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Asian Banks Fill in Gap Left by Exiting Europe Lenders

As European banks continue to pull back in Asia, reeling under the debt crisis back home,regional banks are filling in the gap by buying their assets and increasing lending, say analysts.

Bank Metallic Sign
John Foxx | Stockbyte | Getty Images
Bank Metallic Sign

“It’s interesting because we were very worried about the effect of European banks in Asia. We know they don’t have enough capital and are gradually withdrawing from the region, selling assets and cutting lending and you wonder whether that is going to be disruptive,” Richard Jerram, Chief Economist at Bank of Singapore, told CNBC Asia’s“Squawk Box.”

“But all the signs we are getting are that regional banks are prepared to buy the assets (of European banks) and increase lending (to corporates), so the damage from that European distress is rather less than it seemed likely a year ago,” he added.

Concerns about a debt crisis in the euro zone have mounted this year, with focus turning to Italy and Spain, where borrowing costs have soared. The worries have rattled global markets as investors weigh the likely fallout of the crisis in Europe on the rest of the world.

“Lending by the continental European banks was more than a third of total Asian cross-border lending pre-Lehman and now that’s down to 20 percent and it hasn’t really seemed to matter that much,” Jerram said referring to the collapse of Lehman Brothers in 2008 which sent global markets into a tailspin.

Lending by continental European banks to Asia-Pacific stood at $356 billion at the end of 2011, according to the latest data from the Bank for International Settlements. That compares with $379 billion at the end of 2010 and is down from a peak of around $455 billion in June 2008.

Jerram said that instead of leading to shrinking liquidity in Asia, the fall in European bank lending to the region has prompted local banks to step up their lending to corporates in the region and that has been a positive sign.

According to a report published by Standard & Poor’s Rating Services on Tuesday, banks in Singapore, Hong Kong and China have recently shown particularly rapid credit growth overseas and this has outpaced credit growth in their domestic markets.

In Singapore, for example, growth in credit exposure overseas rose to almost 30 percent in 2011 from just over 10 percent in 2010. Credit growth in domestic markets has been relatively stable at just over 10 percent in 2011 and 2010, the S&P report showed.

Europe’s Loss, Asia’s Gain?

Banks in Singapore, Hong Kong and to some extent Japan are all benefiting from a pullback in banking activity by Europe’s banks in Asia, Ritesh Maheshwari, Managing Director for Financial Services Ratings at S&P told CNBC.

Earnings reports from the region’s big banks have helped boost share prices which were dealt a blow last year from concerns about the global economic outlook.

Singapore-based DBS, Southeast Asia’s largest bank, posted a record first-quarter profit and said its expansion in the region would drive the bank’s future earnings. The bank’s income from Singapore rose 15 percent in the first quarter, while revenue outside Singapore jumped 35 percent as loans to China soared 81 percent and lending to India rose 42 percent. DBS unveils its earnings for the second quarter later this week.

Jerram at Bank of Singapore added that local banks in the region would continue to eye assets up for sale by European banks as they pull back their exposure globally. Malaysia’s CIMB Group is paying about $267 million for some of the Asian units of Royal Bank of Scotland.

There are more opportunities for Asian banks: ING Groep, the Dutch financial services group that was bailed out during the financial crisis, is selling its stake in Thailand’s TMB Bank. The stake is valued at about $775 million.

Both DBS and Australia’s ANZ haveexpanded into the region in recent years. In the last two years, DBS, for instance snapped up RBS’s retail and commercial banking businesses in China.

“To the extent that those (assets) are made available by European banks deleveraging, they will be snapped up by Asian banks,” Maheshwari said.

- By CNBC's Dhara Ranasinghe

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