Sunday,25 September 2022

Ongoing digitalisation and capital management contribute to bank resilience during pandemic

5 min read

Interviewed By Foo Boon Ping

CEOs and decision-makers of banks across Asia Pacific discussed how the second year of the pandemic has impacted the financial strength and stability of banks.

At The Asian Banker Strongest Banks by Balance Sheet Dialogue, CEOs and decision-makers of banks across Asia Pacific including Hajah Noraini binti Haji Sulaiman, deputy managing director at Bank Islam Brunei Darussalam (BIBD), Raymond Sia, CEO of Canadia Bank, Girish Sehgal, head of wealth management at ICICI Bank, Patrick D. Cheng, CFO at China Bank and Rene De Borja, controller at Metrobank discussed the impacts of the pandemic on the bank’s financial strength and stability. They also exchanged views on the top priorities of banks in a post-pandemic environment and how banks can transform business and operating models to create greater cost efficiencies and leverage innovation.

Bank of China (Hong Kong) was named the Strongest Bank By Balance Sheet in Hong Kong and Asia Pacific. In addition, BIBD (Brunei), Canadia Bank (Cambodia), ICICI Bank (India) and Metrobank (Philippines), were all recognised as the Strongest Banks By Balance Sheet in their respective countries, while China Bank is the second Strongest Bank By Balance Sheet in the Philippines.

Strongest banks across Asia Pacific were recognised at The Asian Banker Strongest Banks by Balance Sheet Briefing and Recognition Virtual Ceremony 2021. They demonstrated robust balance sheet performance despite the challenging year. This is based on a detailed and transparent scorecard that evaluates strength in six areas of balance sheet financial performance, namely the ability to scale, balance sheet growth, risk profile, profitability, asset quality, and liquidity.

 The following keypoints were discussed:

  • Banks are well-positioned to play a crucial role in stabilising economies and to deal with the heightened uncertainty
  • Phased withdrawal of government policy support and relief measures leaves high-impact borrowers exposed
  • Banks continue to invest in technology and maintain operational resilience, as new waves of COVID-19 pose further challenges
  • Banks have been proactive in capital management and credit risk management and demonstrate resilience to overcome extended balance sheet stress
  • Strengthened balance sheet enables banks to maintain their ability to support customers and communities
  • Redeploying, retraining and reskilling employees have facilitated operational productivity
  • Banks need to help their clients further digitalise and create a more digital ecosystem

Here is the edited transcript of the session:

Foo Boon Ping (BP): Welcome and good afternoon, ladies and gentlemen. Mathew Welchand I are very excited to be your hosts for this virtual ceremony of the Asian Banker’s Strongest Banks by Balance Sheet Programme. We're very happy to see you from different parts of Asia Pacific, from Brunei, Cambodia, India, Hong Kong and the Philippines. We hope that you're all safe and well at this time. We have a total of six banks and financial holding companies represented today that we are recognising and celebrating your achievement.

As you may be aware of The Asian Bank 500 is the world’s first and most authoritative annual rankings of the strongest banks based on balance sheet strength. Although the concept has been emulated by all other organisations, we remain the most comprehensive and robust evaluation of its kind anywhere in the world today.

Mathew Welch (MW): There's a lot of research on the programme that we share with the industry. The Asian Banker annual ranking of the largest banks and strongest banks by balance sheet started way back in 2002, known back then as the Asian Bank 300. In 2007, we expanded the ranking to include the strength and the balance sheets into our analysis. We've expanded the ranking to include the top 500 banks, so more banks now make it to the list, renaming it The Asian Bank 500.

In 2015, we introduced a ranking of the strongest banks in the Middle East and Africa. In 2019, the strongest Islamic banks ranking was inaugurated. These rankings are based on detailed and transparent scorecards that rank commercial banks, Islamic banks, and financial holding companies across six areas of balance sheet performance namely, the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity.

BP: The evaluation is conducted between June and August each year when banks and financial holding companies’ annual financial results become available. For the past two years, the pandemic has caused unprecedented disruption to the global economy. The banking industry and financial system at large tests having successfully weathered previous financial crisis have confronted the pandemic from a position of strength and are well-positioned to play an important role to help economies on their recovery and restore livelihood. Against this backdrop, this year's ranking reflects the impact of the pandemic on the performance of banks as it unfolded through the year. We especially considered the following in our evaluation of the bank's balance sheet, strength and resilience this year namely, the impact of banks’ digitalisation on their cost-to-income and cost of funding, how banks are recognising non-performing loans (NPL), and with that moratorium and relief support introduced by the governments.

