Interviewed By TAB RadioFinance
Despite continued strong growth in total assets, the Asia-Pacific banking sector is still exposed to high levels of private sector leverage with steps being taken to reign in the excess debt growth
Here is the transcript:
Good afternoon everyone, I am Aman Kler, Research Analyst at The Asian Banker, and I am pleased that you could join us for The Asian Banker Strongest Banks by Balance Sheet Briefing.
The Asian Banker 500 is the world’s first and most authoritative annual ranking of the Strongest Banks, based on Balance Sheets strength. Although the concept has been emulated by other organisations, we remain the most comprehensive and robust evaluation of its kind.
The evaluation is conducted between March and August each year when banks’ annual financial results become available. The Asian Banker 500 ranking is widely followed by investors, analysts, research houses and the media as the leading source to assess the financial strength of commercial banks in the region.
The Asian Banker annual ranking of the largest banks and strongest banks by balance sheet started in 2002, known back then as the Asian Banker 300. In 2007, we expanded the ranking to include the strength of the balance sheets into our analysis. We have also expanded the ranking to include the top 500 banks as more banks in the region grew to make it to the list, calling it the AB 500. Subsequently we also introduced a ranking for banks in the Middle East and Africa. The analysis is based on the financial statement and balance sheet for 2017 with a cut-off date of 31 March 2018. Now into its seventeenth edition, the Asian Banker 500 ranking continues to be the financial services industry’s most comprehensive annual evaluation of the strength, quality and sustainability of the balance sheets of banks in the Asia.
The AB 500 tracks the relative financial strengths of banks in response to their respective market conditions, based on a common scorecard.
The ranking is based on a very detailed and transparent scorecard that ranks commercial banks on six areas of financial performance; namely the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity.
It not only a recognition of the balance sheet strength of players but offers an opportunity for banks to reflect on the factors that underpin their strengths.
This year’s AB500 evaluation covers 19 countries and territories, and the 500 largest banks combined had $58.6 trillion in assets, $29.3 trillion in net loans, $40.6 trillion in deposits and $400 billion in net profit. The cut-off for this year’s ranking has risen substantially. Citibank Philippines is the smallest bank in AB500 2018, with a recorded $5.8 billion in assets, compared to the smallest bank’s assets of $4.5 billion in the previous year’s evaluation. This is mainly driven by the increase in the number of Chinese and Japanese banks on the list.
Half of the Indian banks in AB500 posted net losses for the financial year that ended on 31 March 2018, as they are required to set aside higher provisions for their bad assets and the rise in bond yields has also eroded their profits from treasury operations. These 21 banks have accumulated $12.92 billion in losses, much higher than the ten Indian banks’ cumulative loss of $2.24 billion in the year before.
Public sector banks account for a major share of total bad loans in India, and thus out of these 21 banks, 19 are public sector banks. Some public sector banks have started shrinking their balance sheets, and private sector banks are expected to benefit from the struggles of their state-run counterparts. Although public sector banks are expected to continue posting losses in the coming quarters, the acceleration of cleaning up of their balance sheets will help strengthen Indian banking sector gradually.
Chinese banks continue to dominate The Asian Banker 500 ranking by asset size, with their total assets accounting for half of the combined assets of the 500 largest banks in the Asia Pacific region. The top ten ranking consisted of the same banks from the previous year, the only change being Bank of China, which overtook Mitsubishi UFJ Financial Group and now ranks fourth.
Commonwealth Bank of Australia (CBA) overtook Australia and New Zealand Banking Group (ANZ) to become the largest bank in Australia. CBA’s total as-sets grew by 4.6% in 2017, while ANZ’s total assets declined by 1.9%. ANZ sold its stake in Shanghai Rural Commercial Bank and its retail and wealth businesses in Asia to focus on institutional banking business. Bank Rakyat Indonesia (BRI) surpassed Bank Mandiri as the largest bank in Indonesia with its higher asset growth in 2017. BRI’s plan to refocus on micro business will help the bank maintain its leading position in the country. In South Korea, KB Financial Group recorded an asset growth of 16.3% in 2017, which can be largely attributed to the collaboration and synergy among subsidiaries, and thus their total assets exceeded that of Shinhan Financial Group at the end of 2017.
