Asian banks need 'up to $64b' in new capital

Asian banks need 'up to $64b' in new capital

SINGAPORE (Reuters): The cost of recapitalizing Asia's beleagured banks, excluding those in Japan, could be as high as US$64 billion said global securities firm Merrill Lynch in a report received by Reuters yesterday.

"Crudely, we estimate that the cost of recapitalizing Asia ex- Japan's commercial banks will be US$47 billion to US$64 billion," Merrill said in its Asia Pacific strategy report dated July 22. Including China, the potential costs leaps to US$155-$204 billion, the report said.

Painting a grim picture for the sector, Merrill said it expected non-performing loans (NPLs) should peak at about 24 percent, with banks eventually having to write off as much as half of all their bad debts.

"In several cases (China, Indonesia, South Korea and Thailand) the required additional provision either would eliminate or almost eliminate existing shareholders' funds," the report said.

Such a scenario, coupled to the fact that fresh capital had not poured into the sector, was likely to temper the willingness of banks most at risk to make adequate provisions in future.

"We are concerned that banks in Asia, as a consequence of there being no clear indication of capital availability and in order to avoid panicking depositors... will avoid making the necessary provisions, thereby prolonging the deterioration of asset quality assumptions," Merrill said.

This factor would have a negative impact on bank stocks.

"Historic experience elsewhere in the world suggests it is difficult for bank shares to outperform whilst asset quality assumptions deteriorate," it said.

While many analysts had made comparisons between Asia's crisis and Mexico's banking collapse in 1994, the report said there were significant differences between the two.

Mexican banks had generated a sufficient return on equity, well ahead of loan growth, in the pre-crisis period, and the country's position as a world class cement producer had enhanced its ability to export its way out of the crisis, Merrill said.

"Finally, the benign support of the USA was much more significant than Asia is likely to enjoy either from the USA or its own giant, Japan," it said.