MW: We look at the impact on asset quality given the record low-interest rate and the net interest market. How you are growing alternative sources of income, especially fee income and the impact of industry-wide consolidation as well as policy responses of government to the pandemic and the effect that all has on the pace and scale of the rebound or recovery. The Asian Banker 500 ranking is widely followed by investors, analysts and the media, as the leading source to assess the financial strength of commercial banks and financial holding companies. We publish and share with the industry the key findings and learnings from the programme, which our head of research, Mobasher Kazmi will be presenting now.

Banks are well-positioned to play a crucial role in stabilising economies and to deal with the heightened uncertainty

Mobasher Kazmi (MK): If you were looking at the COVID-19 pandemic-induced restrictions, it had a detrimental impact to the global economy. The banking industry as well has emerged relatively bruised but intact to play an important role in helping the economies recover. Against this backdrop, the financial information for the 2020 financial year was collated and incorporated into the assessment of how banks performed during this pandemic.

Overall, most banks in Asia Pacific have managed to maintain their operational resilience during the COVID- 19 pandemic. The Asia Pacific (APAC) banking sector is gradually recovering from the effects although the recovery is generally uneven. There remains a high degree of uncertainty and that will likely have an impact in bank performance which will continue to be constrained. We are seeing anecdotal evidence from the region that shows that bank customers have begun to resume their payments. There's a small fraction showing some sign of distress. The macroeconomic outlook is awash with some degree of uncertainty.

We can't rule out a weak and protracted recovery with a significant buildup of some element of deteriorated assets over the short to medium term. Even as banks strengthen their credit risk control capabilities. For the most part, and under regulatory guidance, banks across the region have been generally fast in dealing with a buildup of NPLs. There is a consistent focus on keeping clean balance sheets to maintain their ability to lend. We're seeing that banks must be in a position to extend financing to viable retail households, small businesses and corporates, and to accompany the ongoing structural transformation that we're seeing across regional economies towards a more digital and technologically advanced future, as well as one that is greener. Without being weighed down by all of these impaired exposures to various economic sectors that have been hit by the crisis.

This year's evaluation covers 22 countries, territories and regions. The 500 largest banks combined have  $71.8 trillion in total assets, $37.4 trillion in net loans and just under $50 trillion in customer deposits, and $425 billion in accumulated net profit. The aggregate total assets of the 500 largest banks in APAC expanded by 14.2% in 2020, so net positive overall. The top 10 ranking for this year remained largely unchanged, with China's big four banks retaining the top four spots. Chinese banks maintain a double-digit growth, with a 10.6% increase in aggregate total assets of the 183 banks on the list, rising to $38.2 trillion in 2020. ICBC was the largest bank with total assets increasing by 10.7% to $5.1 trillion. Mizuho Financial Group and Japan Post Bank switch places with Mizuho climbing one place to seventh. Despite its total assets growing by 8.7%, we see HSBC slipped from 11th place last year to 13th place this year. It was surpassed by two Chinese banks namely, China Merchants Bank and Shanghai Pudong Development Bank. In addition to some of the stronger asset growth of Chinese banks, this shift can be attributed to the appreciation of the renminbi against the US dollar.

From an APAC perspective, the Bank of China (Hong Kong) or BOCHK again topped the annual ranking of the AB 500 Strongest Banks by Balance Sheet. BOCHK excelled in the areas of scale, risk profile, asset quality, liquidity and it obtained a score of 4.21. It is the lowest in the last five years and this can be attributed to the decline it has registered in its return on assets (ROA), which declined to 0.86%. The gross non-performing loan (NPL) of the bank was contained in 2020, and its loan loss reserves to gross NPLs improved to 230% from 219% in 2019.

