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Bankers Hurry to Reassure Market About Their Evergrande Exposure

Stock MarketsSep 23, 2021 16:36
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(Bloomberg) -- European bankers have spent the past few days reassuring investors, clients and regulators about any fallout from China Evergrande Group as questions swirl about the world’s most-indebted property developer.

Credit Suisse (SIX:CSGN) Group AG, which underwrote the most Evergrande bonds among international banks in the last 10 years, issued statements showing its asset management unit’s funds didn’t hold much of the developer’s debt. It also reached out to shareholders about the bank’s own minimal level of exposure, according to a person briefed on the discussions.

UBS Group AG’s risk is “immaterial” and limited to the execution of collateral calls on margin loans, Chief Executive Officer Ralph Hamers said Thursday. That came a day after his counterpart at HSBC Holdings Plc (LON:HSBA), Noel Quinn, told a Bank of America Corp (NYSE:BAC). conference that he’s not worried about the bank’s direct links to Chinese real estate. 

Standard Chartered (OTC:SCBFF) Plc Chief Financial Officer Andy Halford said at the same event that his bank is “much less concerned than the initial market reaction.”

Global financial markets are bracing for a potential collapse of Evergrande, which is buckling under more than $300 billion in liabilities. The company is China’s largest issuer of high-yield dollar-denominated bonds, and bills are coming due to an array of banks and suppliers.

Financial regulators in Beijing have issued a broad set of instructions to Evergrande, telling the developer to focus on completing unfinished properties and repaying individual investors while avoiding a near-term default on dollar bonds, Bloomberg reported Thursday.

A top British regulator offered his own reassurances Thursday. Sam Woods, chief executive officer of the Bank of England’s Prudential (NYSE:PUK) Regulation Authority, which supervises banks and insurers, said in an interview with Reuters that the direct exposures of British banks to the Chinese firm are “not material, so it’s really not a concern in the first-round effect.” 

The comments comes with little transparency on who is on the hook in the event of a collapse. Most of the liabilities are thought to be held by Chinese firms but Evergrande drew interest from bankers worldwide in its pomp. 

HSBC’s asset management arm has been among large holders of Evergrande debt, along with the likes of BlackRock Inc (NYSE:BLK). and UBS. Over the last 10 years, Credit Suisse has underwritten about $4 billion of debt for the developer, with that tapering off in the last few years as the giant began to deleverage, according to a person familiar. The bank has no material exposure on its own balance sheet though there is some through client portfolios, the person said. 

Evergrande’s crisis is the latest warning shot for Western lenders, which have spent years trying to get a foothold in China’s increasingly lucrative banking market. HSBC is looking to hire thousands of wealth managers in the region while JPMorgan Chase & Co. (NYSE:JPM) won approval from regulators for registration of full ownership of its China securities venture. 

But the market has seen a spate of corporate scandals, and a sudden regulatory crackdown has also hit sentiment among some financiers. While the direct exposures of many Western banks may be limited, the crisis is potentially concerning for the potential ripple effects across markets.

What Bloomberg Intelligence Says

The risks are elevated and costs of any policy missteps would be high for the Chinese economy and financial markets -- with potential for global spillovers. But in our view this isn’t China’s Lehman moment. A quick fix is very unlikely but so too is a systemic meltdown.

David Qu, BI economist

“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact,” HSBC’s Quinn told the banking conference. 

Woods said that the ultimate damage will hinge on the response of Chinese authorities while Swiss National Bank President Thomas Jordan said policy makers are watching for possible fallout, warning that such situations can sometimes escalate out of control.

For now, banking executives are striking a relaxed pose. Evergrande’s financial difficulties, says UBS CEO Hamers, “have not been keeping me up at night.”

©2021 Bloomberg L.P.

Bankers Hurry to Reassure Market About Their Evergrande Exposure

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