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Moody's: Most Asia Pacific banks have buffers against commodity risks

Moodys: Most Asia Pacific banks have buffers against commodity risks

Moodys Investors Service says that banks in Asia Pacific (ex-Japan) show moderate loan exposure to borrowers in commodity-related industries, with such loans making up around 7% of gross loans on average at end-2015.

However, the quality of such loans will likely continue to deteriorate, based on Moodys assessment that energy and commodity prices will remain low over a prolonged period.

In Asia Pacific (ex-Japan), the riskiest exposure for banks in terms of energy and other commodity loans originate from metals and mining, as well as from certain parts of the oil and gas sector, including services, offshore marine and shipping and shipbuilders, says Eugene Tarzimanov, a Moodys Vice President and Senior Credit Officer.

In general, we do not expect negative bank rating actions related to commodity exposures, because banks in Asia Pacific have either good financial buffers, moderate commodity exposures, or ratings that already capture asset quality weakness, adds Tarzimanov.

The report says that based on Moodys expectation that commodity prices will stay low for a prolonged period, corporate earnings will be negatively affected; thereby weakening the debt repayment capacity of many commodity firms, and creating pressure on or delaying the recovery of asset quality and profitability for the banks in Asia Pacific.

Moodys notes that the pressure on the quality of commodity-related loans could lead to possible negative bank rating actions in Singapore, Korea and Mongolia over the next 12-18 months, as reflected in Moodys negative outlooks on many banks in these economies.

Moodys report says that for oil gas and related industries such as shipping and ship and rig building, banks in Singapore and Korea are more exposed when compared with other banks in Asia Pacific. In Singapore and Korea, the exposure is around 5% of gross loans.

As for the metals mining sector, banks most exposed to these sectors are in Mongolia (10% of gross loans), India (7%, including steel), Indonesia (around 5%) and China (around 4%). The global metals mining sector has been under stress for many years and some Asia Pacific banks demonstrate large legacy problem loans in this industry.

On the issue of agriculture-related exposures, Moodys does not expect a material weakening in the banks asset quality, because global agriculture prices have shown better performance relative to energy and metals prices. Moodys points out that banks most exposed to agriculture are in New Zealand (14% of gross loans), India (13%), and Thailand (around 6%).

Moodys report says that overall, banks in Asia Pacific demonstrate good buffers against rising credit risks, despite the likely continued pressure on the quality of their commodity portfolios. Such buffers include their generally low problem loan ratios and a problem loan coverage above 80% for more than half of Asia Pacific banking systems. Banks in Asia Pacificexcept for banks in Vietnam and public-sector banks in Indiaalso show good capital buffers and profitability, providing a good line of defense against rising problem loans.

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Private sector bank stocks decline

Private sector bank stocks decline

Key benchmark indices languished in negative zone in mid-morning trade. At 11:15 IST, the barometer index, the SP BSE Sensex was down 223.16 points or 0.87% at 25,550.45. The Nifty 50 index was currently down 65.65 points or 0.83% at 7,825.10. Weakness in global stocks weighed on the domestic bourses. Prospects of higher interest rates in the United States pulled global markets lower after the latest data showed that US consumer prices rose in April at their fastest pace in three years. Additionally, hawkish comments from US Federal Reserve officials yesterday, 17 May 2016, increased expectations that the US central bank will pick up the pace of rate rises during the current calendar year.

Investors in emerging markets, including India are worried that higher interest rates in the US will drain liquidity from emerging markets and redirect it to developed economies.

The Sensex dropped 267.50 points or 1.03% at the days low of 25,506.11 in morning trade, its lowest level since 16 May 2016. The barometer index fell 102.13 points or 0.39% at the days high of 25,671.48 in morning trade. The Nifty lost 79.25 points or 1% at the days low of 7,811.50 in morning trade, its lowest level since 16 May 2016. The index fell 38.25 points or 0.48% at the days high of 7,852.50 in morning trade.

