters) – European banks have loaned in
excess of $3 trillion to emerging markets, more than four times
U.S. lenders and putting them at greater risk if financial
market turmoil in countries such as Turkey, Brazil, India and
South Africa intensifies.
The risk is most acute for six European banks – BBVA, Erste
Bank, HSBC, Santander, Standard Chartered, and UniCredit –
according to analysts.
But the exposure could be a headache for the industry as a
whole, just as it faces a rigorous health-check by the European
Central Bank, aiming to expose weak points and restore investor
confidence in the wake of the 2008 financial crisis.
“We think EM (emerging markets) shocks are a real concern
for 2014,” said Matt Spick, analyst at Deutsche Bank. “When
currency (volatility) combines with revenue slowdowns and rising
bad debts, we see compounding threats to the exposed banks.”
The Deutsche Bank analysts said the six most exposed
European banks – which they did not name – had more than $1.7
trillion of exposure to developing markets.
In recent weeks, emerging market currencies have come under
fire as China’s growth slows and the U.S. Federal Reserve winds
down its stimulus programme, with investors selling developing
market assets in anticipation of higher U.S. interest rates.
In a bid to protect currencies, interest rates have been
hiked in Turkey and elsewhere, but investors remain nervy,
especially around the so-called “Fragile Five” economies of
Turkey, Brazil, India, Indonesia and South Africa.
An emerging markets crisis could hit banks in a variety of
ways – a collapse in local currency can hurt reported earnings
or capital held in the country; loan losses can jump as interest
rates rise; or income from capital markets activity or private
banking can fall.
European banks’ exposure varies from country to country.
BBVA and UniCredit have big exposure to
Turkey, Santander is most exposed to Brazil, while
Standard Chartered and HSBC would be hurt by
problems in India and Indonesia. Barclays, meantime,
would be most exposed to South African problems, analysts said.
However, they said the impact of apparently individual
problems, such as inflation in Venezuela or lower growth in
India, could quickly spread into wider concern among investors,
and had already contributed to a 7 percent drop by Europe’s bank
index in the last two weeks.
The biggest risk is that a jump in interest rates sparks
defaults on loans, analysts added. Often a credit shock follows
or replaces a currency shock, as happened in Argentina in
1999-2002.
EXPOSURE
Europe’s banks have cut their overseas loans since the
financial crisis and substantially increased the amount of
capital they hold, meaning they have a better cushion to absorb
losses than in the past.
But they still have about 12 percent of their assets in
emerging markets, and about a quarter of their earnings come
from the region as often the businesses there are “unusually
profitable”, Deutsche Bank’s Spick said.
European banks had $3.4 trillion of loans to developing
countries at the end of September, according to data from the
Bank for International Settlements.
British banks had a $518 billion exposure to the
Asia-Pacific region, Spanish banks had $475 billion of loans to
Latin America, and banks in France and Italy each had $200
billion of exposure to developing economies in Europe.
Among the most exposed banks, Standard Chartered makes more
than 90 percent of its earnings from Asia, Africa and the Middle
East, and warned in December that its 10-year record of earnings
growth would likely end.
BBVA had 41 billion euros ($55 billion) of exposure to
Mexico – which last year made up 80 percent of group profits –
and 52 billion euros of loans to South America.
Santander had 132 billion euros of loans to Latin America at
the end of last year, half of which were in Brazil. Brazil
contributed 23 percent of group earnings last year, and the rest
of Latin American contributed another 24 percent.
Analysts said emerging market turmoil could also have a
broader, indirect impact on revenues in investment banking and
wealth management.
“A significant increase in volatility in EM bonds and FX may
result in volumes drying up and hence a potential for a material
slowdown in EM fixed income revenues,” said JPMorgan analyst
Kian Abouhossein.
He estimated the investment banks of HSBC and Standard
Chartered each generated $2.1-2.2 billion from emerging markets,
while Credit Suisse and Deutsche Bank made
about $1.1 billion each.
