Hang Seng Bank is the strongest bank in Hong Kong and Asia Pacific for 2019

• Hang Seng Bank tops the ranking of Strongest Banks By Balance Sheet in Asia Pacific
• The overall balance sheet growth for Asia Pacific banks decelerated, while asset quality remained as a crucial issue in the region
• Mergers and acquisitions expectation picks up as players and regulators seek to increase efficiency, scale and stability

Hang Seng Bank tops the ranking in Asia Pacific for this year’s The Asian Banker Strongest Banks By Balance Sheet, which is the most comprehensive annual evaluation that captures the quality and sustainability of the balance sheets of the banks in the Asia Pacific, Middle East and Africa regions.

The ranking is based on a very detailed and transparent scorecard that evaluates banks on six areas of balance sheet financial performance: the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity.

Hang Seng Bank, along with other strongest banks in the region, was recognised at The Asian Banker 500 (AB500) Strongest Banks By Balance Sheet ceremony held in conjunction with the annual SWIFT-organised SIBOS convention in London, United Kingdom. 

Hang Seng Bank tops the ranking of Strongest Banks By Balance Sheet in Asia Pacific for 2019

With the strength score at 4.4 out of five, Hang Seng Bank is the strongest bank in Hong Kong and Asia Pacific. The bank fared well in most metrics of the balance sheet. Its profitability remained high, reflected by strong profit growth, a high return on assets and a low cost to income ratio. In addition, the bank maintained a strong capital cushion and robust liquidity, and its gross non-performing loan (NPL) ratio stood at a very low level.

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 increased investment in technology, the weighted average cost to income ratio of Hong Kong banks on the list further enhanced to 37.5%, which was second only to Chinese banks. Their overall asset quality was better in 2018, with the average gross NPL ratio stabilising at 0.52% and the provision coverage ratio increasing to 127% from 106% in the prior year.

Industrial and Commercial Bank of China remained the largest bank in the region, and Chinese banks continue to dominate the list with a representation of 163 banks. Meanwhile, there was a noticeable drop in the number of Japanese banks recorded from 99 in the previous year’s evaluation to 92 this year, which can be partially attributed to regional bank mergers in Japan. These findings were revealed by The Asian Banker 500 (AB 500) 2019, the evaluation of the 500 largest banks in the Asia Pacific region for the financial year 2018.

Balance sheet growth decelerated, while asset quality remained as a crucial issue

Asia Pacific banks on the list registered an average asset growth of 5.6%, compared to 6% in the year before. 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%. 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%.

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’s (SBV) tighter controls over credit growth in the banking system, along with the state-owned banks’ capital shortage.

The 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 while 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 ending 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.

Mergers and acquisitions expectation picks up

Banks in Japan, especially regional banks, have been struggling with sluggish loan demand due to an ageing and shrinking population, and their profitability has suffered as years of ultra-low interest rates in the country have continued to depress bank margins. Regional banks have begun consolidation efforts since the 1990s, but the approval process is lengthy. The 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, but consolidation won’t solve the problems completely.

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 10 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 merge to better compete with larger regional rivals amid government efforts to encourage domestic mergers. Indonesia plans to ease bank merger rules 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.