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Credit frailty at the fringe
US credit metrics are worsening. This is contrary to what most believe, and most visible at the fringe. Where interest rate increases in the US are not driven by increased demand for money but rather Fed policy, the risks of loan defaults are exacerbated. Many are facing a higher interest burden, after a prolonged period of stable, low rates.
The reality is that net-charge offs (NCOs) and loan loss provisions (LLP) are rising dramatically for many consumer
lenders in the US, suggesting an underlying frailty. And when consumer lenders start blaming their models, we know something is wrong.
Chailease is a proven, profitable leasing alternative to banks. It is a Taiwan-based multi-sector lease financing company, operating in Taiwan, China and Asean countries primarily.The company has a rich history of lease financing, beginning in 1977, with a proven track record of investing in specialized subsidiaries. The best evidence of the company’s ability to well manage its growing business is its rising ROA from 2.3% to 3.8%, from 2011 through the twelve months to 3Q18. Where Chailease impresses more is with ROE where it ranks 2nd highest in the region at 25.0%.
No corporate deleveraging, with high debt growth at weakest companies
It is a myth that China corporates are deleveraging. There is no indication of this from company data or from bank data. Rather, corporates are re-leveraging. Over the latest full year, total debt of China’s non-financial companies rose dramatically, by US$431 billion. This change is higher than any year in the past five and at 19% growth YoY, it far surpassed the previous three years. Our corporate data shows most growth was with the most distressed companies, those with debt/ebitda at >7x.
It is easy to be lulled into a false sense of confidence with HSBC Holdings (HSBC). This is especially the case when looking at headline figures for impaired loans. Its reported problem loans are down
dramatically over the past several quarters. And yet despite this, its credit costs as a percentage of loans are driving higher. Figures were at a record low of 7bps in 1Q18 and rose to 35bps by 4Q18.
It is typically considered risky to expand lending rapidly during an economic downturn. By the same token it is not a period where conservative bankers want to take market share.
HDFC Bank (HDFC) though is diving headline into loans over the past three years, and well more than its closest peer banks. Of the six banks with quarterly unconsolidated data through 3Q18, HDFC shows the second highest rate of total impairment cost growth: it may be starting.
Surging credit costs at HDFC Bank may surprise some, but this may accelerate further
There is no major bank in Asia-Pacific that is growing loan as fast as HDFC Bank. Over the past two
years, from FY16 to FY18, the bank expanded its gross loans from INR4,873 billion to INR7,000 billion.
This 44% growth comes during a time of unprecedented weakness in the domestic economy, as evidenced by India’s banks having the highest non-performing loan (NPLs) ratios in the region. Average NPL ratios were 9.9% as at calendar year-end 2017 for India’s banks compared with 1-3% for others in