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Emerging Market Banking Sector Outlook - IHS Report

The IHS Banking Risk Team highlights key risks for the emerging market banking sector in the month ahead, specifically for China, India, Hungary, Ukraine, Turkey, Argentina, the UAE and Qatar.

China – Possible boost to regulatory capital from preferred shares; up-tick in securitisation activities
“The China Securities Regulatory Commission is likely to issue more details on the "soon"-to-be-released regulations regarding preferred shares issuances by the country's banks. Over the next quarters, preferred shares may account for a sizeable portion of a new capital-raising drive by Chinese banks that are facing tighter capital adequacy requirements under Basel III directives. Following an announcement in late August that the Chinese government will extend the trial period and will potentially increase the scale for loan securitisation, more banks are expected to step up efforts to engage in these activities in the near term. Most of the funds generated from securitisation will likely be loaned out to SMEs per the China Banking Regulatory Commission (CBRC) request. There is likely to be a great demand for these investment products as they offer significantly higher interest rates than regular bank deposits.”

India – Downgrade of Indian’s banking sector risk rating; foreign funding schemes seek to attract more capital
“Amid increasing asset quality concerns and a weakening economic outlook, IHS Global Insight Banking Risk Service has downgraded the risk rating for India's banking sector from 30 to 35, leaving it in the "Medium" risk category with ‘Negative’ outlook. Going forward, responding to encouragement from the central bank, Indian banks are likely to continue adjusting their funding strategies over the next month, as they seek to attract more capital from overseas. Banks will likely react vigorously to the Reserve Bank of India's decision in September to double the overseas foreign borrowing limit to 100% of unimpaired Tier 1 capital and open a concessional window for dollar-rupee swap transactions at a discounted price. With the latter scheme to be open until end-November only, the share of foreign liabilities on bank balance sheets is set to pick up notably in the near term. From the banking sector stability point of view, foreign banks may be the ones building up the highest exposures to direct foreign exchange risk over the next few months.”

Hungary – Headed for another slump
“With Hungarian banks clearly stating that a quick fix to outstanding foreign exchange loans is impossible, negotiations are likely to heat up further in the coming weeks as the 1 November deadline imposed by the government nears. Following more than two years of losses, partly led by previous loan-restructuring schemes and high bank taxes, the Hungarian banking sector is likely heading for another slump. The extent of losses depends on how much of the bill the government is willing to cover.”

Ukraine – Macroeconomic & political environment deteriorating
“Ukraine's macroeconomic and political environment is feared to deteriorate in the coming months, as the announcement of the government's preference for an agreement with the European Union has to some extent broken a deadlock that was keeping the country out of the headlines. A very weak economic environment will continue adding pressure on banks, while the stability of the local currency is far from assured and will continue to be monitored closely as depreciation would have significant knock-on effects on the banking sector.”

Turkey – Back to international debt markets
“Turkish banks are likely to return to international debt markets to fund their rapid credit expansion, after a period of absence caused by both the instability generated by the US Federal Reserve's monetary policy decisions and social unrest in Turkey. The next couple of months will define whether Turkey's banks, which rely strongly on both bonds and syndicated loans from abroad, have retained the confidence of currently wary investors.”

Argentina – US court battle’s due to reach crucial stage
“Argentina's holdouts' battle in US courts is due to reach a crucial stage, with the US Supreme Court deciding in the coming weeks on whether to hear their case. Uncertainty surrounding the outcome of both the holdouts' court battle and the upcoming mid-term elections in late October has provoked significant volatility in the banking sector's funding position because of growing unease among domestic depositors. As banks are facing growing difficulties to mobilise term deposits, their funding costs have escalated to levels similar to those observed during the short-lived liquidity crisis of late 2011, when the government introduced partial foreign currency capital controls.”

UAE & Qatar – Regulation announcements
“The UAE central bank is expected to publish the final version of regulations that seek to restrict lending for mortgages and lending to government-related entities (GREs). The regulations are expected to cap loan-to-value ratios on a first residential mortgage at 75% for foreigners and 80% for local citizens. The limitation on banks' exposure to GREs, meanwhile, is expected to be watered down considerably from the measure originally proposed in 2012.

Additional UAE and Qatar-based banks could announce increases in foreign ownership limits ahead of those countries' formal inclusion in the Morgan Stanley Capital International Emerging Market Index. Although improving economic fundamentals in the United Arab Emirates will help provide GREs with the funds needed to meet some looming debt payments, given the estimated USD30 billion coming due in 2014, it is likely that additional restructuring deals will be announced in the near term. The transparency surrounding and success of these rollovers will have important implications for the UAE banking sector given banks' elevated exposure to these entities.”

Mercredi 9 Octobre 2013

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