By Lawrence White and Carolyn Cohn

LONDON (Reuters) – HSBC and Normal Chartered (OTC:) may face spillover injury to their earnings and stability sheets from the debt disaster enveloping China Evergrande Group despite the fact that the 2 banks say they’ve restricted their direct publicity, analysts have warned.

Different banks and insurers may additionally endure oblique results akin to lack of charges or a devaluation of their investments.

HSBC and StanChart make an enormous chunk of their earnings in China and Hong Kong and so they have been the international banks most concerned in underwriting syndicated loans for builders there. Which means they’re prone to face probably the most rapid second-order impacts, analysts at JPMorgan (NYSE:) stated in a analysis report.

HSBC and Normal Chartered each declined to touch upon the report.

Evergrande has left world buyers guessing over whether or not it would make a key curiosity fee, including to fears of massive losses for bondholders and sending tremors by means of China’s property sector and economic system.

Hong Kong and mainland China accounted for round 84% of HSBC’s earnings in 2020 whereas Higher China and North Asia contributed 81% of StanChart’s earnings final yr, in accordance with a Reuters evaluation of filings by the 2 firms – underscoring the area’s significance to their total companies.

The 2 have probably the most direct lending publicity amongst international banks to China’s property sector – $17 billion or 1.5% of group belongings for HSBC and $1.3 billion or 0.5% of group loans at StanChart, in accordance with JPMorgan.

The property sector contributes 14% of China’s GDP or 25% if oblique contributions are included, JPMorgan stated, and property loans are price some 6.6% of complete loans, that means successful to the sector may have vital wider financial impacts.

HSBC and Normal Chartered have each stated they don’t have any direct publicity to Evergrande, and that they’ve taken steps in recent times to fastidiously handle their exposures to anyone sector.

HSBC has already bought all positions in its China bond or Asia credit score portfolios with publicity to Evergrande, a supply on the financial institution stated.

Citing Dealogic knowledge, JPMorgan stated HSBC has been concerned in underwriting 39 excellent syndicated loans for Chinese language builders whereas StanChart has labored on 18 such offers, which may come below stress if there are wider property sector defaults.

In a syndicated mortgage banks sometimes underwrite the deal after which promote the debt to different buyers, however could preserve a few of the publicity on their books.

“There’s a threat that this isn’t an idiosyncratic occasion however an industry-wide downside which may end in vital spillover injury,” JPMorgan stated.

The U.S. financial institution stated it estimates there could possibly be an extra 11 defaults price some $30 billion this yr throughout the Chinese language high-yield property sector, amounting to a 23% default price.

MARKET CHILL

Different European monetary companies additionally face a damaging affect on enterprise traces akin to capital markets, asset administration and personal banking, stated Dierk Brandenburg, head of economic establishments at rankings company Scope.

“These will affect the revenue and loss figures of Europe’s globally lively banks within the coming quarters, as may the following regulatory crackdown by Chinese language authorities,” he stated.

Chinese language real-estate firms have tapped the general public U.S. greenback bond marketplace for $274 billion up to now 5 years, Scope analysts stated, citing Bond Radar knowledge, suggesting international banks may lose out on charges if such offers dwindle.

Insurers’ funding portfolios may be affected, stated Volker Kudszus, Sector Lead for EMEA Insurance coverage at S&P International (NYSE:) Scores.

“We aren’t involved by direct publicity of European insurers to Evergrande, however oblique publicity, e.g. by means of investments within the Chinese language fairness or actual property market, may see some volatility,” Kudszus stated.

Insurers Prudential (NYSE:), Ageas and Swiss Re (OTC:) had been prone to have probably the most publicity to Chinese language actual property, Morningstar analysts stated this week.

Ageas stated its Chinese language three way partnership firm had no direct publicity to Evergrande however round 2% of the company bond portfolio was invested in highly-rated Chinese language actual property debt.

“Solely additional widespread spillover to the final inventory markets would have an effect on our outcomes,” an Ageas spokesperson stated.

Prudential Chief Government Mike Wells informed CNBC this week that the insurer’s publicity to Evergrande was “de minimis”, and that lower than 5% of the insurer’s bond holdings had been in Chinese language actual property.

Prudential additionally has a three way partnership in China.

Swiss Re didn’t have direct investments in Chinese language property in its actual property portfolio, a spokesperson stated.