beyondbrics

European banks lent less to Asia at the end of last year, as overall lending to the region fell for the first time since the end of 2008.

Big surprise. But how seriously will this credit pullback in Asia continue? And where – if anywhere – are European banks increasing their lending?

Overall, according to new data from the BIS, cross-border claims from reporting banks rose 2 per cent in the third quarter of 2010, after having fallen 0.6 per cent the prior quarter. But the rising tide didn’t lift all boats.

In Asia, excluding Japan, aggregate claims fell 2 per cent in the quarter — the first drop since Q4 2008. As the BIS writes: “Most of the increase was recorded with developed countries and offshore centres, as activity with emerging economies in aggregate was subdued.”

Claims by European banks in Asia fell even more, an important issue because Europe’s bank dominate the lending scene in Asia (54 per cent of total foreign bank claims, according to Nomura’s analysts).

In South Korea, for example, French banks cut their claims from $9bn in the second quarter to $6.3 in the third. Overall foreign bank claims in South Korea fell 8.8 per cent.

But it’s not all bad news. Given the ECB’s moves to improve liquidity, the situation at European banks is probably not going to get worse, says Neumann (barring, of course, a sudden return of the drachma).

Plus, the pull-back by European banks open the door for more lending by local banks, potentially sparking “a transformation of the Asian credit landscape,” as the FT’s Henny Sender wrote on Wednesday.

Recent IIF data showed that Asia was the only emerging region where domestic funding conditions for banks didn’t tighten. Although Asian banks tightened credit standards, the region’s demand for trade finance and corporate loans grew steadily.

So where have international banks been lending more? Banks clearly aren’t too worried about trade falling off (perhaps they saw the IIF data on demand for trade finance) – lending overall to Singapore and Hong Kong rose, albeit mildly. They also looked favourably on emerging oil and gas-rich nations. Credit to Qatar was basically flat, and claims on Russia rose.

Meanwhile, credit to the Philippines — which just reported 3.7 per cent year-on-year GDP growth backed by domestic consumption and government spending — expanded 4.2 per cent to $34bn (in context: that’s still about 40 per cent of banks’ total claims on Thailand). What’s more – most of that new lending was from European banks.

And, in a tidbit highlighted by Rachel Ziemba, an economist with Roubini Global Economics, French banks raised their claims on Saudi Arabia by $14bn, even as they cut back most everywhere else.

Related reading
HSBC: European banks may cut lending to Asia, beyondbrics
Chinese property boom starts to wobble, FT
Opportunities for Asia in Europe bank crisis, Henny Sender, FT