The strength score of the 500 largest banks in the Asia Pacific region averaged 3.15 out of 5 in this year’s The Asian Banker Strongest Banks evaluation, compared to 3.17 in the previous year. Banks in Hong Kong, Singapore and Australia achieved the highest weighted average strength score, at 4.10, 3.51 and 3.34 out of 5, respectively, except for Brunei, which has only one bank on the list. On the contrary, Bangladesh, India and Pakistan recorded the lowest aver-age strength score, at 1.81, 2.07 and 2.66, respectively.
The Asia Pacific banking sector as a whole has become more robust in the past few years, while there remains concerns over persistent financial risks and vulnerabilities. The regulators have moved aggressively to control the risks and strengthen the banking systems, and this will continue.
In Australia, the cloud of industry wide malpractice and misconduct now the subject of a Royal Commission hangs over the industry. The outcome of the inquiry and any penalty that the authorities may mete out as well as potential litigation and consumer backlash may impact bottom-line yet in future. India accelerated the resolution of stress assets, which exerted a significant impact on banks’ profitability, but it will benefit the Indian banking system in the long run. Meanwhile, the Asia Pacific banking sector is still exposed to high levels of private sector leverage, although the steps taken to rein in excess debt growth has led to the moderation of debt accumulation in some markets.
In general, banks scored lower in terms of balance sheet growth, loan to deposit ratio and liquidity. However, banks’ capital positions were strengthened in the financial year 2017 and their profitability was slightly improved.
Balance sheet growth
Banks’ balance sheet growth varied across markets. The lower score in balance sheet growth is largely the result of slower growth in markets such as Malaysia, New Zealand, Japan and China. The weighted average loan growth of Malaysian banks on the list dropped to 2.4% in 2017 from 5.2% in the year before, driven by weaker business loan growth.
Balance sheet growth accelerated in markets like Hong Kong and Thailand. On average, Hong Kong banks on the list posted an 15.4% growth in net loans in 2017, compared to 3.2% in 2016. The significant improvement can be largely attributed to increased lending to corporates in mainland China and strong demand for mortgage lending.
Higher capital buffer
Capital positions of Asia Pacific banks broadly improved. Indonesian banking sector recorded the highest capital adequacy ratio (CAR), supported by strong profitability and decline in credit costs. Meanwhile, banks in Hong Kong, Malaysia, Singapore and Thailand also enjoyed high capitalisation ratios, which provides sufficient buffers against risks.
However, the capitalisation of Vietnamese banks remained weak. Vietnamese banks need to raise a substantial amount of capital in order to meet Basel II compliance requirements, which will take effect by 2020 in Vietnam. Banks in India were also not sufficiently capitalised. Despite of the significant capital injection from the Indian government into Indian public sector banks, the tier 1 capital ratio of seven public sector banks was still lower than 8%. More capital is needed for Indian banks to meet regulatory capital requirements.
Bank of China (Hong Kong) once again topped the annual ranking of AB500 Strongest Banks, with the strength score increasing slightly from 4.46 in the previous year’s evaluation to 4.49. The bank posted stronger balance sheet growth while maintaining robust capital buffers, strong liquidity and healthy asset quality.
The Hong Kong banks continued to measure well in most indicators. On average, they recorded the highest average strength score in the area of profitability among the 19 countries and territories. Except for Brunei, their average strength scores in the areas of risk profile and liquidity are also the highest. The improved net interest margins, stronger loan growth and the reduction in loan impairment charges contributed to their higher profitability in 2017. The weighted aver-age cost to income ratio of Hong Kong banks on the AB500 list was improved from 39.9% in the year before to 38.8%, which was the second lowest in the region. Meanwhile, their asset quality remained healthy, with the weighted average gross non-performing loan(NPL) ratio declining to 0.52% from 0.66% in 2016.
Thanks to the measures taken to tackle bad debts, the asset quality of banks in most Asia Pacific markets remained stable or showed signs of improvement in the financial year 2017, with the exception of countries such as India, Singapore and Malaysia. The average gross NPL ratios of banks in New Zealand, Australia, Hong Kong and South Korea remained below 1% in 2017.
