TheChek News Flow

Troubled loans double at Europe’s banks

European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising, according to analysis that provides a disquieting backdrop to the region’s forthcoming assessment of lenders’ balance sheets. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the "uncertain economic climate". Richard Thompson, a partner at PwC, said the "reshaping" of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012. The PwC figures come after the European Central Bank this month unveiled plans for a comprehensive assessment of the health of the eurozone’s banking system as it prepares to take on responsibility to oversee the region’s banking sector. The ECB’s probe will encompass a wide range of bank assets and will go on to subject balance sheets to "stress tests" aimed at assessing how resilient lenders are to shocks. The review of banks’ asset quality will attempt to use more closely harmonised definitions of NPLs in a bid to offer greater clarity about the respective states of different euro-area banking sectors. As things stand, cross-country comparisons are riddled with uncertainties because of the different methodologies used. PwC’s figures, which are derived from lenders’ accounts, showed that Germany, the EU’s biggest economy, had the highest amount of non-performing loans at the end of 2012, at €179bn, unchanged on the previous year’s number. Spain had €167bn of NPLs, up sharply from the €136bn recorded for 2011. Britain’s €164bn of non-performing loans represented a decline from €172bn in 2011. Lee Tyrrell-Hendry, an analyst at Royal Bank of Scotland, said there was likely to be an increase in loan provisioning and sell-offs of distressed assets by banks as the ECB’s asset quality review takes its course over the coming months. "I expect the banks would accelerate the deleveraging process," he said. Mr Thompson said PwC was seeing increasing numbers of outside investors consider purchases of loan portfolios, with major US funds the most active but interest also coming from sovereign wealth funds and far-eastern investors. "We know of over 150 different investor groups who are taking a close interest in this market," he said. "As the banks try to position themselves to meet the Basel III capital requirements and react to the ECB’s stress tests following the asset quality review we expect more assets to come to market in 2014 and beyond."

Michael Kors to Replace NYSE Euronext in S&P 500, Change to take place after close Nov. 1.

Apple upbeat over iPhone sales drive

Apple stands at a turning point with Wall Street as it suggested that earnings could return to growth on the back of renewed momentum in iPhone sales. Tim Cook, chief executive, said Apple was "stronger than ever" and would consider returning more cash to shareholders by the beginning of 2014, amid calls for an increased buyback programme. The more positive outlook comes despite an 11 per cent drop in full-year net profits and after a year when Apple’s share price fell heavily after hitting an all-time high. The iPhone maker reported a 5 per cent year-on-year decline in earnings to $8.26 per diluted share in its fiscal fourth quarter, beating consensus forecasts at $7.93 per share. Revenues were up 4 per cent to $37.5bn while net income fell to $7.5bn. The results mark a sharp slowdown in growth compared with a year ago as its gross margin narrowed from 40 per cent to 37 per cent. While iPhone unit sales grew 26 per cent year over year to 33.8m, exceeding expectations, iPad sales of 14.1m were flat on the previous year and below analysts’ forecasts, as customers awaited new devices. However, Apple’s guidance on revenues and margins implies that its earnings could return to growth for the first time in a year, according to Walt Piecyk, analyst at BTIG Research. Gross margins, a metric watched closely by Wall Street, are depressed by $900m worth of revenue that will be deferred to future years, as a result of Apple’s decision to give away its Mac operating system and its iWork and iLife apps for iPhone and iPad. Mr Cook said the quarter represented a "strong finish" to its financial year and again hinted at the prospect of "new product categories with significant opportunities" in the coming year. A stronger push into television and a new wearable "iWatch" are rumoured for 2014 launches. "We are winning with our products in all the ways that are most important to us," namely usage, customer satisfaction and loyalty, Mr Cook added. Apple said more than $36bn had been returned to shareholders in the past five quarters through dividends and share buybacks, as the company comes under pressure from activist shareholder Carl Icahn to scale up its cash return programme to $150bn. Mr Cook said the board was engaged in an "ongoing" discussion about capital reallocation, and would "actively seek" feedback from investors on its future plans. "We will announce any changes to our programme in the first part of the new calendar year," he said. Apple said that with more than three-quarters of its cash now held offshore, its domestic cash reserves that are available for paying dividends and buying back shares have "stopped accumulating". "We have invested essentially all of the increase in net cash since the beginning of our capital return programme in 2012," said finance chief Peter Oppenheimer. Apple gave guidance on revenues for the crucial Christmas quarter of $55bn to $57bn, ahead of Wall Street’s current expectations, but with gross margins of 36.5 per cent to 37.5 per cent, on the lower end of analysts’ expectations. Its stock initially fell 4 per cent in after-hours trading but then recovered to gain as much as 1 per cent, as Apple explained that margins would be closer to 38.5 per cent if not for the deferred revenues from its software giveaway. It launched its latest iPhones in the last few days of September. The company said it had sold 9m of its flagship devices in the opening weekend, up from 5m over the previous launch weekend the year before. The smartphone went on sale in China on the same day as in the US and Europe for the first time, but the iPhone 5s, which boasts gold casing and a fingerprint reader, has faced supply shortages. Anecdotal reports have suggested that the more expensive 5s has been outselling the cheaper, plastic 5c, which comes in a range of colours. The iPhone’s average selling price continued to fall in the last quarter, to $577 from $619 a year ago, Apple said, as more customers opted to buy cheaper or older versions of its smartphone. The iPad stabilised at an average of $439. Last week, Apple revealed its latest iPads, which will go on sale on Friday, completing its Christmas line-up for 2013. The company said it had sold almost 170m iPads in total since its tablet first emerged in 2010. Apple stock is still trading below its all-time high of $702.10 but has seen a 20 per cent rally in the past three months. It closed at $529.88 on Monday, up less than 1 per cent for the day.

