Asia's banks are seen facing a bump-up in dollar-funding costs and potentially slower credit growth after Standard & Poor's historic US debt rating downgrade, strengthening China's case to push the yuan as a global alternative to the dollar.
Ratings agency S&P cut the US long-term rating by one notch to AA+ from AAA on Friday, sparking a sell off in global stock markets already roiling from concerns about the euro zone's debt crisis.
Banks in Asia have about 15-20 per cent of their loan book in US dollars, according to an estimate by Esmail Pili, head of Asian bank research at Macquarie Capital. Analysts said their demand and costs have been climbing.
"We have seen rising demand for US dollar loans by corporates throughout the region," said Christine Kuo, Singapore-based team leader for banking at Moody's Investor Service.
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"Banks have been raising US dollar funding to meet their customer demand. If there is tightening or there is great volatility in the US dollar market, that's where we think the impact will come in. Some of the banks will need to pay higher for US dollar funding or they may have to delay their capital market issuance should the market become too volatile," she added.
Moody's estimates Singapore's DBS and OCBC have loan-to-deposit ratios in US dollar of 140-160 per cent. That means they do not have sufficient US dollar deposits for loans but borrow from the wholesale market to finance corporate needs. The funding squeeze will again intensify calls for replacing the dollar as the reserve currency.
"This is probably one of the triggers that will get people looking at the RMB," said Frances Cheung, a strategist at Credit Agricole in Hong Kong, referring to the Chinese currency yuan, which is also known as the renminbi (RMB).
"With this downgrade, it'll probably have many people wondering if the US dollar should be the international reserve currency, which could drive use of the yuan," he said.
But given their small holdings of US debt, the downgrade won't translate into an immediate earnings hit for the Asian banks and insurers or forced them to raise capital.