The business of financing China’s trade is shrinking, curbing what had been a fast-growing revenue stream for banks in Hong Kong and Singapore over the past decade.
Since reaching a peak of about US$145 billion in June last year, the value of trade loans provided by lenders in the two financial hubs has tumbled 20 percent due to the slowing Chinese economy and a slump in commodity prices, central bank data show.
The slide raises concern that Singaporean banks such as Oversea-Chinese Banking Corp (OCBC) and global lenders like Standard Chartered PLC and HSBC Holdings PLC, which have been financing trade in Asia since the mid-19th century, may face lower earnings growth.
The companies have profited from the 10-fold surge in trade loans since China’s 2001 entry into the WTO.
“Loan growth at banks is definitely coming down as trade finance has been a driver,” said Matthew Phan, a Singapore-based analyst at CreditSights LLC. “There will be some small negative impact on banks’ overall profits as net interest margin from this business is usually thin.”
Trade-related loans booked by banks in Hong Kong and Singapore fell in each of the three months through April to a two-year low of US$110.6 billion, data from the cities’ monetary authorities show. The figure rose to US$116 billion in May.
The reasons for the decline in trade finance include China’s slowing economy and lower commodity prices, said Mike Vrontamitis, Standard Chartered’s Hong Kong-based head of trade products.
The bank reported April 28 that its first-quarter operating income from trade finance dropped 9 percent from a year earlier. That figure had grown about 20 percent in the five years through last year, annual reports show.
The value of China’s monthly imports and exports dropped to US$337 billion in June from a peak of US$405 billion in December last year, government data show.
A commodities slump that has dragged oil prices down by about 50 percent and copper by 22 percent in the past year has also cut the dollar value of transactions involving China’s imports of raw materials.
While most banks do not break down their trade-finance businesses by country, a Greenwich Associates study indicated that Standard Chartered and HSBC play a leading role in Asia.
About 36 percent of large companies in the region used Standard Chartered for trade loans, surpassed only by HSBC’s 42 percent, according to survey last year by the research firm.
HSBC’s Asian gross loans and advances to customers in international trade and services shrank 8.6 percent in the first quarter from a year ago, exchange filings show.
Joanna Fargus, a spokeswoman for the London-based bank in Hong Kong, declined to comment on the reasons for the drop.
OCBC’s bills receivable, which incorporate trade finance, slumped 12 percent in the first quarter and represent about 7 percent of its gross loans, filings show.
Larger rival DBS Group Holdings Ltd’s trade loans contracted 4.5 percent in the period and account for almost 15 percent of interest-bearing assets, the bank’s quarterly report shows.
Hong Kong-based Mizuho Securities Asia analyst Jim Antos cut his net income forecasts for this year for OCBC by 9.4 percent and DBS by 4 percent in a report on June 17, citing trade-finance exposures.
“The continuing weakness in the Chinese economy tends to support this view,” Antos wrote on July 10.
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