A RECENT BLOOMBERG report pointing out that Hong Kong “may need to stand behind some banks and deposits” should Europe’s debt crisis worsen put the spotlight on Asian banks.

Nigel Chalk, the International Monetary Fund’s China mission chief, is reported to have said that in a very bad scenario the government may have to “perhaps guarantee some of the deposits in the banking system as they did in 2008 in the wake of Lehman Brothers”.

After the Lehman collapse in 2008, the Hong Kong Monetary Authority used its foreign exchange reserves to guarantee bank deposits and the government announced a fund from which banks could access additional capital if needed, shoring up confidence in lenders after the run on Bank of East Asia.

 

This time round, the Euro-crisis continues to buffet the markets and Asian banks may remain under pressure. According to a Dec 8 report by Citigroup, Asian banks are currently trading at 1.34 times (trailing) price to book. Going by past cycles, these banks should have 28% upside. However, because of the de-rating of Europe’s banks, US$ liquidity “risk-off” events, and a near-term soft patch for China's economy, Asian banks are unlikely to recover so soon.

 

“We are only six months into bank net earnings downgrades; the 12-14 months of past cycles may prove a better ‘buy banks’ signal,” the report states. Citi economists believe that Asian GDP should hit the trough by March 2012. On a historical basis, banks tend to recover after such an event.

 

Of some concern are the banking systems in Hong Kong, Singapore and Malaysia. Citi cites reports from the Bank of International Settlements data showing that the banking systems of these three economies have large exposures to European banks. Clearly there would be a negative impact when Eurozone banks have to “deleverage” their balance sheets. Citi points out that the large banks in Asia such as HSBC, Standard Chartered and the US and Japanese banks will remain present in the region as they are less affected.