Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: Welcome to Under the Banyan Tree, where we put Asia in context.
Speaker: My name is Harold van der Linde and I'm HSBC's Asian Equity Strategist.
Speaker: And I'm Fred Newman, Chief Asia Economist.
Speaker: This week our theme is resilience.
Speaker: From geopolitical tensions to the pandemic, we'll be looking at how Asia's financial systems have learned to hold their own during uncertain times.
Speaker: That's right, and we're going to explore this idea further with Abhishek Muraka, our senior financials analyst in Mumbai and India.
Speaker: He'll be joining us later to talk stress in the Indian banking system and how it's been overcome for recent years.
Speaker: Plenty to discuss on the podcast this week.
Speaker: Let's dive in.
Speaker: So, Harold, I think it's fair to say we had a fair degree of geopolitical uncertainty in markets over the past week.
Speaker: But by and large, markets seem to have held up quite well.
Speaker: They're quite resilient across the region.
Speaker: Is that a fair statement?
Speaker: Yeah, I would say so.
Speaker: We've had a bit of volatility over the last week, but markets have become a little bit accustomed to the political risk.
Speaker: It's a bit of a fact of life for us in Asia, right?
Speaker: We've had in the past issues in Korea, the Taiwan Straits, the South China Sea.
Speaker: There are regular elections in India, Indonesia, you name it.
Speaker: So it's a bit of a fact of life for us.
Speaker: So a degree of resilience then for Asian markets, perhaps also a bit of a in the price.
Speaker: Is there a discount?
Speaker: Generally speaking, Asian markets already counts for this political risk.
Speaker: Yeah, that I believe there is.
Speaker: There is a discount for certain markets, but actually for the whole of Asia for a variety of reasons.
Speaker: But I think geopolitical risk is somewhat priced in.
Speaker: But of course, if there is then a major event that goes a little bit beyond what we're accustomed to, the markets will have to price in additional risk.
Speaker: And there's actually also some academic studies that suggest that whenever you have repeated geopolitical events of the same nature, that markets tend to react less and less over time.
Speaker: Now, of course, some of these developments are unique and they might be new.
Speaker: But in other cases, it's very well documented that the impact is less immediate for financial markets.
Speaker: Of course, there's always a long-term impact as well.
Speaker: This is interesting, Fred, because...
Speaker: We don't only have geopolitical risk, but we have had a slowdown in China, rising interest rates in the US.
Speaker: So that means that money is sucked out of the region, a pandemic.
Speaker: And you would have thought exactly the pandemic, for example, would have had been a major headache for financial systems across banking systems.
Speaker: And you and I have been sitting here for quite a long time.
Speaker: And Asia's had its fair share of banking sector stress.
Speaker: But last two years, it wasn't that bad.
Speaker: No, you would actually almost have expected that there would have been a bank that would have said, listen, we have a serious problem here.
Speaker: And there have been some issues in China, but that's more related to the property sector.
Speaker: But across the region, we haven't had the stress that we've seen in the past, in the 80s and the 90s.
Speaker: Yeah, and I think one reason might actually be for the resilience or one reason for the resilience might be the experience of the 1990s, because after the Asian financial crisis, we've seen a huge change in the regulatory framework that was rolled out across the region.
Speaker: You see much higher capital levels being required by regulators, reduced foreign exchange risk.
Speaker: Bank supervision by central banks is very important as well.
Speaker: We came into this pandemic with very high capital levels, in fact.
Speaker: But speaking of the 1990s, Harold, you were in Jakarta when the Asian financial crisis struck.
Speaker: How did it feel at that time?
Speaker: Yeah, no, that's a good point to actually start off because financial stress and financial crisis or bank issues come in various gradations from very light to really heavy.
Speaker: And maybe we start off with a heavy case.
Speaker: And Indonesia in 97, 98 was one of the largest banking crises that we've seen in this region.
Speaker: Maybe just to step back on what happened in those days.
Speaker: We had a weak currency.
Speaker: Interest rates were high.
Speaker: So people who had a mortgage couldn't serve that mortgage anymore.
Speaker: Corporates that had borrowed money, very often used dollars, could not pay that back to the banks.
Speaker: And yeah, they called the banks and said, sorry, we're having a problem here.
Speaker: So these banks had all the assets went non-performing.
Speaker: They went, the value of these assets fell apart.
Speaker: In addition to that, the depositors who had money at the banks, and I was actually one of them,
Speaker: realized that these banks have made you a problem.
Speaker: So what did they do?
Speaker: They ran on the banks, literally there were lines on the banks trying to get your money out as fast as possible because if you got your money out, then the problem was for somebody else.
Speaker: And so a strong bank can actually overnight
Speaker: And I think, yeah, you make that point well.
Speaker: We tend to think of that in abstract terms, right?
Speaker: Economic impact, GDP went down.
Speaker: But really, the average saver in Asia was worried about, you know, what went on.
Speaker: And people's nest eggs was in danger.
Speaker: But it wasn't just Indonesia.
Speaker: It was Thailand.
Speaker: It was Korea.
