China Construction Bank

Banks' year could go from bad to worse overnight

PUBLISHED : Sunday, 17 June, 2012, 12:00am
UPDATED : Sunday, 17 June, 2012, 12:00am


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The business prospects of the world's banks for the rest of the year very much depend on the result of today's Greek election.

The outcome may force them to cut their exposure to debt even further and eat into their revenues.

There are fears that the vote will increase the chances of Greece leaving the euro and the global financial system will be shaken even more when the markets open tomorrow.

According to data compiled by rating agency Fitch, the growth from 2008 to 2011 of risk-weighted assets in China's 'big four' state-owned commercial banks - Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China - has already outstripped their global counterparts.

Risk-weighted assets are worked out by adjusting each asset class for risk in order to determine a bank's exposure to potential losses.

Bank of America, JP Morgan Chase and Citigroup, for example, have reduced their balance sheet of risk-weighted assets while the big four banks of China have increased theirs by about US$2 trillion, making them the biggest financial institutions in the world.

In Europe, the withdrawal of Greece could create chaos across the entire euro-zone banking system. European financial officials have already discussed limiting the size of ATM withdrawals, imposing border checks and introducing euro-zone capital controls in case Greece leaves the euro.

In Greece and Spain, two of the hardest-hit by the debt crisis in the 17 countries that use the euro, savers and businesses are already pulling money out of banks.

Spanish banks are awaiting the conditions under which they will receive an estimated 100 billion euro (HK$980 billion) rescue package.

The exact amount of the bailout and its details will be confirmed on June 21.

The uncertainty of the euro zone has already taken toll on the investment banking business worldwide. The fate of about 20 announced listings in Hong Kong worth at least US$36 billion will depend on the results of the Greek election.

Around the world, of 175 initial public offerings and share offerings worth US$11.3 billion have been withdrawn so far, according to data provided by Thomson Reuters, eating into the investment banking revenue of global banks. Withdrawn listings in Hong Kong alone reached US$2.0 billion, including the US$1 billion the Graff Diamonds IPO.

Bankers said issuers would like to 'wait and see' before deciding on their listing timetable.

'If even a brand as strong as Graff is pulling out, that means the market is really, really weak,' said an investment banker who preferred not to be named. 'But a positive breakthrough in the euro-zone crisis may change the market sentiment overnight and get things moving again.'

Attention will also be turning towards the acquisition opportunities in Europe, where asset prices may drop further as companies seek capital injections from outside.

Ratings agency Fitch warned last week that the 17 states in the euro zone could be downgraded should Greece exit the euro zone and the European Union does not come up with an effective policy to stop the contagion effect from spilling over to other countries.

Merger and acquisition activities in some of the euro-zone countries have become more aggressive.

The value of deals involving British companies as targets, for example, more then doubled to US$5.52 billion in the first half of 2012 from US$2.13 billion in same period last year through fewer but larger deals. The number of deals dropped to 49 from 62.

Similarly, the value of German companies targeted for mergers and acquisitions deals went up three-fold to US$983.8 million year-on-year from US$310 million.

China, Australia and the US have been the top three most targeted destinations for such deals so far this year.