In overseas markets, Chinese stocks led decline in Asian stocks after a top Chinese official made no mention of a stock trading link between Hong Kong and Shenzhen. In mainland China, the Shanghai Composite index was currently down 1.72%. In Hong Kong, the Hang Seng index was currently down 1.54%. US stocks dropped yesterday, 17 May 2016, after Federal Reserve officials implied that interest rates could be raised as early as next month. Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams, both, yesterday, 17 May 2016, said the Feds decision on whether to raise rates at the June 14-15 meeting hinges on the data. Lockhart said that June certainly could be a meeting at which action could be taken. Dallas Fed President Robert Kaplan, seen as a hawk, said he will push for an interest rate hike in June or July.

The consumer-price index increased a seasonally adjusted 0.4% in April from the prior month after rising 0.1% in March. That was the largest one-month increase since February 2013. A measure of underlying price pressures, which excludes the often-volatile categories of food and energy, rose 0.2% last month after ticking up 0.1% in March. Core prices were up 2.1% from a year earlier, a fifth consecutive month of annual growth above 2%the longest such streak in four years.

Closer home, the market breadth indicating the overall health of the market was negative. On BSE, 1,159 shares fell and 925 shares rose. A total of 114 shares were unchanged. The BSE Mid-Cap index was currently off 0.36%. The fall in this index was lower than Sensexs decline in percentage terms. The BSE Small-Cap index was currently up 0.01%, outperforming the Sensex.

Stocks of private sector bank declined. HDFC Bank (down 1.55%), Federal Bank (down 0.79%), Kotak Mahindra Bank (down 0.85%), ICICI Bank (down 1.24%) and Yes Bank (down 0.23%) declined.

Axis Bank fell 1.29%. The bank has kept its lending rates based on marginal cost of funds unchanged effective from 18 May 2016. The banks Marginal Cost of Funds based Lending Rate (MCLR) for overnight loans will be 8.95%, the rate for one month will be 9.05% and for three months it will be 9.25%. The MCLR on 6-month loans will be 9.3% and for one-year loans the rate will be 9.35%, the bank said. MCLR on two-year loans will be 9.45% and for three-year loans the rate will be 9.5%. The announcement was made after market hours yesterday, 17 May 2016.

All rupee loans sanctioned and credit limits renewed with effect from 1 April 2016 are priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark of the concerned bank. Actual lending rates are determined by adding the components of spread to the MCLR.

IndusInd Bank fell 1.23%. IndusInd Bank and Honda Motorcycle Scooter India today, 18 May 2016, signed a Memorandum of Understanding (MoU) with IndusInd Bank whereby the latter will offer retail finance at an attractive rate of interest for Hondas two wheeler models. The announcement was made during market hours today, 18 May 2016.

PSU bank stocks were mixed. Union Bank of India (up 0.83%), IDBI Bank (up 0.62%), Canara Bank (up 0.77%) rose. Bank of Baroda (down 0.09%) and Bank of India (down 0.06%) fell.

Reserve Bank of India (RBI) Deputy Governor R. Gandhi was quoted as saying yesterday, 17 May 2016, that the RBI will continue reviewing the asset quality at commercial lenders this financial year as part of a continuous process aimed at avoiding an increase in levels of distressed debt. Reviewing asset quality is a permanent process of supervisory action, he said. As part of an asset quality review (AQR) of the banking sector, the RBI has directed lenders to make additional provisions on certain loans in Q3 December 2015 and Q4 March 2016. The purpose of this exercise is to have cleaner balance sheet of the lenders.

State Bank of India (SBI) after the state-run bank said it is considering merger of five associate banks with itself. The stock was up 0.96% at Rs 178.75. The stock hit a high of Rs 179.25 and a low of Rs 173.65 so far during the day. State Bank of Bikaner and Jaipur slipped 0.18%. State Bank of Mysore jumped 8.04%. State Bank of Travancore advanced 3.92%. SBI after trading hours yesterday, 17 May 2016, announced that it is seeking in principle sanction of the Government of India (GoI) to enter into negotiation with its 5 subsidiary banks viz. State Bank of Bikaner and Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore to acquire their businesses including assets and liabilities. The decision is purely exploratory at this stage and there is no certainty in relation to SBI completing the acquisitions, SBI said. SBIs board of directors will take a final call after evaluating all the relevant considerations. SBI also said that it is considering acquisition of Bharatiya Mahila Bank.