Speaker: Absolutely.
Speaker: And today, we haven't seen those worries reemerge across the region.
Speaker: No, but it is maybe good to go back to Indonesia and look at how they've eventually dealt with this, because these banks become then feeble institutions.
Speaker: What then happened is that the government stepped in and said, listen, we are taking those bad loans that you have, the good loans you can keep, but the bad loans, we will take care of them.
Speaker: If you do that, then suddenly the depositors say, well, I don't need to draw my money out of the bank.
Speaker: So that's that it creates a bit of stability.
Speaker: And what then the Indonesian government did is to set up what they call the Indonesian Banking Restructuring Agency, IBRA.
Speaker: And they said, we will restructure these loans and see what we can get paid and whatnot.
Speaker: And if we can't get paid, well, the loss is for the government, which means for all the taxpayers in Indonesia.
Speaker: And this idea of an asset management company is something we see come up again, actually, in recent times.
Speaker: And that is in China, for example, where there is at least suggestions that we might see some of the bad assets in the real estate market being housed by an asset management company, potentially, to help just smooth out some of those wrinkles in the financial system.
Speaker: Exactly.
Speaker: Exactly, and this is a kind of a different variety on this Indonesian option, you could say, whereby you take some of the bad loans away, you put it in an asset management company, and you try then also to ensure that the property companies get money in so that they can finalize the projects that they still have, so that people are willing to buy still, to purchase a flat or an apartment.
Speaker: or that what they've already purchased actually will be delivered.
Speaker: So you calm the situation down and you make the bad assets a government problem.
Speaker: And effectively, it's all the taxpayers in China in this case that will somehow sort it out.
Speaker: But maybe over the longer run, you can then actually restructure.
Speaker: And governments have a better ability to restructure these loans and get paid than very often the bank itself did.
Speaker: So this might be a solution that works.
Speaker: And what I think they try to do in China is to get the private sector involved as well.
Speaker: Yeah, some of the private sector involvement is critical because you don't want the taxpayer to carry the entire risk and burden, right?
Speaker: Bail out the private sector.
Speaker: So there's some talk about the private sector having a stake, skin in the game, as we say.
Speaker: And that's, I think, one of the key principles.
Speaker: But it is important also to recognize that even though there is an increased fiscal burden,
Speaker: we're limiting the damage on the overall economy.
Speaker: And ultimately that's the goal here to prevent a big recession.
Speaker: And that's, I think, where Asia so far has been quite successful in recent years.
Speaker: The problem, and you economists, I believe, call this moral hazard.
Speaker: The problem though is that if you bail out, not bailing out, but if you help that sector to recover, you might give the impression to the corporates that next time you have a problem, we'll help you out again as well, right?
Speaker: And you don't want to give that message either.
Speaker: So it's a very fine line, right?
Speaker: You don't want to create these wrong incentives.
Speaker: And that's where the moral hazard considerations certainly come in.
Speaker: But it's a very difficult choice in every case.
Speaker: But there is one country, though, where we have seen a bit of banking sector stress in recent years before the pandemic, actually, and that's India.
Speaker: but they came through the pandemic itself actually in reasonably resilient shape.
Speaker: So even here we've seen quite an effective response.
Speaker: Yeah, if we put all of these responses to a banking problem in spectrum, you could say, we've spoken about Indonesia, there was an extreme situation.
Speaker: In China we've seen asset management companies.
Speaker: In India what they seem to have done is to say, listen, let's put a good bankruptcy law in place.
Speaker: Let's write down some of the assets.
Speaker: And because of the pandemic, a lot of companies haven't really invested and therefore accumulated cash.
Speaker: They are now in a better situation to pay off the banks.
Speaker: And it seems like that is really helping to bring that sector back again in India.
Speaker: Yeah, we should bring in now Abhishek Muraka, our analyst in India, to shed a bit more light on this.
Speaker: He's certainly the expert who's looking at this on a daily basis.
Speaker: That sounds like a good plan.
Speaker: Hi, Abhishek.
Speaker: Welcome to Under the Banyan Tree podcast.
Speaker: Thanks, Harold.
Speaker: Thanks, Fred.
Speaker: So Abhishek, paint a picture for us.
Speaker: So we had in the Indian financial system, we had a lot of stress in recent years.
Speaker: In fact, before the pandemic, a lot of bad assets were in the banking system.
Speaker: How do things look today?
Speaker: The pandemic certainly disrupted growth there.
Speaker: Do we have a big problem with non-performing assets?
Speaker: Are Indian banks struggling with their assets?
Speaker: Actually, to the contrary, even before the pandemic, a lot of that was taken care of.
Speaker: And a lot of these large corporates have started cutting down debt pretty aggressively and banks were helping them do that.
Speaker: So when we entered the pandemic, they were fairly well placed.
Speaker: I think the challenge after the pandemic has been in the retail asset quality and also in the SMEs asset quality.
Speaker: What has happened now is that there have been government schemes to sort of support these two segments.
Speaker: And now it's only a small tail end of problems which remains.
Speaker: Most of the main problems have been tackled pretty well.
