Banks are under increased pressure to raise loan margins in the Greater China region as the coronavirus pandemic weakens lending and a global dollar liquidity squeeze pushes up funding costs.
That’s a key takeaway from a Bloomberg survey of 15 major syndicated loan arrangers operating in the region, including international and Chinese banks. The survey was conducted between March 30 and April 1.
All but one surveyed bank expected syndicated loan volumes to fall this year as borrowing activity across the Greater China area may continue to wane despite signs of the Chinese economy slowly returning to some form of normality.
Offshore syndicated loan volumes for Greater China borrowers tumbled 40% to $20.3 billion in the first three months of 2020 from a year ago, marking the slowest quarter since the last quarter in 2016, according to data compiled by Bloomberg.
Funding costs have risen for all surveyed banks, ranging from 10 basis points to as much as 75 basis points, reflecting unabated concerns about tight dollar liquidity even as central banks worldwide have embarked on a wave of monetary easing.
According to Gavin Gunning, senior director at S&P Global Ratings, it will be difficult for Asia Pacific banks to pass potentially higher wholesale funding costs to borrowers. “This is putting heightened pressure on banks’ profitability, which we expect will be lower in 2020 compared with 2019,” he said.
Thirteen of the 15 banks surveyed say they think loan margins need to go up for both top-tier and non-investment-grade firms, with seven expecting an increase of 5-30 basis points for investment-grade borrowers. For riskier high-yield names, five lenders see a rise of 20-50 basis points and three said margins may jump by 75-100 basis points.
The surveyed banks said they will continue to underwrite loans but some said they may commit a smaller amount or to deals of shorter tenors. A few expressed caution against underwriting event-driven financing or deals for new clients at this time.