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HSBC and Standard Chartered could face additional damage to their profits and balance sheets because of the debt crisis engulfing China Evergrande Group, even though both banks say they have limited their direct exposure, analysts warned.

Other banks and insurers could also suffer indirect impacts, such as loss of fees or depreciation of their investments.

HSBC and StanChart make most of their profits in China and Hong Kong, and they were the foreign banks most heavily involved in underwriting syndicated loans to developers there. That means they are likely to face the most immediate second-order strikes, according to a JPMorgan research report.

HSBC and Standard Chartered declined to comment on the report.

Evergrande has kept global investors guessing whether it will make a key interest payment, adding to bondholders' fears and causing turmoil in China's real estate sector and economy.

Hong Kong and mainland China accounted for about 84 per cent of HSBC's profits in 2020, while Greater China and North Asia contributed 81 per cent to StanChart's profits last year, according to a Reuters analysis filed by the two companies, highlighting the importance of the region to their business as a whole. .

According to JPMorgan, the two banks have the largest direct credit exposure among foreign banks to China's real estate sector - $17 billion or 1.5% of group assets for HSBC and $1.3 billion or 0.5% of group loans for StanChart.

According to JPMorgan, the real estate sector accounts for 14% of China's GDP, or 25% including indirect contributions, and real estate loans account for about 6.6% of total loans, meaning that the blow to the sector could have a much wider economic impact.

HSBC and Standard Chartered said they were not directly linked to Evergrande and that they had taken steps in recent years to carefully manage their risks in any one sector.

A bank source said HSBC had already sold all positions in its China or Asia bond portfolios linked to Evergrande.

Citing Dealogic data, JPMorgan said HSBC was involved in underwriting 39 outstanding syndicated loans to Chinese developers, while StanChart was working on 18 such deals, which could come under pressure in the event of wider defaults in the real estate sector.

In the case of a syndicated loan, banks usually underwrite the deal and then sell the debt to other investors, but may leave some of the risk on their books.

"There is a risk that this is not an idiosyncratic event but an industry-wide problem that could lead to significant secondary damage," JPMorgan said.

The US bank said it estimated that 11 more defaults could occur in China's high-yield real estate sector this year, worth about $30 billion, accounting for 23% of defaults.

COOLING MARKET

Other European financial companies are also facing a negative impact on businesses such as capital markets, asset management and private banking, said Dirk Brandenburg, head of financial institutions at ratings agency Scope.

"This will affect the profit and loss performance of globally active banks in Europe in the coming quarters, as will subsequent regulatory measures by the Chinese authorities," he said.

According to analysts at Scope, citing Bond Radar data, Chinese property companies have taken up $274 billion in the public dollar bond market over the past five years.

Insurers' investment portfolios could also be affected, said Volker Kudschus, head of the EMEA insurance sector at S&P Global Ratings.

"We are not concerned about the direct impact of Evergrande on European insurers, but the indirect impact, such as through investments in the Chinese stock market or the property market, could have some volatility," Kudschus said.

Morningstar analysts said this week that insurers Prudential, Ageas and Swiss Re are likely to have the biggest impact on Chinese property.

https://exness1.org/payments/ said its China joint venture was not directly related to Evergrande, but about 2% of its corporate bond portfolio was invested in China's highly rated real estate debt.

"Only further expansion into the stock markets as a whole could have affected our results," said their spokesman.

Prudential chief executive Mike Wells told CNBC this week that the insurer's exposure to Evergrande was minimal and that less than 5% of the insurer's bonds were in real estate in China.

Prudential also has a joint venture in China.

According to a Swiss Re spokesman, Swiss Re had no direct investments in Chinese real estate in its real estate portfolio.