Among all the 19 countries and territories, banks in Bangladesh and India recorded the lowest scores in asset quality. Indian banks saw their asset quality weaken the most, due to the revised framework that tightened norms for the resolution of stressed assets. The weakness in asset quality will continue to put significant pressures on Indian banks’ profitability and capital positions. However, the acceleration of cleaning up of their balance sheets will benefit the Indian banking system in the long run.
Qatar National Bank remained the largest bank by assets in the Middle East and Africa, and First Abu Dhabi Bank replaced Standard Bank Group to become the second largest bank in the region after the successful completion of a merger of National Bank of Abu Dhabi and First Gulf Bank on 1st April 2017. This according to The Middle East and Africa 200 (MEA 200) 2018, the evaluation of the 200 largest banks in the Middle East and the Africa for the financial year 2017.
This year, we expanded the evaluation to 200 banks from the previous 100, which covered four more countries. With the addition of 100 more banks, the accumulated total assets of the banks in the evaluation increased to $3.48 trillion from $2.52trillion in the previous year.
Meanwhile, given that the Islamic banking is an important part of the banking industry in the region, Islamic banks are included in this year’s study. National Bank of Egypt was squeezed out of the top 10 rankings by assets, due to the inclusion of Al Rajhi Bank, the second largest bank in Saudi Arabia and also the largest Islamic bank in the region.
The study covers 16 countries, namely Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Ara-bia and United Arab Emirates (UAE) in the Middle East and Algeria, Egypt, Ghana, Kenya, Mauritius, Morocco, Nigeria and South Africa in Africa. Egypt and UAE are the countries with the largest number of banks on the list, at 23 and 21, respectively.
When measured on an asset-weighted basis, banks in Saudi Arabia, UAE and Qatar achieved the highest average strength score at 3.83, 3.69 and 3.56 out of five, respectively, while banks in Oman and Jordan underperformed their peers, with the lowest average strength score at 2.90 and 3.02 out of five, respectively.
Overall, Saudi banks delivered better financial performance than banks in other countries in the Middle East, although Saudi Arabia was the only Middle Eastern country that saw banks’ balance sheet growth shrink in 2017. On average, their net loans edged down by 1.1%, mainly because the economic slowdown cut demand for loans. Nevertheless, banks in Saudi Arabia have strong profitability. The weighted average return on assets (ROA) of Saudi banks on the list stood at 2%, which was the highest in the region. Meanwhile, they maintained strong capitalisation, with the average capital adequacy ratio increasing to 20.5% in 2017, and their asset quality stayed relatively sound despite the challenging operating environment.
When it comes to the ranking of strongest banks in Africa, National Bank of Egypt and Banque Misr, the two largest lenders by assets in Egypt, remained the top two strongest banks in Africa. National Bank of Egypt achieved higher strength score in this year’s evaluation, due to improvement in balance sheet growth, capital position and liquidity. However, the bank’s profitability weakened, with the ROA declining from 2% in 2016 to 1.3% in 2017.
Banks in Egypt achieved the highest weighted average strength score at 3.78 out of five. Egyptian banks continued to deliver robust financial performance, especially in the areas of balance sheet growth, asset quality and liquidity. They are funded by stable and low-cost domestic deposits, and their weighted average cost to income ratio of Egyptian banks on the list was only 28%, the lowest among banks in Africa. Their overall capitalision experienced some improvement in 2017, although capital buffers for Egyptian banks are still relatively weak. It’s expected that their capitalisaion will see more improvement in the near future, as banks retain more of their profits
The continued sluggish economic growth and ongoing political uncertainty and problems with state-owned enterprises in South Africa have exerted significant impact on the financial performance of South African banks, which used to used to dominate. In 2017, The weighted average strength score for banks in South Africa was 3.34, the second highest in Africa. The balance sheet growth in South African banking sector remained in the low single-digits. On average, net loans of South African banks grew by 3.3% and deposit expanded by 4.9%. Similarly, they recorded low operating profit growth at 4.5%, despite improvement in net interest margins and impairment charges.
The financial results of banks in the Middle East and Africa are strongly divergent. Looking forward, most banking sectors are expected to enjoy resilient financial performance, although operating environment remains challenging.