Swiss open criminal probe in F1 scandal

Swiss prosecutors have begun a criminal investigation into the Formula One bribery scandal, potentially opening another front in the legal battles being fought by F1 chief executive Bernie Ecclestone. Prosecutors in Geneva will examine the circumstances of a $44m payment to German banker Gerhard Gribkowsky, who worked on the motorsport’s sale to private equity group CVC in 2006. Some former F1 stakeholders claim the deal undervalued the company. The money was paid to Mr Gribkowsky by Mr Ecclestone, the longstanding F1 chief executive and Bambino, the Ecclestone family trust. The investigation comes after Mr Ecclestone was served with an indictment from German prosecutors, investigating allegations of bribery earlier this year. Any new investigation of the sale may complicate CVC’s efforts to float F1 later this year. CVC previously attempted to float F1 – one of the most profitable deals in the private equity group’s history – in 2012 but pulled the initial public offering because of market turmoil. The investigation by Swiss prosecutors was triggered by the receipt of third party complaint. It will attempt to establish the facts of the case, whether it falls under Swiss jurisdiction and whether the payment was criminal under Swiss law. No charges have been laid. Mr Ecclestone and Bambino did not respond to emails asking for comment. The developments come a year after Mr Gribkowsky was jailed for eight and a half years. The judge in the case said Mr Ecclestone was the "driving force" when the German banker accepted corrupt payments related to the sale of F1. Mr Ecclestone said he was "shaken down", saying that he was being blackmailed by the German banker, who had threatened to reveal Mr Ecclestone’s tax affairs. A judge is expected to announce in the new year whether Mr Ecclestone will be brought to trial in Germany. Mr Ecclestone also faces another day in court in London this week when former F1 stakeholder Constantin Medien brings its case against the 83-year-old billionaire, claiming the motorsport was undervalued when it was sold to CVC. Constantin Medien claims that an F1 stake held by BayernLB, the German bank, in which the media group had an interest, was undervalued when the motorsport was sold to CVC in 2006 for $820m. Constantin Medien is seeking damages of up to $171m. If it is successful, then BayernLB – which owned 47 per cent of F1 – could be in line for a payout of up to $1.5bn. The case will begin on Tuesday and is expected to last about six weeks.