Overall, the weighted average strength scores of Hong Kong and Singapore banks remain the highest in this year's AB500 evaluation at 3.84 and 3.66, respectively. We've seen banks in Thailand, China, South Korea and Malaysia achieve higher strength scores than the average of the 500 largest banks in APAC at 3.24. The financial performance of Indian banks improved as well with a higher average ROA of 0.67%, a lower gross NPL ratio of 7.5% and an improved capital adequacy ratio (CAR) of 15.8%.

From a profitability perspective, looking at the APAC banking sector, we see a weakening in 2020. This was primarily due to the compressed net interest margins and the rise in loan loss provisions. On average, the ROA of banks on the AB500 list was down from 0.73% last year to 0.64% this year. Banks in Indonesia, Malaysia, Philippines and Thailand recorded the biggest drop in ROA. We're seeing the average ROA of Indian banks reaching 0.67%. Looking at it from private sector banks, though they registered an average ROA of 1.2%, it’s much higher than their public sector counterparts. Banks in Pakistan and Vietnam witnessed some improvements in their ROA. Looking at those, the average ROA of Chinese banks is slightly down to 0.81%.

In June last year, the Chinese regulatory authorities urged the financial institutions to give up almost $212 billion in profits. This was impacted and driven by the lowering of lending rates and fees, the deferring of loan repayments and the granting of more unsecured loans to small businesses. As a result, we've seen that the aggregate net profit of Chinese banks on the list contracted to $280.6 billion.

Phased withdrawal of government policy support and relief measures leaves high-impact borrowers exposed

From an average gross NPL ratio perspective, we've seen that it has risen moderately from 1.53% last year to 1.62%. As the COVID-related relief measures led to the deferred recognition of problem loans, banks in Indonesia and the Philippines have seen average gross NPL ratios deteriorate the most. The average gross NPL ratio of Philippine and Indonesian banks on the list went up considerably from 1.8% and 3% in 2019 to 3.8% and 4%, respectively. Philippine National Bank (PNB) had the worst asset quality among these banks with a gross NPL ratio of above 10%.

However, Indonesian banks have built sufficient loan loss buffers to weather these asset quality risks, and this is reflected by the significant rise in the average loan loss reserves (LLRs) to gross NPLs ratio. On average, banks in South Korea, Macau, Australia, Taiwan and Hong Kong achieved the highest score in asset quality while banks in Sri Lanka, Bangladesh, Brunei and India underperformed. The average gross NPL ratio of some of the Bangladeshi banks remains the highest at 13.6%, so there’s something to watch out for in that market.

We will move to the assessment of the strongest banks in the Middle East and Africa (MEA) region. Looking at the top 20 largest banks in the MEA region, it comprises five Saudi Arabian banks, four South African banks and four UAE banks. Qatar National Bank and First Abu Dhabi Bank retained their positions as the two top largest banks in the region, with $282 billion and $250 billion, respectively at the end of 2020. Emirates NBD and Standard Bank Group remained in third and fourth place, respectively.

From a strength perspective, Saudi Arabia-based Al Rajhi Bank (ARB) and the National Bank of Egypt (NBE) were the strongest banks in MEA. The top 10 banks in the Middle East were predominantly Saudi banks. We had some Qatari banks and one from Kuwait, UAE and Bahrain. ARB had the highest ROA among all the banks. From an African perspective, there were three Nigerian banks and South African banks, but the NBE registered the strongest balance sheet growth and demonstrated good asset quality.

On the Middle Eastern side, with a weighted average strength score of 3.83 and 3.65, we had Saudi and Qatari banks performing much better than their Middle Eastern counterparts. On the African side, the weighted average strength score of African banks on the list declined to 3 from 3.13 in last year's evaluation. Looking at the average ROA in 2020-2021, Middle Eastern banks had reported net losses. This was fairly widespread across the region. The profitability of African banks weakened in 2020 with average ROA down, as well as average cost-to-income ratio up. What does this mean from an NPL perspective, broadly in the region? The COVID-related support measures have postponed the asset quality issues temporarily, but the asset quality of banks in Kuwait and Saudi Arabia remain strong. From Africa, the Egyptian banks demonstrated the strongest asset quality at 3.5% average gross NPL.

