Banks in BRICs Signalling Credit Risks as Bad Loans Curb Growth

Higher debt threatens growth as US hiring stalls & Europe deepens austerity measures

 Banks in the biggest emerging markets are losing the confidence of investors as loans turn sour after a twoyear credit binge. 

Brazil's financial shares have lost more this year than counterparts in crisis-stricken Europe as consumer defaults hit a 12-month high in June and borrowing costs climbed to 46%. China bank stocks are trading at lower valuations than global emergingmarket indexes for the first time since 2006. China faces a financial crisis with bad debt that may jump to 30% of total loans. In India, the cost of insuring banks against default has climbed to the highest level in a year. Loan-loss provisions at State Bank of India rose 77% in the first three months of 2011, while net income fell 99%. 
Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery and turned emerging-market banks into some of the world's biggest companies by market value. Now increased debt burdens threaten growth as central banks raise interest rates to fight inflation, US hiring stalls and Europe deepens austerity measures. China and Brazil may see expansion cut by at least 50% in the next few years, according to economic consulting firms A Gary Shilling and Capital Economics. A slowdown would curb profits at global banks including Citigroup and HSBC, which boosted lending in the fastest-expanding economies to fuel growth after the US credit bubble burst in 2008. "China isn't this juggernaut that's going to grow forever without any interruption," Shilling said earlier. 
The surge in loans exceeded credit expansions in the US before its financial crisis, in Japan before its stock and property bubbles collapsed in 1990 and in South Korea before the Asian financial crisis of the late 1990s, according to Fitch. 
Credit is expanding in developing nations after a decade of relative economic stability. Most governments in the largest emerging markets are now strong enough to prevent an increase in bad debt from hobbling their banking systems, Amer Bisat, who manages money at hedge fund Traxis Partners , said. "So long as the economy continues to grow at trend, the system can take a significant amount of banking problems," Bisat said. "The cushion of savings through reserves is so big that a lot of problems can be absorbed." 
This time around emerging countries may struggle to grow out of their debt problems because demand from the US and Europe is slowing, said Richard Duncan, a partner at Blackhorse Asset Management. 
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 lowered rankings for 34 borrowers last quarter. 
Indian lenders' nonperforming assets (NPAs) may rise 25% in the year ending March 31, 2012, to 2.92%, the central bank said on June 14 after conducting stress tests. The Indian banking system is under pressure and higher provisioning is "imminent" if regulators want to control asset quality, Diwakar Gupta,MD & CFO, State Bank of India, said. 
Bad loans "are going to rise because we will have to pass on the rate increase," the bank's chairman, Pratip Chaudhuri, told reporters 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," Chaudhuri said. 
Second-quarter earnings reports may provide more clues on the outlook for NPLs and bank earnings in emerging markets. — Bloomberg 
A CAN OF WORMS 

• Brazil's financial shares have 
lost as consumer defaults hit a 12-month high in June and borrowing costs climbed to 46% 

• China bank stocks are trading 
at lower valuations than global emerging-market indexes for the first time since 2006 

• In India, the cost of insuring 
banks against default has climbed to the highest level in a year 

• Bank of Moscow needed the 
biggest bailout in Russian history last month after racking up at least 150 b rubles ($5.4 billion) of unsecured bad loans