NIKKEI ASIA Trade war Mounting fears of global recession hit banks in Asia Japanese lenders fall sharply on declining hopes of BOJ policy normalization - Updated on April 7, 2025 19:41 JST

 NIKKEI  ASIA 

Trade war

Mounting fears of global recession hit banks in Asia

Japanese lenders fall sharply on declining hopes of BOJ policy normalization

20250407 Asian Banks

Shares in Asian banks have been severely hit by growing fears of a global recession. 

(Source photos by Nanami Sato, Takaki Kashiwabara, Nozomu Ogawa, Reuters)

MITSURU OBE, KENJI KAWASE, KIM JAEWON and TSUBASA SURUGA

April 7, 2025 18:35 JST

Updated on April 7, 2025 19:41 JST

TOKYO/SEOUL/SINGAPORE -- Bank stocks led the sell-off in Asia on Monday, as fears intensified of a global recession in the wake of the sweeping tariffs introduced by U.S. President Donald Trump.

The sharp downturn came as investors calculated that lenders' asset quality and profitability would be hit by an economic downturn, which would also curb dealmaking.

The drubbing meted out to bank stocks was particularly severe in Japan, reflecting investors' receding hopes of rate rises that would have boosted profitability. The TOPIX banking subindex closed down 10.0%, compared with a 7.8% fall in the wider TOPIX index.

Hong Kong-based bank stocks were also hit hard. HSBC Holdings and Standard Chartered led the fall on Monday, declining by 14.8% and 16.1%, respectively. Bank of East Asia, a major local lender with a heavy reliance on mainland Chinese business, dipped by 11.2%, and Dah Sing Financial Group lost 12.2%. The benchmark Hang Seng Index, in which HSBC has the second-biggest weighting at 8.36%, lost 13.2%.

Gary Ng, Hong Kong-based senior economist at Natixis, said more internationally active banks have higher risks of being implicated in the tariff-led recession fears, in comparison to those limited to certain regions.

The falls of major Chinese state-owned lenders were relatively less severe between 8% and 11% for the country's big four -- Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China.

In Singapore, DBS Group Holdings fell 9.3%, while Oversea-Chinese Banking Corp. and United Overseas Bank declined 6.9% and 6.3% respectively.

Jayden Vantarakis, head of Asean equity research at Macquarie Capital said trade finance accounted for between 12-18% of Singapore banks' credit exposures. This part of their business would see a slow down if there was no respite from the new tariff regime, he said.

Eunice Tan, Singapore-based credit analyst at S&P Global Ratings, said trade-centric Asia-Pacific would be hit by slower global growth. "There is also a potential for risk-off sentiment to take root, amplifying the economic effects through raising financing costs."

In South Korea, shares in KB Financial Group declined 7%, while Hana Financial Group dropped around 6%. "The market reflects recession worries stemming from an intensifying trade war, and banking stocks are no exception," said Choi Jung-wook, a senior analyst at Hana Securities.

Investors' appetite for Japanese bank stocks had been rising on the expectation that the Bank of Japan would continue its policy normalization and allow banks to improve their profit margins. Until last month, MUFG -- Japan's largest bank -- was rewriting its all-time highs daily. MUFG shares have fallen by 26% since the end of March.

"Some investors apparently bought bank shares on borrowed money. They are now facing margin calls and may be forced to liquidate the positions," said Mutsumi Kagawa, senior market analyst at Marine Strategies. He noted that the worsening business environment could affect bank lending, which has been growing on the back of strong dealmaking activities such as mergers and acquisitions and management buyouts.

"Expectations for an additional interest rate increase this year have receded, so have expectations for an improvement in bank earnings," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

"There are concerns that banks will face rising credit risks," Kumano said. "At this point, the sell-off is based on expectations of credit losses, but they could well become real losses in the future."

The scaled-back expectations for policy normalization were also reflected in the yield on 10-year Japanese government bonds, which dropped to around 1.1% on Monday from close to 1.6% just 10 days ago.

The market turmoil has sparked speculation that the BOJ could intervene. Prime Minister Shigeru Ishiba has said that his government is considering support for industries hit by the tariffs, such as through providing short-term operating funds. During the COVID-19 pandemic, there had been precedents such as the BOJ injecting liquidity into the financial system by using bank loans as collateral. Kumano says it is not certain yet whether the BOJ will take similar steps this time.

Kagawa believes that the sell-off was overdone. He argues that Japanese banks have steadily increased dividends over the years amid growing pressure from both investors and regulators on listed companies to focus on shareholder interest. Investors are also demanding that Japanese companies use a large amount of retained earnings on their balance sheets more efficiently.

"There will be some adjustment to the business strategy in response to the Trump tariffs," Kagawa said, "but it is unlikely that the banks will change their policies of becoming more efficient with their retained profits."

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