The 23 per cent surge in corporate lending by Chinese banks in Australia over the past the year is a sign of their growing appetite for higher risk assets at a time when the big four banks are pulling back from the institutional lending market.
The big four are under pressure in property lending because of regulations and are shedding corporate loans in a bid to lift return on equity.
In the year to June Chinese banks lifted loans and advances 23 per cent from $26 billion to $32 billion, according to the latest banking statistics published by the Australian Prudential Regulation Authority.
A senior banker at one of the big four banks told Chanticleer that Chinese banks increased their direct property lending in Australia over the past year by about 50 per cent. He estimated that over the same period the big four banks only lifted direct property lending by about 2 per cent.
Borrowers in the corporate lending market are benefiting from the continuing flood of liquidity in global financial markets. Apart from new banks opening branches and subsidiaries in Australia some banks that pulled out years ago are back.
Chanticleer understands that Societe Generale has been active in Australia recently despite closing down its local operations several years ago.
In the wake of the global financial crisis SocGen, Royal Bank of Scotland, Lloyds Bank, Barclays and WestLB pulled out of the Australian market as authorised deposit taking institutions.
Over the same time frame two Chinese banks have opened their doors in Australia: Agricultural Bank of China and China Merchants Bank.
In the past five years, Chinese banks have boosted their corporate lending in Australia more than threefold from about $10 billion to $32 billion.
Over this five year period the two fastest growing lenders were Bank of China and Industrial and Commercial Bank of China.
It is instructive to compare the corporate lending growth of these two banks in the past 12 months with the overall growth in business lending in Australia in the year to June.
Bank of China lifted its total lending by 23 per cent to $17.7 billion in the year to June while ICBC lifted its lending by 20 per cent to $5.9 billion.
Business credit in Australia rose 4.4 per cent in 2017, according to private sector credit growth data released by the Reserve Bank of Australia on Monday.
Flow data impressive
The Chinese growth rates are impressive given that the RBA data is flow data whereas the APRA statistics are based on the change in stock of loans, which is net of loan repayments.
Total Chinese corporate lending in Australia now, for the first time, eclipses the combined corporate loan books of all the American banks operating here.
The five America banks had $30 billion in loans at June 30 but about $11 billion of that came from Citigroup’s lending for home loans and credit cards.
At current growth rates the Chinese banks will have loan books larger than the combined corporate loan books of the European banks operating in Australia.
The APRA data shows the European banks had corporate loans of $35 billion at June 30.
Several of the European banks are very active in retail lending, most notably ING Bank, which has $42 billion in housing loans and HSBC, which has $11 billion in housing loans.
The only other banks to have a larger exposure to corporate Australia than the Chinese banks are the Japanese. They were reasonably aggressive in 2017 on the back of several large corporate deals.
Sumitomo Mitsui Banking Corp lifted its corporate lending by 13 per cent from $16.35 billion to $18.56 billion in the year to June 30.
Lyn Cobley, who is chief executive of Westpac Banking Corp’s institutional bank, says the foreign banks have plenty of liquidity because of the easy money policies of central banks.
She says Australia is regarded as a safe, stable place to lend money.
“They are looking for somewhere to make some level of return better than what is available in their home markets,” she says.
“We have been seeing activity by banks that have not been around for several years.”
She says Westpac has managed to continue to service its clients by taking them to offshore debt capital markets.
“Nine of the last 15 larger deals we did were in the offshore debt markets including the offshore placement market,” she says.
Cobley believes Australian companies tempted to take up attractive loan offerings from foreign banks should remember that offshore banks have been fickle when times get tough.
“We are not just fair weather friends,” she says.
The surge in lending by Chinese banks in Australia over the past few years is not a flash in the pan. Chinese banks are the most profitable in the world, according to data released by the Bank for International Settlements in June.
The BIS data shows the net income of Chinese banks in 2016 as a percentage of total assets was 1.34 per cent, compared to 1.17 per cent for Australia and 0.22 per cent in the United Kingdom.
In other words Chinese banks are generating plenty of organic capital which should enable them to deploy more loans at home and abroad. Also, their lending in Australia has been associated with a surge in Chinese foreign direct investment, particularly in large scale residential property. That trend will continue.
By Tony Boyd