Thai banks need for dollars makes uneconomic bonds appetizing
* Three Thai bank deals in the market in the same week
* Basis swaps near 2012 highs make dollar bonds expensive
* Demand for trade finance driving need for hard currency
By Christopher Langner
Sept 11 (IFR) - A sudden flurry of dollar deals from Thai banks could be a sign of a dearth of trade finance availability in Bangkok as European banks accelerate their exit from Asia. Luckily for Thai lenders, the dollar market is wide open just as they need to find alternative sources of hard currency funding.
On Monday, Siam Commercial Bank surprised the market with a drive-by US$500m reopening of its bond due September 19 2017, originally priced in March this year. The deal would be viewed as just an opportunistic tap if it were not conspicuously coming at the same time as deals for Kasikornbank and Bangkok Bank.
The fact that three banks from the same country come in the same week is hardly a novelty in Asia, where deals tend to come in clusters. But Thai banks are seldom this active, given that they have strong deposit bases and can usually secure cheaper funds locally than in the G3 market. Moreover, basis swaps have recently spiked, making dollar bonds more expensive for Thai issuers. "It is now relatively expensive to borrow Thai baht with US dollars," said a senior DCM banker in Bangkok. For a graphic of Thai Baht/US Dollar basis swaps please click here. r.reuters.com/bet52t
So it is little wonder Kexim did a large Thai Baht transaction late in August, and ICBC is on course to do another one. Both are getting better rates in Thailand, when swapped to floating rates in dollars, than they would in the global market.
However, the problem that is driving Siam, Kasikorn and Bangkok Bank to the dollar market despite its costs may be dollar liquidity. Thai banks have been hard pressed to lend in dollars to their corporate clients for trade finance and acquisitions. Anecdotally, demand for both kinds of loans from local lenders is on the rise.
That makes sense. Thailand's trade is starting to pick up. Economists surveyed by Reuters expect the country's next trade report to show a 13.3% rise in imports. As for exports, they are worth about 70% of Thailand's GDP.
TRADE FINANCING GAP
Meanwhile, trade finance is becoming scarcer than ever. Dealogic data shows that in the first quarter of 2011, global trade finance volumes dropped 18% to US$26.8bn, the lowest level since the third quarter of 2009. That plunge has been more because of a lack of supply than of demand. The problem is that European banks, which funded more than three-quarters of trade finance transactions with EM countries a few years ago, have been aggressively deleveraging.
Asia has been among the hardest hit. Based on BIS data, a Morgan Stanley report in May pointed out that eurozone banks had decreased their exposure to Asia by 18% in the second half of 2011. "Our new analysis of syndicated trade finance suggests that French and eurozone banks (ex German) have gone from an approximately 43% share of large-ticket Asian trade finance 18 months ago to just about 3% in 1Q12."
As the European banks stepped out of Asia, Japanese banks, Asia-focused institutions such as HSBC, Standard Chartered and local banks have filled the gap. Japanese banks now command more than half the region's big-ticket syndicated trade finance loans, Morgan Stanley said.
For Thailand, it is even more serious. About 90% of the dollars offered to Thai banks and companies used to come from US, British and European banks, the very banks that are reducing their exposure to Asia. "The clients need money in dollars and the banks are trying to keep their assets matched to the liabilities," said a bank credit analyst in Singapore. "This is not only happening in Thailand. That helps explain a lot of the recent bank deals in the region."
But the Southeast Asian country may be more hard-pressed than others. In a June article, the Bangkok Post noted that local liquidity is also drying up and that Thai banks have been raising their deposit rates to increase their money base. "Thai commercial banks' loan-to-deposit and borrowing ratio started to pick up quickly in February this year, and in May stood at 89%, comparable to the peak seen during the US sub-prime crisis in 2008," the paper said.
The problem is more serious on the dollar front. The paper said: "The dollar liquidity shortage is a clear and present danger to the Thai economy, especially when so much hinges on international trade."
Luckily, though, the dollar bond market is more receptive than ever to Thai banks just as their local clients demand more dollars for trade finance and acquisitions to make-up for the European money that has left the country. (Reporting By Christopher Langner; editing by Nachum Kaplan)
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