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Risks to Emerging Market Banking Sector - IHS Report

The IHS Banking Risk Team highlight key risks for the banking sector specifically in China, Turkey, Brazil, Mexico, Hungary and Kenya below.

China – New body to co-ordinate monetary and financial policies; rumours of credit transfer system
“Seeking to ensure financial stability and reduce systemic risks, China will be establishing a new body to co-ordinate monetary and financial policies in the near term. Headed by the People's Bank of China (PBoC), the Central Bank, the new agency will work to increase oversight of cross-asset financial products and innovations that are presently being supervised by multiple bodies, improve information sharing, and improve accounting practices across the financial system.

Rumours are spreading that the country's banking regulators will develop a "credit transfer system" for off-loading asset-backed securities and non-securitised loan packages from banks to other banks, non-bank financial institutions, and large companies.”

Hungary – Further distress in banking sector
“After negotiations with the banking industry in August, the Hungarian government is now expected to reveal the details of a new scheme to deal with outstanding foreign exchange household loans before the end of September, when it needs to submit the draft budget for 2014. With the banking sector posting losses for the past two years on the back of previous support schemes and high bank taxes, another wave of unscheduled costs will further add to the distress in the sector.”

Turkey – Negative effect on capital flows following Fed policy shift
“The US Federal Reserve's expected policy shift and an overall change in sentiment towards emerging markets have had a particularly negative effect on capital flows to Turkey as well as on its currency. Both factors are of importance to the banking system given the sector's reliance on foreign funds and sizeable foreign exchange-denominated lending. Hence, the on-going policy actions by the Turkish central bank will remain a focal point in the near future as risks to banking sector stability remain present. The Turkish authorities are also likely to continue tackling the rapid pace of credit growth, especially in the politically targeted credit card market.”

Mexico – Likely move towards consolidation
“Mexico's new financial sector reform regime will enter its final stages of parliamentary approval after months of protracted delays due to political infighting. Government and political forces are expected to reach agreement on all the different pieces of legislation composing the ambitious reform package that aims to boost the banking sector's role in the economy. As details are being revealed, Mexican banks are likely to move to consolidate operations, raise funds, or acquire assets to adjust their capacity to meet the stronger credit growth that the government is targeting through the new regulation.”

Brazil: Access to foreign funds constrained
“In Brazil, authorities are likely to offer additional regulatory or financing support to boost credit growth at state-run banks to compensate for the lending slowdown of private-sector banks. This lending drive is likely to be taken up by Caixa Economic Federal and the state development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), as the largest state bank – Banco do Brasil – seeks to address impairment pressure in its loan portfolio. Shifting investor sentiment in light of the expected monetary policy tightening in the United States, meanwhile, will likely constrain access to foreign funding by Latin American banks in the near term. Under these conditions, Latin American banking sectors that have been traditionally or recently reliant on foreign wholesale sources – such as Chile, Peru, or Brazil – may be forced to recalibrate their funding strategies and curb foreign borrowing.”

Kenya – Elevated level of near-term credit risk
“The Kenyan banking sector faces an elevated level of near-term credit risk and the central bank's reporting of lower lending standards in the second quarter is an additional red flag that will be watched over the coming quarters. With interest-rate spreads moderating on tighter monetary policy conditions, local banks could further loosen lending standards to maintain profitability through higher lending. Finally, efforts to mobilise deposits and signs of potential liquidity strains at some Nigerian banks should be watched in September following the central bank's abrupt decision in July to increase the cash reserve requirement on government deposits.”


Mardi 10 Septembre 2013