Speaker: So I would say the health is fairly good.
Speaker: Abhishek, there seems to be a very distinctive difference between the private banks and the state-owned banks.
Speaker: They seem to grow faster.
Speaker: The private banks and the quality of their loan book is a little bit better as well.
Speaker: Is that correct?
Speaker: Why is this the case?
Speaker: Yeah, Harold, actually, that is correct.
Speaker: The private banks have been much more efficient.
Speaker: in managing stress, and before that in sort of underwriting or giving the right kind of loans.
Speaker: The public sector banks earlier in the last decade, they were very, very free in distributing loans to a lot of corporates, and they did not do a great job of underwriting.
Speaker: So as a result, they got saddled with a lot of debt.
Speaker: On the other hand, the private banks, as I said, were much, much more prudent in their lending and also in cutting exposures wherever things were going wrong.
Speaker: So they have actually done a much better job over the last 10, 12 years.
Speaker: And that's why they are in better health today.
Speaker: So you paint a picture of a fairly resilient banking sector.
Speaker: Despite the pandemic, Indian banks are perhaps in a stronger position, generally speaking, than before the pandemic.
Speaker: But interest rates are rising globally as well as in India.
Speaker: And is that positive for Indian banks or negative?
Speaker: Because you might argue rising interest rates are always good for banks because they make their money lending.
Speaker: But on the other hand, it could also push up non-performing loans.
Speaker: in India.
Speaker: So which side outweighs here?
Speaker: Is rising interest rates good or bad for Indian banks?
Speaker: You know, it's quite interesting, Fred.
Speaker: With higher interest rates, margins should have gone up.
Speaker: But a part of the bank's books are actually dependent on how the Indian central bank moves their rates and not on the internal rates of the bank.
Speaker: So there's a bit of a lag.
Speaker: But overall, I think margins for banks will start improving going forward because of interest rate hikes.
Speaker: On the asset quality question also, we are at a very, very early part of the interest rate hike cycle.
Speaker: So typically at the later part of the cycle is when we see a material increase in monthly installments or the payments that people have to make.
Speaker: And that is when it contributes to higher asset quality problems.
Speaker: So I think we are looking at a pretty good period for Indian banks where margins should rise and asset quality problems should not arise yet.
Speaker: Excellent.
Speaker: Well, that's all very good news.
Speaker: So what is the outlook then for loan growth or credit growth in India?
Speaker: Are these banks going to extend more capital and is there demand for capital again?
Speaker: Actually, the demand for capital is picking up.
Speaker: But the good news is for banks, they are now standing or sitting rather with a lot of capital themselves and with a lot of extra liquidity.
Speaker: So they would also be hungry to lend.
Speaker: So on the one side, the banks have enough money to lend.
Speaker: And on the other side, some corporates who are now in much better financial health than a few years back, they are also looking to borrow.
Speaker: On the retail and the small and medium enterprises side, also there's a lot of demand for credit.
Speaker: So overall credit growth in India right now is trending at about 13% year on year.
Speaker: And given a 6-7% inflation, I think credit growth can remain in low teens.
Speaker: And that's good news for most banks.
Speaker: Well, those were some really interesting insights from Abhishek Muraka in Mumbai, our banking analyst.
Speaker: They were.
Speaker: And also I found it interesting that he's quite positive on credit growth.
Speaker: So despite the stress we've seen, actually the Indian banking system is in a position to expand credit, which would be helpful for growth going forward.
Speaker: Absolutely.
Speaker: So that's a good story.
Speaker: But let's go a little bit beyond politics and markets.
Speaker: Fred, what has kept you busy outside of markets?
Speaker: Well, I got to admit, you know, we've already spoken about books we read and art, but sometimes watching online videos.
Speaker: And I stumbled last night, actually, across one I haven't
Speaker: seen for years and that's Stella the dog.
Speaker: There is this famous video watched by millions of people around the world of this dog who just loves jumping into a pile of leaves.
Speaker: And if you want to take your mind off things, you've got to watch this.
Speaker: It's three minutes of this dog just taking the run, a big pile of leaves and jumping into it.
Speaker: That sounds fun to me.
Speaker: But is that something that you do when you relax under the banyan tree?
Speaker: No, I don't really generally jump into a pile of leaves, but I'm going to check this out.
Speaker: But actually, I've actually been watching some online videos as well.
Speaker: Somebody made cardboard paper cutouts and used those to animate the stories of the Austrian composer Schubert, who made small songs based on the poetry of German poet Goethe.
Speaker: And these animated stories, whereby for example a boy sits on the back of a horse with his father, they go through the forest and there's a ghost that tries to attack him.
Speaker: They're beautiful stories, wonderful to watch and there are only two or three minutes and there's a whole host of them, but it's really enjoyable to do, relaxing to do.
Speaker: So plenty away from markets and economics to keep us busy as well.
Speaker: This has been another fantastic episode here under the Banyan tree, putting Asian markets and economics in context.
Speaker: I'll see you next week.
Speaker: See you next week, Harold.
Speaker: Cheers.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