Talisman Energy: Icahn discloses 6.96% stake, up from 5.97% stake reported on Oct 7

After Hours Summary: NTRI +12.9%, DATA +7.2%, MAS +4.7%, STX -4.5%, AGNC -3.6%, AAPL -0.2% following earnings/guidance

WRAPX After Hours Gainers:

Companies trading higher in after hours in reaction to earnings: - NTRI +12.9%, DATA +7.2%, MAS +4.7%, JLL +3.3%, PRE +2.4%, LINE +1.8%, HIG +1.8%, CHE +1.5%, CNO +1.2%, NCLH +1%, RVBD +1%, MIC +1%, FMC +0.3%, IDTI +0.1%

Companies trading higher in after hours in reaction to news: - KORS +3.7% (to replace NYSE Euronext (NYX) in the S&P 500), - BTH +3.2% (Bloomberg reporting co as received an offer to be acquired by CVSL Inc. for $268 mln), - IM +1.0% (announced acquisition of Shipwire, a provider of global fulfillment services for emerging multi-channel brands), - TLM +1.0% (Icahn discloses 6.96% stake, up from 5.97% stake reported on Oct 7), - GPS +0.8% (Lone Pine Capital disclosed 5.4% passive stake),

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: ECOM -9.7%, ARR -5%, STX -4.5%, AGNC -3.6%, ICAD -2.2%, HLF -1.4%, OLN -1.1%, BHLB -0.9%, CMP -0.8%, GGP -0.6%, ALSN -0.4%, PEI -0.4%, AAPL -0.2%, OII -0.1%, ADVS -0.1%

Companies trading lower in after hours in reaction to news: - ECOM -9.7% (announced proposed follow-on offering of 5 mln shares; 1 mln shares to be offered by co and 4 mln shares to be offered by certain selling stockholders), - CLSN -9.4% (announced 1 for 4.5 reverse stock split), - SHO -3.4% (announced public offering of 20 mln shares of common stock), - CLNY -3.1% (announced public offering of 10 mln shares of common stock), - FNB -2.2% (announced capital action plan and commences $50 mln common stock offering), - EROC -2.0% (decreased quarterly distribution ~32% to $0.15 from $0.22 per unit; sees Q3 adjusted EBITDA of $62.8 mln), - SLG -1.2% (announced proposed offering of 2.6 mln shares of common stock)

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Pioneer’s Permian Oil Seen Commanding $40 Billion Bid: Real M&A 2013-10-29 01:35:32.537 GMT

(For a Real M&A column news alert: SALT REALMNA <GO>.)

By Brooke Sutherland and Edward Klump Oct. 29 (Bloomberg) -- Pioneer Natural Resources Co., the energy explorer with more than 7,000 wells in the largest U.S. oil field, may draw buyers from Chevron Corp. to ConocoPhillips to one of the industry’s biggest takeover targets. Pioneer’s market value more than doubled this year to $29 billion as investors wagered its acreage in the $5 trillion Permian Basin oil trove will boost profit and lure acquirers. Suitors would have to offer at least a 30 percent premium, or in the range of $275 a share, said Capital One Securities Inc. That would value that company at about $40 billion, approaching Exxon Mobil Corp.’s record North American bid for XTO Energy Inc., according to data compiled by Bloomberg. “They are the big kahuna in the most attractive oil play in the U.S.,” Fadel Gheit, an analyst with Oppenheimer Holdings Inc. in New York, said of Pioneer in a phone interview. “The onus is on the buyer to believe that, ‘You know what, I can double or triple what I am buying, so I am justified paying the premium and chasing the stock.’” While fluctuating oil prices may make energy companies cautious about such a large deal, billionaire hedge-fund manager and Pioneer shareholder John Paulson said this month that the explorer’s proven reserves and production in low-risk, predictable areas make it a possible target. Pioneer also could give potential acquirers such as Chevron or Royal Dutch Shell Plc more expertise in the techniques required to extract oil from the Permian’s shale bands, and the larger companies could spend to ramp up production, said Iberia Capital Partners LLC.

