HSBC, StanChart could face secondary shockwaves from Evergrande crisis – analysts

LONDON, Sept. 24 (Reuters) – HSBC and Standard Chartered could be negatively impacted on earnings and balance sheets from the debt crisis enveloping China Evergrande Group (3333.HK), though both banks say they have limited exposure direct, analysts warned.

Other banks and insurers could also suffer indirect effects such as a loss of commissions or a devaluation of their investments.

HSBC and StanChart make a large portion of their profits in China and Hong Kong, and they have been the foreign banks most involved in underwriting syndicated loans for developers there. That means they’re likely to face the most immediate second-order impacts, analysts at JPMorgan said in a research report.

HSBC and Standard Chartered both declined to comment on the report.

Evergrande has left global investors wondering if he will make a key interest payment, adding to fears of large losses for bondholders and causing tremors in China’s real estate sector and economy. Read more

Hong Kong and mainland China accounted for around 84% of HSBC’s profits in 2020, while Greater China and North Asia contributed 81% of StanChart’s profits last year, according to a Reuters analysis of the two filings. companies – emphasizing the importance of the region to their global activities. .

The two have the most direct credit exposure among foreign banks to the Chinese real estate sector – $ 17 billion or 1.5% of group assets for HSBC and $ 1.3 billion or 0.5% of loans from the group at StanChart, according to JPMorgan.

The real estate sector contributes 14% of China’s GDP or 25% if indirect contributions are included, JPMorgan said, and home loans account for around 6.6% of total loans, which means a big blow for the sector could have greater economic impacts.

HSBC and Standard Chartered have both said they have no direct exposure to Evergrande and have taken steps in recent years to carefully manage their single sector exposures. Read more

HSBC has already sold all positions in its Chinese bond or Asian credit portfolios with exposure to Evergrande, a source told the bank.

Citing data from Dealogic, JPMorgan said HSBC had been involved in underwriting 39 outstanding syndicated loans for Chinese developers while StanChart worked on 18 of those deals, which could come under pressure in the event of more default. important to the real estate sector.

In a syndicated loan, banks typically underwrite the transaction and then sell the debt to other investors, but may keep some of the exposure on their books.

“There is a risk that this is not an idiosyncratic event but an industry-wide issue that could result in significant spillover damage,” JPMorgan said.

The U.S. bank said it estimates there could be 11 more defaults worth around $ 30 billion this year in China’s high-yield real estate sector, a default rate of 23%.

COOLING OF THE MARKETS

Other European financial firms are also facing a negative impact on business sectors such as capital markets, asset management and private banking, said Dierk Brandenburg, head of financial institutions at the agency. Scope notation.

“These will have an impact on the profit and loss figures of European banks active around the world in the coming quarters, as will the regulatory crackdown that will follow by the Chinese authorities,” he said.

Chinese real estate companies have exploited the U.S. dollar government bond market for $ 274 billion over the past five years, Scope analysts said, citing data from Bond Radar, suggesting that foreign banks could lose fees if these transactions were decreasing.

Insurers’ investment portfolios could also be affected, said Volker Kudszus, EMEA insurance sector manager at S&P Global Ratings.

“We are not concerned with the direct exposure of European insurers to Evergrande, but the indirect exposure, for example through investments in the Chinese equity or real estate market, could see some volatility,” Kudszus said. .

Insurers Prudential (PRU.L), Ageas (AGES.BR) and Swiss Re (SRENH.S) were probably the most exposed to Chinese real estate, Morningstar analysts said this week.

Ageas said its Chinese joint venture has no direct exposure to Evergrande, but about 2% of the corporate bond portfolio is invested in highly rated Chinese real estate debt.

“Only another widespread spillover in the general stock markets would impact our results,” said a spokesperson for Ageas.

Prudential chief executive Mike Wells told CNBC this week that the insurer’s exposure to Evergrande was “de minimis” and that less than 5% of the insurer’s bond holdings were in Chinese real estate.

Prudential also has a joint venture in China.

Swiss Re did not have direct investments in Chinese real estate in its real estate portfolio, a spokesperson said.

Reporting by Lawrence White and Carolyn Cohn; Editing by Catherine Evans

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