Banks in Hong Kong and Singapore remained the strongest in this year’s The Asian Banker Strongest Banks evaluation, with the weighted average strength score at 4.06 and 3.61 out of 5, far above the average strength score of 3.2.

Hong Kong banks achieved a high strength score in all areas, except balance sheet growth. Their average score in the area of profitability is the highest in the region, as they benefited from improved net interest margin in 2018. Despite increasing investment in technology, the weighted average cost to income ratio of Hong Kong banks on the list was further enhanced to 37.5%, which was second only to Chinese banks. Their overall asset quality was better in 2018, with the average gross non-performing loan (NPL) ratio stabilising at 0.52% and the provision coverage ratio increasing to 127% from 106% in the prior year.

Hang Seng Bank topped the annual ranking of AB500 Strongest Banks by Balance Sheet, as the bank fared well in most indicators. It has strong profitability, with a high return on assets (ROA) of 1.6% and a low cost to income ratio of 29.4% in 2018. Besides, the bank remained well-capitalised, and its gross non-performing loan (NPL) ratio stood at only 0.24%.

On the contrary, Bangladesh and India continued to record the lowest average strength score among the 20 countries and territories, at 1.71 and 2.14, respectively, which is mostly triggered by their poor asset quality and low profitability. On average, the ROA of Indian banks remained negative, and their cost to income ratio was higher at 53.3% from 50.6%. The average gross NPL ratio of Bangladeshi banks stood at 20.3%, the highest in the region.

Decelerated balance sheet growth

Asia Pacific banks on the list registered average asset growth of 5.6%, compared to 6% in the year before. In particular, Pakistan and Vietnam saw the most significant drop in their banks’ asset growth, albeit still at a decent level, followed by Hong Kong, Thailand and Taiwan. Banks in Asia Pacific markets like Bangladesh, Cambodia, Indonesia, Macau, the Philippines, Sri Lanka and Vietnam still recorded a noticeable increase in assets of over 10%, while, in contrast, banks in Australia and Japan showed the asset growth below 3%.

Banks in the region saw their average credit growth contracting to 8.9% from 10.4% in the prior year, driven by the moderate credit growth posted by banks in markets like Hong Kong, Japan and Vietnam. The average bank lending growth in Hong Kong dropped considerably from 15.4% in 2017 to 6.1% in 2018, which can be primarily attributed to the lingering US-China trade tensions and subdued loan demand from Mainland China. In Vietnam, bank lending growth moderated from 19.6% in 2017 to 14.1% in 2018, the lowest since 2014, mainly due to the State Bank of Vietnam (SBV)’s tighter controls over credit growth in the banking system, along with the state-owned banks’ capital shortage.

 Meanwhile, average bank deposit growth slowed down slightly from 6.5% to 6.2% in the region. Apart from Hong Kong and Vietnam, markets like Sri Lanka, the Philippines and Taiwan also saw their bank deposit growth decelerate. Also, with loans growing faster than deposits in most markets, the average loan to deposit ratio in the region went up from 75% in the prior year to 77.2%.

Bad debt worries

Asia Pacific banking sector witnessed some improvements in asset quality, following great efforts to tackle bad loans. Gross NPL ratio averaged 1.6% in 2018 for AB500 banks, down marginally from 1.7% in the year before, and in the meanwhile, the provision coverage ratio was higher at 158%, from 144% in the year before. Banks in Australia, Hong Kong, New Zealand and South Korea achieved average gross NPL ratios below 1% and average provision coverage ratios above 100% in 2018. Notwithstanding the positive signs, the banking sector as a whole is still exposed to high levels of leverage and asset quality remains a crucial issue in the region.

Indian banks on the list managed to lower gross non-performing asset (NPA) ratio to 9.5% in financial year ended 31 March 2019, from 11.4% one year earlier, while increasing average provision coverage ratio from 52% to 61%. This can be attributed to the lower formation of new bad loans and higher recoveries and resolutions from large stressed assets under the Insolvency and Bankruptcy Code (IBC). Nevertheless, their average NPA ratio was still higher than 9.1% in the financial year ended 31 March 2017.

The reported NPL ratios of Chinese banks stabilised in 2018, partially because credit growth remained strong. Chinese banks have been required to recognise loans that are more than 90 days overdue as NPLs since June 2018, and in 2019, banks with nationwide operations have been informed that they must identify corporate loans overdue for more than 60 days as NPLs. Smaller Chinese lenders will be more affected if the new rule is strictly enforced nationwide, as the largest banks have already applied more stringent reporting standards. In addition, the ongoing US-China trade conflict continues to weigh on their asset quality. 

Consolidation among banks

In Japan, many regional banks have faced difficulty remaining profitable, and some of them have merged. However, consolidation has been slow in the country, as current anti-monopoly law blocks mergers between smaller banks outside of Japan’s major cities if the combined entity accounts for a dominant market share in the local community. The government is expected to ease antitrust rules that will enable regional banks to consolidate more easily.

Likewise, more bank mergers are expected in some other Asia Pacific markets such as India, Indonesia and Thailand, to boost operational efficiencies and scale. With the announcement of mergers of ten public sector banks into four at the end of August 2019, there will be only 12 public sector banks in India, against 27 in 2017. In Thailand, TMB Bank and Thanachart banks will be merged to better compete with larger regional rivals amid government efforts to encourage domestic mergers. Indonesia plans to ease bank merger rules further to speed up banking consolidation to strengthen the national banking sector.

Moving forward, most Asia Pacific banking systems will remain safe and sound. Overall, capitalisation, funding and liquidity are expected to be relatively stable across most markets, while the most challenging issues for banks is to maintain steady balance sheet growth and stable profitability and asset quality amid uncertainty.