Permian Presence

Susan Spratlen, a spokeswoman for Irving, Texas-based Pioneer, declined to comment on whether the company would be interested in selling itself. Pioneer was among the 10 largest holders of Permian net acreage at the end of the third quarter, according to data compiled by Bloomberg. In 2012, the company said it drilled 691 wells in the Permian’s Spraberry field. The company estimates the Spraberry field in Texas contains more than the equivalent of 50 billion barrels of oil, more than any field except Saudi Arabia’s Ghawar, and said its own 640,000 net acres will yield at least 7 billion barrels. Those oil resources could lure acquirers, Paulson & Co. said this month in a third-quarter report to investors, a copy of which was obtained by Bloomberg News. The firm, run by Paulson, owned more than 2.4 million shares of Pioneer as of June 30, data compiled by Bloomberg show.

Shale Focus

“There aren’t too many other asset bases out there in the country with that sized position with contiguous land,” Cameron Horwitz, director of exploration and production research in Houston at U.S. Capital Advisors LLC, said in a phone interview. For larger energy companies willing to pay up for reserves, “Pioneer is certainly at the forefront of the opportunities.” The company said last week it agreed to sell its Alaskan oil assets for about $550 million, after divesting Tunisia and South African properties in 2011 and 2012. By focusing on the oil-rich Permian, Pioneer has made itself more appealing for potential buyers, according to Phillips Johnston, a New Orleans- based analyst at Capital One. While a takeover would be expensive, “from an asset perspective, Pioneer would certainly be an attractive takeout,” Johnston said in a phone interview. “It’s all very high-return projects and drilling locations.” ConocoPhillips, Chevron and Shell are probably looking to expand their Permian acreage and buying Pioneer would accomplish that, while giving them more expertise in unconventional drilling techniques, according to Eli Kantor, a New Orleans- based analyst at Iberia Capital.

Deep Pockets

“It’s going to take an incredible amount of capital to fully develop the resource,” Kantor said in a phone interview. “A larger, integrated company like a Conoco or a Chevron or a Royal Dutch Shell could buy and meaningfully increase the value by accelerating drilling activity.” Chevron has a market capitalization of $234 billion, while The Hague-based Shell is valued at $223 billion and Houston- based ConocoPhillips at about $90 billion. Representatives for San Ramon, California-based Chevron, ConocoPhillips and Shell said their companies don’t comment on deal activity or speculation when asked whether they would be interested in buying Pioneer. A deal may be too large and expensive for buyers to stomach, Gabriele Sorbara, a New York-based analyst at Topeka Capital Markets Inc., said in a phone interview.

Stock Rally

Pioneer shares surged 94 percent this year and closed yesterday at $206.87. The company’s enterprise value is 18 times its earnings before interest, taxes, depreciation and amortization, a higher multiple than all but two North American exploration and production companies valued at more than $5 billion, according to data compiled by Bloomberg. Both Sorbara and Capital One’s Johnston said suitors would need to offer at least a 30 percent premium, while Gheit of Oppenheimer said Pioneer may demand at least 50 percent. A bid at the lower end of the estimates would value the company at about $40 billion, including net debt, which would make it the largest announced deal for a North American oil or gas explorer since Exxon offered $41 billion for XTO Energy in 2009, according to data compiled by Bloomberg. The final value of Exxon’s stock deal was about $35 billion, the data show. Buyers would need to be comfortable with the future direction of oil prices, which could decline as supply from U.S. shale formations such as the Permian floods the market, Horwitz at U.S. Capital said.

