EU deleveraging most likely to impact Singapore
Blame it on their high levels of borrowing from European banks.
Here's more from BBVA:
As the sovereign debt and financial crisis continues to grip Europe, European bank loans to Asia have contracted. Loans to Asia from French and German banks have decreased for two consecutive quarters, falling by -17.2% and -16.0% y/y in the first quarter alone (the most recent period for which BIS data are available). Within Asia, Korea and Taiwan have perhaps been the hardest hit, with loans from European banks (including the UK) contracting by 11.5% y/y and 32.2% y/y, respectively, in the first quarter (Korean borrowings from France have dropped 38.2% year-on year.)
However, elsewhere in the region credit growth of European banks has remained positive, including in Japan, Singapore, Hong Kong, and China. China in particular has continued to see robust loan growth from Europe (17.2% y/y in 1Q12).
Despite the recent trend of deleveraging by other European countries, loan growth from the UK, which represents over half of European loans to Asia, remains relatively strong at 4.1% y/y 1Q12. Lending from Japanese banks has been even stronger, with loans to the region growing 13.2% y/y in the first quarter of this year. Australia, too, has continued to step up intraregional lending, with loan growth over 18% on year to each of its Asian counterparties in the last recorded quarter. This, along with relatively strong lending from the US, has helped offset some of Europe’s retreat in the region.
Looking ahead, the region’s banks appear to be well prepared to withstand further European deleveraging. The drawn out nature of the European crisis has given regional banks and their customers ample time to prepare. In general, Asian bank balance sheets remain strong. Tier 1 capital levels in Singapore (13.5%), Malaysia (13.2%), Hong Kong (12.4%) and Korea (10.7%) are already above Basel III requirements, and delinquency rates are low.
That said, the greatest impact will likely be felt in the financial centers of Hong Kong and Singapore, given their high levels of borrowing from European banks. Elsewhere, though India relies on European banks for more than half of its foreign bank borrowing, as a percentage of total credit these European loans amount to only 5%, thus limiting the expected overall impact of European bank deleveraging on domestic credit availability.
Thus far, the drop in loans from European banks to the region is small relative to that seen during the global financial crisis. From the peak in 2Q08 to the trough in 1Q09, Europe’s loans to Asia dropped by $547billion, while so far loans have only fallen by $102 billion to the region since the recent peak in the second quarter of 2011. Asia may continue to see further deleveraging from Europe, but local banks appear more than willing to capture market share.