Shrinking China trade dragging banks from Hong Kong to Singapore

A woman using a smartphone stands near a screen displaying the Hang Seng Index figure, left, outside the Hang Seng Bank Ltd. headquarters in Hong Kong.
A woman using a smartphone stands near a screen displaying the Hang Seng Index figure, left, outside the Hang Seng Bank Ltd. headquarters in Hong Kong.PHOTO: BLOOMBERG

SINGAPORE (BLOOMBERG) - 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 per cent due to the slowing Chinese economy and a slump in commodity prices, central bank data show.

The slide raises concern that Singapore banks such as Oversea-Chinese Banking Corp. (OCBC) and global lenders like Standard Chartered and HSBC, 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 World Trade Organization.

"Loan growth at banks is definitely coming down as trade finance has been a driver," said Matthew Phan, a Singapore- based analyst at CreditSights. "There will be some small negative impact on banks' overall profits as net interest margin from this business is usually thin."

Trade-related borrowings 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.

Among the reasons for the decline in trade finance are China's slowing economy and lower commodity prices, according to 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 per cent from a year earlier. That figure had grown about 20 per cent in the five years through 2014, annual reports show. The London-based lender gets a 10th of its operating income from the business globally and doesn't disclose trade-finance revenue for Asia.

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, government data show. Meanwhile, a commodities slump that has dragged oil prices down by about 50 per cent and copper by 22 per cent in the past year has cut the dollar value of transactions involving China's imports of raw materials.

While most banks don't break down their trade-finance businesses by country, a Greenwich Associates study indicated that Standard Chartered and HSBC play a leading role in Asia. Some 36 per cent of large companies in the region used Standard Chartered for trade loans, surpassed only by HSBC's 42 per cent, according to a 2014 survey by the research firm.

HSBC's Asian gross loans and advances to customers in international trade and services shrank 8.6 per cent 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 per cent in the first quarter and represent about 7 percent of its gross loans, filings show. Larger rival DBS Group's trade loans contracted 4.5 per cent in the period and account for almost 15 percent of interest-bearing assets, the bank's quarterly report shows.

Mizuho Securities Asia analyst Jim Antos cut his 2015 net income forecasts for OCBC by 9.4 per cent and DBS by 4 per cent in a June 17 report, citing trade-finance exposures. "The continuing weakness in the Chinese economy tends to support this view," Hong Kong-based Antos wrote in a July 10 e-mail.

Four interest-rate cuts by the Chinese central bank since November to revive growth have also narrowed the premium of onshore borrowing costs to those in Hong Kong and Singapore, giving mainland companies less incentive to seek loans overseas, according to Geoffrey Heenan, the International Monetary Fund's Singapore representative.

The premium of the three-month Shanghai interbank offered rate over the Singaporean benchmark fell to the lowest since 2010 in June.

Still, long-term prospects for trade finance "remain strong" as commodities trading volumes will continue to grow, Standard Chartered's Vrontamitis said in a July 7 e-mail. OCBC will continue to deepen its "market penetration" in China, Clara Hang, its head of global trade finance, wrote in a June 29 e-mail.

"The reason why we have 600 to 700 Chinese customers is because we have trade finance," DBS's Chief Executive Officer Piyush Gupta said July 10. "That allows us to build on the relationship. The fact that we've used trade finance as a beachhead to go in, it really pays off."