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Retail-oriented banks in Asia can shine as stress among corporates grows

Daniel Tabbush has coveredbanks in Asia for 20 years, most recently as head of Asian bank research atCLSA. The following does not constitute investment advice, and the views andopinions expressed are those of the author and do not necessarily represent theviews of S&P Global Market Intelligence.

Signsof stress among corporates are growing across Asia, an ominous trend for mostbanks in the region. For consumer-oriented banks, thiscan be a time to shine.

The collapseof South Korea's Hanjin Shipping, one of the biggest cargo carriers globally,is a worrisome event for banks anywhere with exposures to the sector, not justfor lenders in the country. That is because there could be more failures in theshipping industry, which is grapplingwith a supplyglut.

In another high-profile case, Bohai Steel in China is in trouble, reportedlywith US$28.9 billion in overdue loans, while a slump in the steelsector in Thailand has hit several banks there as well. Stress among oil andgas companies came to the fore in August, with the near-bankruptcy of Swiber, aSingapore-based oil fieldservices firm, which the city-state's top lender,DBS Group Holdings Ltd.,to take a hefty write-down. The energy industry'sdownturn, of course, is not limited to Singapore, and global banks have flaggedrisks related to this space.

Suchmajor incidents of corporate stress can hurt banks involved in them in manyways. When more corporate loans turn bad, credit costs rise, and so do overallrisk weights. Banks with heavy exposures to weak companies may also see their own counterparty risks rise. At a timelike this, banks often try to cut risks, essentially by calling in loans fromcompanies in high-risk sectors or increasing exposures to less-risky sectors.But this so-called de-riskingstrategy has itslimits. Chancesof the weakest corporate borrowers repaying their debt early are slim, so largevolumes of problem loans can still remain on a bank's book even afterde-risking efforts.

Aswoes of the health of businesses grow in a region where most banks are focusedon corporate lending, institutions that primarily lend to consumers deserve thespotlight. The subprime segment canbe risky, as seen in the U.S. But with a low level of credit penetration, thereis ample room for business with prime borrowers in Asia, so there will notlikely be a repeat of the crisis in the U.S. Also, a major culprit of subprimelosses in the U.S. were loans with variable ratesthat rose incrementally after remaining low in the two preceding years. Bank retail loans in Asia generally donot have this kind of feature.

in Malaysia is one of the Asian banks that benefit from a retail focus themost. It had a mean return on averageassets of 1.41%from 1997 through the first half, with the metric staying in a narrow range of 1.23% to 1.58%,according to SNL Financial data, an offering of S&P Global MarketIntelligence. A bank beholden to the corporate credit cycle typically is not so stable. At the end of June, corporateloans accounted for just 36.98% of total loans at Public Bank. Also notable isthat its NPL ratio was a mere 0.49% at the end of the first half, falling from0.61% at the end of 2014.

Thailand'sTISCO Financial Group PCL is another bank that stands out, with the share of corporateloans at 29.39% as of June 30. Its ROAA rose to 1.78% in the first half from1.30% in 2014. In terms of asset quality, it may not be as pristine as PublicBank, with an NPL ratio of 3.03% as of June 30, but the figure declined from the end of 2015,as NPLs inabsolute terms decreased.

For certain,banks focused on the consumer sector can also feelthe pinch from a worsening economy. But an economic slowdown hits companiesfirst, and the financials of Public Bank and Tisco Financial show thatretail-oriented banks can for now be insulated from asset quality worries gripping lenders across Asia.