Punjab National Bank rose 1.63% ahead of its Q4 March 2016 results today, 18 May 2016.

United Bank of India fell 3.91% after the bank reported net loss of Rs 413.04 crore in Q4 March 2016 compared with net profit of Rs 104.52 crore in Q4 March 2015. The result was announced after market hours yesterday, 17 May 2016.

The banks gross non-performing assets (NPAs) stood at Rs 9471.01 crore as on 31 March 2016 as against Rs 6721.53 crore as on 31 December 2015 and Rs 6552.91 crore as on 31 March 2015. The ratio of gross NPAs to gross advances stood at 13.26% as on 31 March 2016 as against 9.57% as on 31 December 2015 and 9.49% as on 31 March 2015. The ratio of net NPAs to net advances stood at 9.04% as on 31 March 2016 as against 5.91% as on 31 December 2015 and 6.22% as on 31 March 2015. The increase in slippages on sequential basis is due to economic slowdown and also as a part of Assets Quality Review (AQR) as advised by the Reserve Bank of India (RBI). The central bank has advised banks to revise asset classification/provision in respect of certain advances over two quarters ending Q4 March 2016.

The banks provisions and contingencies rose 73.6% to Rs 1173.43 crore in Q4 March 2016 over Q4 March 2015. The provision coverage ratio stood at 53.36% as on 31 March 2016.

United Bank of India announced that it has allotted 23.24 crore equity shares of Rs 10 each for cash at an issue price of Rs 20.65 per equity share to Government of India on preferential basis against capital infusion of Rs 480 crore.

Telecom stocks fell. Bharti Airtel (down 1.03%), Idea Cellular (down 0.95%), MTNL (down 0.56%), and Reliance Communications (down 0.68%) declined. Tata Teleservices (Maharashtra) was currently trading unchanged at Rs 6.66.

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LendingClub CEO resigns; internal probe of loan sale

LendingClub CEO resigns; internal probe of loan sale

The chairman and CEO at LendingClub stepped down after an internal review determined that the companys business practices were violated with the sale of a USD 22 million in loans to people with sketchy credit scores to a single investor.

The sudden departure of Renaud Laplanche, along with the firing or resignation of three senior managers involved in the sale, sent shares of the company plunging 26 per cent today.

It was not immediately clear what role Laplanche played in the sale, but the company said that the sale of loans held by customers with low credit scores failed to conform to the investors express instructions.

The review of that sale was initiated after it was found that the dates on loans worth USD 3 million had been changed.

As it investigated that matter, another unrelated problem was uncovered that involved the failure to inform the boards risk committee of personal interests held in a third party fund while the LendingClub was considering an investment in the same fund.

President Scott Sanborn will now serve as acting CEO.

LendingClub and other companies like it grew in the aftermath of the financial crisis.

The online companies pair borrowers, either individuals or businesses, with lenders. But the business model has come under pressure as investors find better payouts elsewhere.

LendingClubs market capitalization neared USD 9 billion shortly after its initial public offering in late 2014. The value of the company in the past 12 months, however, has been clipped by almost 70 per cent.

The shakeup at LendingClub led to a quick downgrade Monday from Stifel Nicolaus Co.

We put a lot of faith in the teams ability to execute and build trust with lenders and consumers, wrote analyst Scott Devitt. Our faith and trust is shaken by the set of events announced this morning as could be the case with the companys constituents.

Shares of LendingClub Corp. Tumbled USD 1.87 to USD 5.23 in midday trading.



Foreign investors likely to become sellers again: Saurabh Mukherjea

As the threat from adverse external events lingers and with earnings unlikely to grow in double-digits any time soon, Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital, tells Hamsini Karthik it is naive to expect a well-intentioned government to deliver a bull market. Edited excerpts:

The markets are almost back (down) to where they were when Narendra Modi took charge as prime minister.

