Emerging Markets

Bad Loans Haunt Banks in Brazil, China, and India


Loans to Brazilian shoppers, Chinese infrastructure projects, and Indian property developers have fueled the global economic recovery and turned emerging-market banks into some of the world’s biggest firms by market value. The party may be ending. Worrisome inflation rates in Brazil, Russia, India, and China have local monetary authorities raising interest rates and tightening credit conditions. That, plus evidence nonperforming loans are on the rise, has investors rethinking their enthusiasm for BRIC bank stocks.

Brazil’s financial shares have fallen more this year than counterparts in crisis-stricken Europe as consumer defaults rose to a 12-month high in June. Bank stocks in China are trading at their lowest valuations since February 2009. In India the cost of insuring banks against default has climbed to a 12-month high. “People are beginning to smell the credit cycle turning,” says Michael Shaoul, chairman of Marketfield Asset Management.

Policy makers have moved to curb credit growth. Brazil doubled to 3 percent a tax on consumer credit in April and required banks to hold more capital against certain credit-card loans last month. China has raised banks’ reserve requirements 12 times since the start of 2010. The Reserve Bank of India has hiked interest rates and ordered lenders to set aside more cash to cover bad loans.

Andreia de Matos Esmeraldo, a babysitter and housecleaner in Rio de Janeiro, is one of the reasons credit has boomed in Brazil. “I love to shop, it gives me this personal satisfaction,” says Esmeraldo, who also sells products for Natura Cosméticos, Brazil’s largest cosmetics company. “But two days later I feel sick, because I have to pay it back.”

Esmeraldo carries her HSBC (HBC) credit-card statement in her purse as a reminder that using the card to purchase clothes and shoes is costly. The bill shows an annual interest rate of 456 percent on 3,000 reais ($1,916) of debt that she has agreed to pay off in installments. Loan payments ate up 26 percent of Brazilian consumers’ disposable income in March, vs. 24 percent the year before.

Brazil’s biggest lender, Itaú Unibanco (ITUB), raised its default-rate forecast for 2011 to between 4.5 percent and 4.6 percent on July 11, from a range of 4.2 percent to 4.5 percent previously. Itaú’s shares have tumbled more than 34 percent this year, helping to drag down the MSCI Brazil Financials Index by 27 percent.

Chinese banks expanded credit at a record pace in 2009 and 2010, lending more than 17.5 trillion yuan ($2.7 trillion) as the government moved to offset a collapse in exports during the global recession. Many of those loans went to local governments, which borrow by setting up financing vehicles to get around laws prohibiting direct lending to cities. About a third of local financing vehicles don’t have sufficient cash flow to make payments on their loans, according to China’s banking regulator. “We expect Chinese banks’ nonperforming loans to rise noticeably over the next few years,” says Liao Qiang, a director at Standard & Poor’s in Beijing.

Such forecasts are weighing on Chinese bank stocks. Shares of Industrial & Commercial Bank of China, the world’s largest lender by market value, have slumped 23 percent since the end of March. The cost of default insurance on the Bank of China, the nation’s third-largest lender by assets, has jumped by 60 percent since Mar. 31. The MSCI China Financials Index’s price-to-book ratio, a measure of share prices relative to net assets, has tumbled to 1.8, the lowest level since February 2009, from 2.8 two years ago, according to monthly data compiled by Bloomberg.

In India, debt ratings for companies are deteriorating at the fastest pace since 2009 as slower economic growth and 11 interest-rate increases by the central bank since March 2010 heighten the risk of defaults. ICRA, the local unit of Moody’s Investors Service (MCO), lowered ratings for 34 borrowers in the three months ended June 30, according to data compiled by Bloomberg. After conducting stress tests, India’s central bank said lenders’ nonperforming assets may jump 25 percent in the year ending Mar. 31, 2012, to 2.92 percent.

The cost of default insurance for ICICI Bank (IBN), the second-biggest Indian lender, reached a 12-month high on July 19. Bad loans “are going to rise because we will have to pass on the rate increase,” Pratip Chaudhuri, chairman of State Bank of India, told reporters in Mumbai after the central bank increased borrowing costs on July 26. “Interest-rate sensitive sectors like real estate and education loans will most definitely be affected.” Ghanshyam Kulwal, an exporter of towels and sheets in Mumbai, is feeling the squeeze. He bought a two-bedroom apartment in the suburb of Kandivali in 2003 for his wife and two children, taking a loan at a floating rate of 6 percent. Today he’s paying 12.5 percent. Says Kulwal: “The government’s one-point agenda to check inflation by raising rates has led to common people like me suffering a lot.”

The bottom line: Investors are concerned that developing market banks will see an upsurge in bad loans after a two-year lending binge.

Patterson is a reporter for Bloomberg News in Hong Kong.

We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Companies Mentioned

  • ITUB
    (Itau Unibanco Holding SA)
    • $16.01 USD
    • 0.08
    • 0.5%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus