Driven by regulation, banks in Japan, Hong Kong, Singapore and Australia are better prepared to move from the London Interbank Offered Rate (LIBOR) by year-end (and for some U.S. dollar settings, June 30, 2023) than their peers in emerging markets that remain in a policy vacuum. Asia’s exposure is significant, with $190 billion of tough legacy bonds across 560 issuances.
Source: Bloomberg Intelligence
Risk of market fragmentation rises
Unlike EU peers, banks in Asia aren’t subject to a centralized regional rulebook, which is partly why LIBOR transition remains fragmented. Those in Japan, Singapore, Hong Kong and Australia are, we believe, at a more advanced stage due to global-market exposure and regulatory pressure. Progress is slower in emerging markets, such as Malaysia and Indonesia, with banks reluctant to restructure their front books having received scant regulatory guidance, yet this exposes them to higher legal risk.
Regardless, the issuance of products linked to SOFR (Secured Overnight Financing Rate — the U.S. dollar LIBOR replacement) remains limited across Asia-Pacific. Only 18 floating rate notes have been issued, according to Bloomberg data, by companies including Bank of China, Macquarie and Mizuho.
Source: Bank of Japan, Bloomberg Intelligence
Japanese banks may have LIBOR-switch advantage
Banks in Japan may have a first-mover regional advantage, we believe, due to strong regulatory engagement. LIBOR transition remains a clear priority: the Bank of Japan in March wrote to the country’s lenders urging them to reduce contracts referencing JPY LIBOR, even if synthetic yen LIBOR can be used as a safety net. In 3Q20, its second consultation confirmed a commitment to publish formal rates that can be used for actual transactions by mid-2021. While banks were required to submit transition plans by July 1, much remains to be done (e.g., executing IT-system upgrades).
According to the BoJ’s 2020 survey, regional banks are at a less-advanced stage than the country’s major banks including Mizuho, MUFG, Resona and Sumitomo Mitsui, and risk losing market share if they don’t accelerate their plans.
Hong Kong banks on route to transition
Among banks in Asia, those in Hong Kong and Singapore, including DBS, OCBC, Hang Seng and Bank of East Asia, may be well-prepared, due to clear guidance from regulators HKMA and MAS. The bodies have urged lenders to develop transition plans with haste. Even foreign firms with a Hong Kong office, such as SBI and Bank Mandiri, are asked to comply. While banks are making progress, particularly after March’s announcement of the decision to publish the main U.S. dollar LIBOR for an extra 18 months, transition milestones will be tight. This is despite the HKMA’s decision to delay the target for banks to phase out LIBOR-linked products by six months to year-end.
Source: HKMA, Bloomberg Intelligence
Emerging Asia vulnerable with regulatory void
Banks in Asia’s emerging markets are the most exposed to legal risk and regional-market-share loss as they’re at the least-advanced stage of LIBOR-transition planning, in our view. This is primarily due to scant regulatory guidance. Bank Negera Malaysia, the central bank and regulator for banks such as Maybank and CIMB, only consulting on an alternative rate on May 19. In Indonesia, consultation remains in its infancy after a spate of local reform, leaving banks such as Mandiri, BCA and BRI in a policy vacuum. Thailand is best-positioned in these markets, with transition planned using THBFIX which will be discontinued by end-2021 as it graduates to THOR.
India’s vibrant Overnight Index Swap (OIS) market cushions its banks, such as HDFC, ICICI and SBI, to some extent from lagging on LIBOR transition.
