Standard Chartereds(LSE: STAN) third-quarter results shocked the banks investors. Indeed, after their release, Standards shares slumped around 10%, which is a huge move fora FTSE 100 giant like Standard.
These declines were powered by a stark warning from the bank; the quality of loans within Asia is deteriorating rapidly.
As a result, Standard has been forced to book impairments charges, totalling hundreds of millions of dollars, as it writes off non-performing loans. Not only is this a problem for Standard but it also likely to impactHSBC(LSE: HSBA), as the bank does most of its business within Asia.
Standards third quarter results revealed a surge in the number of bad loans on its balance sheet, which crimped profits. The banks management revealed that impairments during the third quarter hit $539m, up from $250m as reported during the same period last year.
But now the bank is facing more commodity related expenses. Indeed, the majority of the $539m impairmentcharge was related to businesses with exposure to the commodity market. These problems were not just limited to China, Indian businesses also suffered.
Unfortunately, these problems are not just limited to Standard. Banks throughout Asia are reporting a higher volume of loan impairments as highly leveraged companies struggle to repay debts. These impairments are particularly prevalent within the housing, steel, iron ore and coal sectors. Standard has already taken a $175m charge this year to cover the banksexposure to suspected commodities fraud in China.
Its unlikely that HSBC will escape from this wave of defaults unscathed. The bank is one of Asias largest lenders and any major financial crisiscaused by a high number of loan defaults, will have a knock-on effect across the region.
Analysts are also becoming increasingly worried about thecarry trade. A practice where wealthy individuals borrow money from banks within Hong Kong, to invest in China for a higher rate of interest. It is estimated that this market is worth up to $200bn.
And its this kind of financial intergeneration across Asia that is putting HSBC at risk. HSBC generates around 64% of its reported profit before tax within Asia. So, if a credit crunch were to spread across the region, half of HSBCs pre-tax profit could disappear almost overnight.
The bottom line
Standards revelation that loan impairments within Asia are surging, is worrying for all regional banks. Like Standard, HSBC is highly exposed to the region and is more than likely to suffer from any regional slowdown or credit crunch.
However, before you make any trading decision I strongly advise that you take a closer look at HSBC.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.