Global Investing

(By Alice Baghdjian)

Ravaged by the financial crisis and struggling with new capital regulations, European banks have scaled back overseas assets and slimmed loan books.

New loans to Asia, normally the largest recipient of developed market bank lending, fell by 27 percent over the last 12 months compared with the same period in 2010-2011.

But it was lending to emerging eastern European economies that fell most markedly, cut by more than a third.

Deleveraging accounted for as much 0.8 percent of eastern European GDP in the second quarter of 2012,  a separate study showed last month.

These companies, unlike their larger peers, won’t be able to ride out the cuts in lending on the recent wave of bond issuance in emerging markets, and will remain reliant on international bank loans, Creighton says.

The demand for funding continues to increase from businesses in emerging markets, but the crisis in Greece, Portugal, Italy and Spain has forced Western banks to retrench under intense pressure from politicians to increase lending in their home markets to spur their own sluggish economies. A funding gap has definitely been created in the emerging markets as a result.

Creighton reckons the introduction of stricter rules on banks’ capital reserves in Europe, known as Basel III, is also applying the brakes to lending, and emerging markets are the “major casualty”.

With the spectre of the euro zone crisis lingering, it seems unlikely that banks will increase their emerging market lending significantly in the foreseeable future.

But the picture is not gloomy for everyone.

The combination of demand for financing in emerging markets and reduced supply has led to increased margins — and better returns for investors, Creighton says.