Bullish Bet

“You really have to be a bull on oil prices to think about doing an acquisition like that,” he said. “The last thing somebody wants to do is make some big headline-grabbing acquisition and then 12 months from now, we’re staring at a $65 oil price.” U.S. benchmark crude touched $95.95 a barrel on Oct. 24, the lowest intraday price in about four months. Brent crude, the benchmark for much of the world’s oil, climbed yesterday to $109.61 a barrel. Brent probably will fall to the $70-to-$80 range, Oppenheimer’s Gheit said, without providing a timeline. Pioneer’s management may not want to sell until it has developed more of its Permian assets, said Leo Mariani, an Austin, Texas-based analyst at Royal Bank of Canada. Even so, Pioneer’s acreage may be lucrative enough to tempt buyers, said Rehan Rashid, an Arlington, Virginia-based analyst at FBR & Co. “Any one of the larger kind of global integrated companies that are out there need assets like these,” Rashid said in a phone interview. “The question is, are they too big for somebody to pay up right upfront for what’s going to come down the pipe 20 to 30 years from now?”

For Related News and Information: Oil’s $5 Trillion Permian Boom Threatened by $70 Crude: Energy NSN MV8ETO6TTDS7 <GO> Paulson Says Vodafone, Kodiak Potential Takeover Targets NSN MUVVXM6TTDSB <GO> Shale Drillers Pull Ahead of Global Oil Giants in Profit: Energy NSN MR2OKN6S972R <GO> Pioneer deal news: PXD US <Equity> TCNI MNA <GO> Real M&A columns: NI REALMNA <GO> Top deal stories: DTOP <GO> Top oil market stories: TOP OIL <GO>

--With assistance from Kelly Bit in New York. Editors: Beth Williams, Sarah Rabil

To contact the reporters on this story: Brooke Sutherland in New York at +1-212-617-0448 or bsutherland7@bloomberg.net; Edward Klump in Houston at +1-713-547-8407 or eklump@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at +1-212-617-5992 or srabil@bloomberg.net; Susan Warren at +1-214-954-9455 or susanwarren@bloomberg.net

Closing Market Summary: Stocks End Little Changed The S&P 500 punctuated an uneventful session with a modest gain, adding 0.1% to extend its October advance to 4.8%. Stocks alternated between gains and losses through the first two hours of action before the S&P climbed to a fresh record high of 1764.99. Final-hour selling cut the S&P's gain in half, but the index still finished ahead of the Dow (unch) and the tech-heavy Nasdaq (-0.1%), which was challenged by its flat line throughout the session. Although the third-quarter earnings season is far from being over, today featured just a handful of notable reports. Health care components caught the eye of some participants with Biogen (BIIB 254.43, +2.17) reporting solid results and Merck (MRK 45.35, -1.19) beating bottom-line estimates on below-consensus revenue. Although Merck weighed, the broader health care sector (+0.3%) drew strength from the 6.7% gain in Bristol-Myers Squibb (BMY 52.02, +3.25) after the company announced positive clinical trial data.

Generally speaking, countercyclical sectors followed in health care's lead as consumer staples (+1.2%) and telecom services (+0.4%) outperformed while utilities (-0.2%) lagged. Meanwhile, cyclical groups were a bit more mixed. Energy (+0.1%) and technology (+0.3%) finished in positive territory while consumer discretionary (-0.2%), financials (-0.2%), industrials (-0.1%), and materials (-0.6%) trailed the S&P. The technology sector ended among the leaders with its top component, Apple (AAPL 529.88, +3.92), adding 0.7% ahead of its after-hours earnings report. However, the Nasdaq could not build on the relative strength of the sector as momentum names like Facebook (FB 50.23, -1.72), Priceline.com (PCLN 1060.15, -10.70), and Netflix (NFLX 314.00, -14.03) weighed. Also of note, the industrial space was little changed as defense contractors and transports headed in opposite directions. The PHLX Defense Index shed 0.3% as the second largest component, Boeing (BA 129.88, -1.31), fell 1.0%. On the upside, the Dow Jones Transportation Average rose 0.4% as 12 of 20 members advanced. Treasuries held inside narrow ranges throughout the session, and the 10-yr yield ended at 2.52%. Trading volume was in-line with average as just over 730 million shares changed hands on the floor of the New York Stock Exchange.

