TOO MUCH LENDING?

2014/11/10

From：Macau Business Daily

The loan-to-deposit ratio has reached record highs. For non-resident customers it still stands at 147 percent. Anything above 120 percent poses a problem, say experts.

They were and still are a goldmine for local banks. The arrival of thousands of foreigners in Macau in the last few years has been a shot in the arm for the local economy, funnelling a flow of fresh customers – and their funds – to the financial institutions here. New customers available to give credit to and receive deposits from. The problem – contrary to what happens with local customers – is that banks are giving much more credit to non-residents than they receive in deposits from them, a trend that is increasing the risk of the banks’ balance sheets.
According to data from the Monetary Authority of Macau (AMCM) the loan-to-deposit ratio of non-resident customers reached 147 percent in September and has stayed around the 150 percent mark for the last five years.
The ratio, as the name implies, measures the amount of loans vis-a-vis deposits. If the ratio is 100 percent, it means that for each pataca lent there’s a pataca deposited. In the event of a crisis, at least the bank would have the funds to repay its customers.
A ratio of 80 percent means that the bank lends 80 cents for each pataca deposited, assuring full payment to its customers and also allowing some financial margin. But in Macau, and for non-resident clients in particular, it’s the opposite. Banks here are lending 1.5 patacas for each pataca deposited.

Dangerous path

A loan-to-deposit ratio of 150 percent is considered unsustainable in the financial world. The market benchmark is a ratio of 80 to 90 percent. The International Monetary Fund (IMF) says 120 percent is the top limit for a sustainable ratio. Before the recent financial crisis in Europe, most banks there were running loan-to-deposit ratios of 150 percent, following years of abuse in terms of credit. When the crisis hit, dozens of banks went bankrupt due to excessive credit and not enough available liquidity. In Europe, banks are now forced to have a ratio of lower than 120 percent.
The Macau banking system is still sound but the increasing credit frenzy here could mean bigger problems in the future. The loan-to-deposit ratio in Macau stayed at 84.4 percent in September, a sustainable level by international standards but already an all-time record. The ratio for local clients also increased to a record level of 58.2 percent.
A non-resident customer ratio of 150 percent means that the risk for these customers is being supported by local customers. If the non-residents don’t repay their loans banks here will not have enough money to cover these losses and have to turn to residents’ deposits.

Leading the credit race

However, Macau banks lend today more to non-residents than to locals, even though the amount of the deposits of the former are only half of the latter.
In September, outstanding loans for residents totalled MOP328 billion compared to MOP346billion for non-residents. The bank deposits of local customers amounted to MOP477 billion versus MOP234 billion for non-residents.
According to AMCM data, credit in Macau is growing much faster than deposits. In September, total outstanding loans reached MOP675 billion, 31.8 percent more than a year ago, while deposits reached MOP800 billion, a 21.9 percent increase. In one year, Macau banks granted MOP160 billion in new loans, while they only pulled in MOP60 billion in new deposits, three times less.

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