From an Islamic banking perspective, the top 10 banks ranking of the largest Islamic banks remained almost the same, with the exception of CIMB Islamic Bank, which has moved up one notch to the ninth spot, while Al Baraka Banking Group dropped to the 10th place. Saudi Arabia-based ARB again topped the ranking of the largest Islamic banks in the world, with total assets up by 22% to $125 billion in 2020. Dubai Islamic Bank and Kuwait Finance House maintain their second and third places, respectively. In the strongest Islamic banks, they were predominantly Saudi-based, three Qatari-based, two Turkish banks and one each from Kuwait and Pakistan. ARB was on top of the ranking of the strongest Islamic banks.

This year's rankings fully reflect the impact of the pandemic on the financial performance of banks. The pandemic is expected to weigh heavily on the financial results, looking at this year as well. With the recovery largely in place, the industry has turned a corner and they are encouraging signs of normalcy returning. Banks remain under heightened acid quality pressure, and they will report some constraint profitability numbers this year. Nevertheless, both banks are positioned better to weather this crisis than compared to the global financial crisis. It will be interesting to see how the ongoing supply chain crisis will have a knock-on effect on bank balance sheet quality, as we're seeing creeping inflation and product rationing and rising energy prices, coupled with anaemic growth, raising this ugly spectre of potential stagflation.  Evergrande type events are unlikely to be contained and the risk of contagion is relatively limited, as we're seeing that the balance sheet exposure of banks across the region to China's property and real estate market remains rather limited. With that said, we do expect slower balance sheet asset growth of Chinese banks in 2021. With that, I'd like to conclude the briefing.

BP: We see a few encouraging signs that the global economy is the only economy in the region emerging from COVID worries over the supply chain, especially on asset quality that postponed the effect of debt relief. We’d like to get some responses to the key points from your briefing. In particular, how the industry is preparing itself to emerge from COVID? Despite the disruption from the pandemic, financial institutions have proven to be extremely resilient and robust, especially for the consumers. Banks operate as normal as you can, enabling the consumers and small businesses to access financing for them to conduct transactions remotely.

MW: As banks, you're providing critical financing to help the economies rebuild, including more sustainable and greener solutions. The safe and efficient conduct of banking and financial services during the height of the COVID-19 lockdowns and work from home measures bear testimony to your operational resilience and the levels of digitalisation and automation that you've achieved.

BP: We're starting a dialogue with our guests. The first thing we want to talk about is, now we are going into almost passing the second year of the COVID pandemic, and how has that impacted your financial health, strength and stability? What are some of the priorities going forward? I’d like to get some comments from Hajah Noraini binti Haji Sulaiman from BIBD Brunei.

Banks continue to invest in technology and maintain operational resilience, as new waves of COVID-19 pose further challenges

Hajah Noraini binti Haji Sulaiman (HNHS): For Brunei, last year was a bit of a breeze from a pandemic point of view, but it has accelerated the uptake for the digitalisation for the Bruneians. It was a good thing coming out of the pandemic.  Speaking for Brunei, the second wave has hit a bit harder than the first wave for us especially with the Delta variant and it can be the infectiousness of this particular string. Digitalisation has kicked in well because now it has become the norm for our clients. It has been weathered better by our clients by the first wave that we experienced last year. Going forward, it has pushed us to go on a more accelerated basis for digitalisation. We are looking into other means. We are starting a journey of sustainability that augurs well with the younger generation. Digitalisation and sustainability are something that we look forward to uphold and support in the future.

BP: Those are some of the new themes that are emerging as we go into the second year of the pandemic. As we're doing the outlook for the industry, we're looking at the arrival or the advent of the vaccine. There might be some respite and then we were hit by the Delta variant that seemed to be more severe than what we went through last year. They have greater new challenges in disruption to the supply chain. Banks continue to work on the digitalisation as well as on sustainable alternative.

We’d like to hear from Rene De Borja, controller at Metrobank for your perspective on how banks in the Philippines are responding to the second year of the COVID pandemic.

Banks have been proactive in capital management and credit risk management and demonstrate resilience to overcome extended balance sheet stress

Rene De Borja (RB): Over the past 18 months, we've took a very proactive and prudent approach in handling the pandemic. Our efforts are mainly centred on protecting the health and safety of our employees and our customers. We made sure that our capital and liquidity positions are more than adequate. We've set aside loan loss provisions that we believe were appropriate, given the level of uncertainties that continues to prevail in 2020.  Early on in the year, we took a very cautious but optimistic view, especially knowing that the vaccines are already available at that time.  Unfortunately, Delta variant, at the middle of the year prevented us from opening the economy further, but we are in a very good position right now to deal with prolonged economic uncertainty and are just as ready to take on growth prospects, increase business activities, even our strong balance sheet position.