Today's economic data was limited to September industrial production and pending home sales. Industrial production increased 0.6% after rising 0.4% in August (consensus +0.3%). That was the largest monthly increase since February.

The headline number is undoubtedly striking for its perceived strength. However, that thought process is actually a misnomer. Rather than coming from manufacturing growth, almost the entire gain came from a 4.4% increase in utilities production. After five consecutive months of declines from cooler-than-normal temperatures, utility production returned to more normal levels as weather conditions reverted to their averages. Manufacturing growth, which is key for economic growth, increased a very modest 0.1% in September, down from a 0.5% gain in August.

Separately, pending home sales for September tumbled 5.6%, which was worse than the 1.3% decrease forecast by the consensus. Today's reading followed last month's decrease of 1.6%. Tomorrow, September retail sales and Producer Price Index will be reported at 8:30 ET, August Case-Shiller 20-City Index will cross the wires at 9:00 ET, and August business inventories will be announced at 10:00 ET. Also at 10:00 ET, the October Consumer Confidence report will be released.

o Russell 2000 +31.6% YTD o Nasdaq +30.5% YTD o S&P 500 +23.6% YTD o DJIA +18.8% YTD

Iran tries to lure back western oil groups

Iran plans to convince international companies to invest in its oilfields by offering them more lucrative contracts as part of efforts to repair its battered economy and improve the Islamic Republic’s relations with the western world. The move comes as Tehran and Washington engage in the most constructive negotiations for several years about curbing Iran’s nuclear programme, which could pave the way for the loosening of sanctions that have crippled the oil industry, the engine of the Iranian economy. In a rare interview, Mehdi Hosseini, an adviser to the oil minister, said the current system of "buyback" contracts – which do not allow foreign companies to book reserves or take equity stakes in Iranian projects – would be scrapped. Mr Hosseini said the government was developing a "win-win" form of contract so leading companies "whether American or European" could benefit. Details are expected to be revealed in London next March, he said, as part of an effort to attract at least $100bn in investment over the next three years. The overhaul would mark a big step for a regime that has traditionally been hostile to any form of foreign ownership of its vast oil and gas wealth. Iran has the world’s largest gas reserves and fourth-largest oil reserves. "We hope that with these preparations the language of our contracts will be very, very close to international norms and that we will see them [international companies] queueing up once again," Mr Hosseini said. "Iran has a long history of aggressive resource nationalism, and I doubt that will change," said Robin West, senior adviser to IHS Energy, a consultancy. "They have always had very aggressive fiscal terms and always tried to shift the investment risk to operators while keeping the lion’s share of revenue." But he said the country’s mature reserves required heavy investment from western majors and, to coax them in, Tehran would have to offer "extremely attractive terms." "If they do, it’ll be a real break with the past," he said. Even if sanctions remain in force, the country should still be able to implement a new contract system that would attract investors, Mr Hosseini said. "I agree that sanctions may not be lifted formally, quickly, simultaneously and immediately," Mr Hosseini said. But he said there were ways that companies and governments could circumvent them, such as being granted waivers. American and European sanctions have caused a slump in oil production that has battered Iran’s economy. In September oil production fell to 2.58m barrels a day, according to the International Energy Agency – its lowest level since 1989, when the country was grappling with the impact of the Iran-Iraq war. Iran produced roughly 3.5m b/d in early 2011, before the US and European sanctions came into force. Mr Hosseini acknowledged that unattractive contracts had long deterred western companies from investing in Iran. "These problems did not let us keep good relations with oil companies in the long run. We will use all our previous experience . . . to understand and accommodate the logical expectations of oil companies. He declined to offer details of the new contracts but said the new scheme would not be a modified version of buyback nor production sharing and would not resemble Iraq’s technical service contracts. Future contracts would however allow for joint ventures for onshore and offshore projects. In 1997, Total defied US sanctions when it signed a contract worth $2bn to develop part of South Pars – the world’s biggest gasfield. Other international companies, such as Shell, Italy’s Eni and Norway’s Statoil, followed suit, even though they later complained about the low rate of return and refused to develop other fields. The stringency of current sanctions make any investment almost impossible. The IEA said this month that despite the first high-level talks between Iran and the US since the 1979 Iranian revolution, few expected sanctions to be eased soon. "Rather, most expect that turning the clock back on sanctions will be a drawn-out process based on tangible diplomatic progress with regard to the issues at hand, which many still view as a remote prospect," the IEA said.

