Bangkok--25 Jun--Moody's
Moody's Investors Service says that its recent survey of single-client exposures at banks in Asia (ex-Japan) shows their credit portfolios as significantly more concentrated than those in North America.
"Such higher concentrations are due mainly to the region's banks demonstrating greater importance -- as opposed to North American institutions -- to the financing needs of their business communities, given the less-developed state of the financial markets in which they operate," says John Tham, VP/SCO and author of the report for Moody's financial institutions group in Asia Pacific.
"The Moody's granularity survey for Asian banks sought to identify the large credit exposures which represent potential sources of volatility in earnings and asset quality, and therefore are important considerations when assigning ratings," says Tham.
"In terms of methodology, it was similar to those conducted before in North America, and specifically in Asia, it involved comparing the banks' 20 largest exposures and 20 largest exposures rated below A3 (or Moody's equivalent) to their core earnings (pre-tax pre-provision profits, or PPP), equity and tangible common equity (TCE)," adds Tham.
Moody's approach of comparing large exposures against PPP is consistent with its traditional view that core earnings -- rather than capital -- are the first line of defense against losses. However, Moody's further recognizes that reviewing large exposures to capital is also important because earnings can be impacted by non-recurring items.
According to the data from the survey, median single-client exposures in 2008 appeared to be rising, particularly when measured against core earnings. While there were higher exposures in some instances, PPP was also generally lower. If debt market conditions weaken again after their recent improvement, larger corporations could be channeled back to the banks, particularly local institutions as a number of foreign banks rein in lending -- or exit Asia -- to preserve capital.
Moreover, the Moody's survey highlights that increases in credit exposures would need to be carefully balanced with PPP, capital levels and robust risk management.
The findings also show that stronger banks typically have smaller exposure concentrations to borrowers rated below A3, although Moody's notes that lenders in riskier and therefore lower rated operating environments seldom have the luxury to finance groups rated single A or better.
Furthermore, the survey results illustrate that the large- (US$35-99bn) and medium-sized banks (US$10-34bn) have higher concentrations than the very large (>US$100bn) and small banks (Lenders in the very large group -- of which there were meaningful numbers of wholesale-funded banks -- were able to lower the size of their exposures or at least rebalance them with higher-quality credits.
Smaller institutions typically have a commercial/SME client orientation and are somewhat constrained by the size of their capital to support large corporate loans without testing single borrower regulatory limits.
The report is entitled, "Annual Survey of Asian Banks' Single Client Exposures". It can be found at www.moodys.com.