BP: Thank youRene. Heightened uncertainty is the theme for 2021. I'd like to hear from Raymond Sia, CEO of Canadia Bank Cambodia, how in the second year of COVID are you?

Raymond Sia (RS): Over the past year, we have seen more small and medium-sized enterprise (SME) loans being granted in the country using some of the schemes that have been instituted by the government under SME Bank. The launch of a credit guarantee scheme over the past 12 months, where customers are able to use that scheme to use it as collateral to get financing.

Redeploying, retraining and reskilling employees have facilitated operational productivity

For us in Canadia Bank, we continue to look at how we can protect and grow our balance sheet. One area of focus is on investment in technology. This is an area where we will continue to invest in technology to see how we can further improve the overall customer experience, as well as simplify some of the processes that we have. Another area is retraining and redeploying our people. What the pandemic has taught us is that there are new skill sets that we can learn. One message that we always send across our bank here is that let's not waste this opportunity, learn something new from an experience like this. We’re retraining our people, reskilling them into some of the areas where they can be a lot more effective in productivity in the bank.

BP: We see that a lot across the industry as well. This whole theme of reinvention using pandemic, as you mentioned not to waste prices, but to convert something positive from it. Girish Sehgal from ICICI Bank, we hear from Mobasher’s presentation that in the past year in ROA, there's been some recovery for Indian banks, although the content of asset quality still remains. Tell us, what are you seeing there from ICICI Bank's perspective?

Girish Sehgal (GS): The key like everybody else highlighted is digitisation. We have tried and ICICI Bank is always known for its digital prowess among clients. This gave us a decent opportunity to ensure that all our products and processes, if at all, something goes missing  to be digitised and brought on mobile banking and internet banking platform. All in all, digitisation played a key role and are the next big thing that we did was, we launch a virtual relationship management platform so that the relationship teams started calling customers because there was a slowdown in the footfalls because of social distancing norms. The key was reaching out to customers, treating them with a lot of care, empathy, emotional support, frequency of engagement. Everything was done through cloud calling, where every call is getting recorded, and a strong corporate memory was getting created. In all, digitisation, virtual relationship management and instant accounts and loans, pre-approved offers, all these help in this coming over this last 18-month crisis.

BP: The whole pivot to the virtual environment, then the operating of businesses as usual. Next, we’d like to hear from Patrick Cheng, CFO of China Bank for your perspective. Congratulations China Bank. For the first time, you’re in the highest ranking in the Philippines, among the strongest bank in the country.

Strengthened balance sheet enables banks to maintain their ability to support customers and communities

Patrick Cheng (PC): We have been managing prudently through this crisis. As we came into this, we made sure that we took care of all our key stakeholders, the employees, even the agency employees that we have and the clients. We have tried to do them, even go a little bit beyond some of the regulatory measures just to make sure that they are held through all throughout this has been the key. We have used this time to make sure that we keep in close contact with our key clients and try to continue to provide them support while at the same time, making sure everyone is aware and accelerating some of our key digital initiatives.

MW: Thank God, we all did our digitalisation before COVID. It certainly served as a very helpful accelerant of digitisation. As we begin to look at what are the priorities post-pandemic. The next question for our panel here is what are the key institutional priorities for the post-pandemic environment? What do you see as the outlook as we come out of this, and perhaps again, if I can first ask Hajah Noraini binti Haji Sulaiman from BIBD, Brunei on your thoughts, key institutional priorities going forward?

Banks need to help their clients further digitalise and create a more digital ecosystem

HNHS: I already mentioned more of the digitisation. Again, sustainability is taking focus more into the world and probably will. I speak for Brunei, the take-up has been encouraging, but there's a lot that we need to do to help our clients to accelerate or pick up the digitisation agenda. We are the biggest bank in Brunei in helping the country, Brunei, as a partner for the Brunei government in furthering digitisation because it can cripple a system because of the pandemic. We have seen that it could have. Fortunately, we are able to avoid that and came up better. What it has shown us is, it is not just us as a financial institution that can afford this. We are all forward-looking, we invest, but we need to bring the whole system within Brunei, the whole ecosystem in a country and globally. It has to be hand in hand because you can't come out as a winner alone. This is a team race to do that.