The world's banking watchdog warns that foreign loans to companies and banks in China has tripled over the last five years and may be large enough to set off financial tremors in the West

Foreign loans to companies and banks in China have tripled over the last five years to almost $900bn and may now be large enough to set off financial tremors in the West, and above all Britain, the world’s banking watchdog has warned. “Dollar and foreign currency loans have been growing very rapidly,” said the Bank for International Settlements in a new report. “They have more than tripled in four years, rising from $270 billion to a conservatively estimated $880 billion in March 2013. Foreign currency credit may give rise to substantial financial stability risks associated with dollar funding,” it said. China’s reserve body SAFE said 81pc of foreign debt under its supervision is in dollars, 6pc in euros, and 6pc in yen.

The BIS said loose money policies by Western central banks since the Lehman crisis had cut the cost of foreign funding in East Asia, tempting firms to borrow heavily in dollars. The risk is that this process could go into reverse as the US Federal Reserve shuts the spigot, triggering off a dollar liquidity shortage across the region with even bigger knock-on effects than during the East Asian crisis in 1997-1998.

British-based banks hold almost a quarter of all cross-border bank exposure to China, and the figure has risen since 2008. By contrast, German, Dutch, French and other European banks have slashed their share from 32pc to 14pc, chiefly because they are retrenching to beef up capital ratios at home. Some of the British banks are likely to be branches of Mideast lenders or agents of foreign wealth funds, recycling money through London.

The BIS said the Asian dollar funding crisis after the Lehman crash should be a warning shot, though the sums in the region are already much larger. Korea was deeply alarmed by its reliance on European bank debt in 2008-2009 and has capped dependence, but China and Hong Kong have not followed suit. Talk of Fed `tapering’ in May this year offered a foretaste of trouble to come. It caused a ‘sudden stop’ in capital flows and a surge in dollar borrowing costs across much of Asia. The squall blew over when the Fed began to pull back again, but the BIS said the issue has not gone away. “It is worth recalling that the deflationary shock from the currency depreciations during the Asian financial crisis in 1997–98 interrupted the tightening phase of the Federal Reserve, with implications for asset markets,” said the report, entitled ‘Transmitting Global Liquidity to East Asia’. East Asia is a much bigger economic animal today than it was fifteen years ago. The BIS said “financial instability” in the region could complicate the West’s exit from quantitative easing. “There is a risk of blow-back effects to major economies.” The report said the loan-to-deposit ratio for foreign currencies in China has doubled from a well-behaved level of around 100pc in 2005 to nearer 200pc today. It is “not clear” where the extra foreign currency has been coming from, but seems to involve foreign exchange swaps and forms of credit off the BIS radar screen. At the same time bond issuance by Chinese firms has increase tenfold to almost $80bn in just eight years.

The Chinese state holds the world’s largest foreign reserves at $3.7 trillion and the country has capital controls, so there is little danger that China itself could suffer the sort of currency crisis that hit Korea, Indonesia, or Thailand in the 1990s. That does not mean foreign banks will necessarily get their money back if they lent too much to over-indebted Chinese companies. The Chinese state has already signalled that it will not rescue private firms with too much debt, letting the solar company Suntech Power default on $541m of notes. Premier Li Keqiang is pledging market discipline as part of his liberalization and reform drive. For China itself the risk is that a dollar funding crisis becomes the trigger for an internal financial crisis. Chinese credit has soared from 125pc to 200pc of GDP in just five years, prompting a string of warnings from Fitch Ratings over the stability of the financial system. A dollar squeeze could come at a very unwelcome moment.