We became pessimistic about Indian equities in March 2015 when the Sensex touched 30,000 points. We continue to remain so because of what I call the Modi-Rajan-Technology reset and the external factors. Whenever we have had major policy reform in India which changes the rules of the game, the stock market churns heavily. This happened in the six years following the July 1991 reforms, with 20 of the 30 Sensex constituents were booted out of it.

In March 2015, we reckoned the Sensex was again entering such a period of adjustment. There is a concerted effort to arrest black money and welcome foreign direct investment (FDI) into India. Also, the Reserve Bank is overseeing the disruption of the banking system and reduction in capital flow to crony capitalists. These are seismic changes and might take two-three years for the economy and market to adjust.

To me, it appears naively optimistic to believe that the actions of a well-intentioned government and a reformist central bank chief should result in the stock markets flying high.

Has the external environment improved since last August?

Going by what the Bank of Japan (BoJ) said two weeks earlier, more negative data might be on the anvil. The European Central Bank policy (review statement) on June 2 and the (US) Fed policy thereafter might be on similar lines. In the past six months, no developed country which has gone into negative interest rates has reported economic improvement. Negative interest rates are a slow death for the banking system. Central bankers are throwing their hands up and saying easy monetary policy is not yielding any incremental benefit.

Back in the emerging world, since neither expansionist fiscal policy nor easy monetary policy has been able to stem the slide in Chinese economic growth, the central bank there might let its currency slide by 20 per cent over the next couple of years.

If the Chinese let their currency fall further, India and other emerging markets (EMs) will also let their currency slide. Weve had 17 months of falling export and Rs 66 to the dollar looks unviable for India. When you have the next major bank fall in the West or in Japan, or the central banks give up on monetary easing or China lets its currency fall, equities across the world will also fall.

Foreign institutional investors (FIIs) were sellers in 2015. After an interim period in 2016 as buyers, they are again sellers. How do you see the trend?

FIIs are likely to become sellers again as there are many negative catalysts haunting global equity markets. Western central banks and the BoJ have pumped $5 trillion into the global system since the Lehman debacle (of late 2008, which led to the global financial crisis) and India has got some of this. With quantitative easing coming to an end and the US Fed hiking rates, risky asset classes are pulling back. For instance, property prices in Europe are correcting. Commodity prices have been correcting for four years. The last man standing is the equities market, whether in the West or in India. We touched 30,000, a Sensex high, last year and might do that again. But, fundamentally, the outlook for equities looks challenging.

Earnings so far have been disappointing. Whats your view on their trend?

The consensus is making the same mistake in FY17 as it has in the past two years. Earnings expectation at the start of the financial year is at the high teens; it then tapers by Diwali and settles at three-four per cent by the end of the financial year. This cycle is again playing out.

As for the banks, I see at least four quarters of increasing provisioning levels. The current level doesnt seem adequate. The provisioning to stressed assets ratio might go up to 30 per cent. The ultimate challenge is recapitalising these banks. Every time a clean-up happens in the Indian banking system, the economy is twice bigger than it was when the loans were lent. This will be the third clean-up for Indian banks in three decades and we cant afford another once-a-decade cleaning.

Monsoon-led consumption spending seems the only theme working for now.

FDI money that percolated in India last year has been consumer-oriented, whether it is cheap taxi rides or consumer electronics or even jobs in the dot-com space catering to these segments. This has buoyed into the aviation, passenger vehicles and food beverages sectors. Banks are bending backwards to give home loans, car loans and credit cards, and the urban consumer now has easy access to credit. With the pay commission rollouts, I think this trend will continue in FY17 and urban consumption will be a good theme. But, I have never understood the monsoon or timed the market on its basis.

Do you view the state election results, due in a day, as a game-changer for the markets?

Other than in Assam, the (ruling) NDA is not expected to be a political force in other states. To the extent that Assam could turn out to be the NDA#39;s first taste of success in assembly elections in one and a half years, the market might cheer the result.



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