MW: Thank you. That's, particularly interesting what you're saying Hajah Noraini about how, first as banks, we had to make sure we digitised. Now, it's about helping our clients digitise and helping the whole ecosystem. You're doing that in Brunei. It's similar in Singapore, where the government wants everybody to work together to create a more digital ecosystem. At this point, banks can feel quite good about the fact that they're at the forefront. It's typically the SMEs that need to be brought up. Thank you. Can I ask Rene de Borja from Metrobank? What are your key priorities?

RB: Aside from continuously safeguarding the health and safety of our employees and customers, we need to sustain. Our balance sheet position is very key because that will either allow us to cushion any lingering effects of the pandemic on our credit portfolio, but at the same time gives us the opportunity to take advantage of the market uptick. Our priorities include ensuring that we understand the needs of our customers.  Understanding what they need at this point in time is very important. We can support them as well in their efforts to recover. Our digital transformation has been in place for a few years. But that's a strategic imperative, but the pandemic nudged us to have a sharper focus on what to prioritise and our ability to do it faster and a bit nimbler. Time to market is a key element to our digital transformation.

Our efforts are not only focused on customers but on allowing our employees to be equipped, to adapt to the changes that are being introduced internally and even the customer facing systems that we are employing. All of these need to sit on a strong set of governance and risk management framework and practices to protect our customers and key stakeholders.

MW : It's been a very good thing, going into this pandemic, that the Asian banks in general, and in particular, those of you that are here, had very strong balance sheets going into this. Perhaps if I can now ask Raymond Sia from Canadia Bank of Cambodia, what do you see as the key institutional priorities? As we come into a post-pandemic environment?

RS: In Cambodia, the regulators have allowed banks to restructure some of these loans up to the end of this year. It’s less than three months before the restructuring period ends. That is where, I would say that the rubber hits the road, and we'll be able to see the real impact to our customers. This is where banks like ourselves need to strike a balance to ensure that we still continue to support some of these customers who have been detrimentally affected.

FBP: Finally, we hear a lot about this shift or pivot towards digitalisation toward more sustainable finance. Now, how is that impacting your business and operating model? Are there changes as to how you're running your business, creating the revenue, or your cost model and greater cost efficiency leveraging innovation? How is that impacted your businesses and operating models? If I can, maybe get a few comments from Girish especially from a wealth management perspective?

GS: With increasing digitisation, we would get an opportunity to augment and enhance it, as in when, there is no human intervention. One, we have seen clearly the cost comes down and second, clearly the net promoter score (NPS) moves up for any process or product which is digitised. These two are big benefits that we see and because of digitisation, customers who have banked with us in the last 18 months, the impetus is to capture the 360-degree banking from all customers so there is a huge opportunity. Going from personal banking towards business banking, or vice versa to ensure that we capture the entire opportunities which are available, or a 360-degree banking, which is available for that particular customer digitally that should help in reducing the costs.

FBP:  Thank you, Girish. The new way of banking allows you to do more with each customer and with the customer’s customer as well.

MW: The customers will be happy at the bank, as well.

FBP: Patrick from China Bank, how is that impacting the way you run your business and your operating model with all the shifts towards digitalisation, or more sustainable financing or banking?

PD: The key really is keeping close to your clients. Your digital offerings and processes should take into account their pain points and make sure that things are easier for them. If your offerings primarily have the features that your clients want. On the issue of sustainability, the Philippine central bank has asked all banks to set up a sustainable finance framework. We are in the process of incorporating that in our credit processes.  In this transition period, we should make sure that we work closely with our clients, that the shift is not too abrupt, so that those who have the chance to transition can transition properly.  In our environment in China Bank, we are working with some multinational or multilateral organisations that are giving technical advice and expertise and some incentives for us to be able to move along this sustainable path.

FBP: Thank you, Patrick, and thank you to all our panellists and guests. 


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