Last checked at 
* Banks face wider hit to trading, wealth management lines
* HSBC and Standard Chartered seen as most likely impacted
* Banks say no direct exposure, limited second order impact
* Insurers face volatility in investment portfolios
By Lawrence White and Carolyn Cohn
LONDON, Sept 24 (Reuters) - HSBC and Standard Chartered
could face spillover damage to their profits and balance sheets
from the debt crisis enveloping China Evergrande Group
even though the two banks say they have limited their direct
exposure, analysts have warned.
Other banks and insurers could also suffer indirect effects
such as loss of fees or a devaluation of their investments.
HSBC and StanChart make a big chunk of their profits in
China and Hong Kong and they have been the foreign banks most
involved in underwriting syndicated loans for developers there.
That means they are likely to face the most immediate
second-order impacts, analysts at JPMorgan said in a research
report.
HSBC and Standard Chartered both declined to comment on the
report.
Evergrande has left global investors guessing over whether
it will make a key interest payment, adding to fears of big
losses for bondholders and sending tremors through China's
property sector and economy.
Hong Kong and mainland China accounted for around 84% of
HSBC's profits in 2020 while Greater China and North Asia
contributed 81% of StanChart's profits last year, according to a
Reuters analysis of filings by the two companies - underscoring
the region's importance to their overall businesses.
The two have the most direct lending exposure among foreign
banks to China's property sector - $17 billion or 1.5% of group
assets for HSBC and $1.3 billion or 0.5% of group loans at
StanChart, according to JPMorgan.
The property sector contributes 14% of China's GDP or 25% if
indirect contributions are included, JPMorgan said, and property
loans are worth some 6.6% of total loans, meaning a hit to the
sector could have significant wider economic impacts.
HSBC and Standard Chartered have both said they have no
direct exposure to Evergrande, and that they have taken steps in
recent years to carefully manage their exposures to any one
sector.
HSBC has already sold all positions in its China bond or
Asia credit portfolios with exposure to Evergrande, a source at
the bank said.
Citing Dealogic data, JPMorgan said HSBC has been involved
in underwriting 39 outstanding syndicated loans for Chinese
developers while StanChart has worked on 18 such deals, which
could come under pressure if there are wider property sector
defaults.
In a syndicated loan banks typically underwrite the deal and
then sell the debt to other investors, but may keep some of the
exposure on their books.
"There is a risk that this is not an idiosyncratic event but
an industry-wide problem which could result in significant
spillover damage," JPMorgan said.
The U.S. bank said it estimates there could be a further 11
defaults worth some $30 billion this year across the Chinese
high-yield property sector, amounting to a 23% default rate.
MARKET CHILL
Other European financial firms also face a negative impact
on business lines such as capital markets, asset management and
private banking, said Dierk Brandenburg, head of financial
institutions at ratings agency Scope.
"These will impact the profit and loss figures of Europe's
globally active banks in the coming quarters, as could the
ensuing regulatory crackdown by Chinese authorities," he said.
Chinese real-estate companies have tapped the public U.S.
dollar bond market for $274 billion in the past five years,
Scope analysts said, citing Bond Radar data, suggesting foreign
banks could lose out on fees if such deals dwindle.
Insurers' investment portfolios could also be affected, said
Volker Kudszus, Sector Lead for EMEA Insurance at S&P Global
Ratings.
"We are not concerned by direct exposure of European
insurers to Evergrande, but indirect exposure, e.g. through
investments in the Chinese equity or real estate market, might
see some volatility," Kudszus said.
Insurers Prudential, Ageas and Swiss Re
were likely to have the most exposure to Chinese real
estate, Morningstar analysts said this week.
Ageas said its Chinese joint venture company had no direct
exposure to Evergrande but around 2% of the corporate bond
portfolio was invested in highly-rated Chinese real estate debt.
"Only further widespread spillover to the general stock
markets would have an impact on our results," an Ageas
spokesperson said.
Prudential Chief Executive Mike Wells told CNBC this week
that the insurer's exposure to Evergrande was "de minimis", and
that less than 5% of the insurer's bond holdings were in Chinese
real estate.
Prudential also has a joint venture in China.
Swiss Re did not have direct investments in Chinese property
in its real estate portfolio, a spokesperson said.
(Reporting By Lawrence White and Carolyn Cohn; Editing by
Catherine Evans)
