Is Asia Headed Toward a European-Style Banking Crisis? –

6 months ago Comments Off on Is Asia Headed Toward a European-Style Banking Crisis? –

The backbone of an economy is its banks. If banks collapse, they can bring an entire economy to its knees. By that measure, Asia’s economies may be a bit more weak-kneed than they first appear.

Sustained and prolonged underperformance in the share prices of some of the world’s biggest banks is a bad sign. So far in 2016, the S&P Pan Asia ex. JANZ (Japan, Australia and New Zealand) Financials Index is down over 3% and the MSCI Europe Bank Index is down nearly 15%. China’s four big banks (ICBC, Agricultural Bank, CCB and Bank of China) are all down between 35% and 40% over the past year.

Things look even more bleak since the beginning of the decade. The MSCI Europe Bank Index is down 29% since 2010. European banks are down 70% from their highest point.

Asian banks, measured by the S&P Pan Asia ex. JANZ Financials Index, are off 25% from their recent highs of last year.

Some investors are worried about Asia’s banks — even though Europe has been the sick region of the banking world so far this decade.

Must Read: Why Uranium Is a Great Investment Right Now

European banks are still in prolonged recovery mode. They took on too much debt going into the 2008 financial crisis. Investors have been spooked by the endless debate over whether or not some member countries — like Greece — would leave the Euro. And European bank shares have also been pressured by efforts to raise huge amounts of capital to improve their balance sheets.

Asian banks have avoided a lot of the problems plaguing Europe’s banks. The 1997 Asian financial crisis forced many Asian banks to be more conservative in their lending and growth strategies. Since they were mainly lending in Asia, not globally, they avoided most of the risky exposures that later hammered European and U.S. banks. And strong economic growth has helped to stabilize and strengthen Asia’s banks, and they’re better capitalized than banks in Europe.

In fact, half of Bloomberg Market’s 2015 top 10 strongest banks are in Asia. Six Asian banks are in the top 20, along with six from Europe.

The International Monetary Fund estimates that European banks still hold $1.12 trillion worth of bad loans. In November 2015, a European Banking Authority report stated that about 6% of European bank loan books were in trouble — that’s twice the rate for U.S. banks.

Is Asia Headed Toward a European-Style Banking Crisis? –}