AB500

Stronger balance sheets, weaker profits

By Wendy Weng

Despite the strength of their balance sheets, Asia Pacific banks continue to face massive challenges in growing profits, a conundrum created by modern capital rules.

  • Bank of China (Hong Kong) topped the annual ranking of AB500 Strongest Banks, with the strength score increasing from 4.14 in the previous year’s evaluation to 4.46 this year
  • The Asia Pacific banking industry experienced weakened profitability in the financial year 2016
  • The overall asset quality of the Asia Pacific banking sector is manageable, given the generally sound loss-absorption buffers

In general, the Asia Pacific banking sector delivered better results in this year’s The Asian Banker Strongest Banks evaluation. The evaluation is based on a very detailed and transparent scorecard that ranks commercial banks on six areas of balance sheet financial performance; namely the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity.

The 500 largest banks in the region achieved higher weighted average strength score at 3.17out of 5.00, compared with 3.10 in last year’s evaluation. The higher average regional strength score is primarily driven by better performance in the areas of balance sheet growth, risk profile and liquidity. All markets across the region witnessed improvement in their average strength score, with the exception of Australia, Bangladesh and New Zealand. The average strength scores for banks in Australia and New Zealand were lowered from 3.32 and 3.35 in 2015 to 3.19 and 3.28 in 2016, respectively.

Bank of China (Hong Kong) once again topped the annual ranking of AB500 Strongest Banks, with the strength score increasing from 4.14 in the previous year’s evaluation to 4.46 this year.The bank maintained strong capital and liquidity positions and sound asset quality, and also recorded improved balance sheet growth and better profitability, although the strong net profit growth was buoyed by a one-off gain generated from the disposal of its interest in Nanyang Commercial Bank. With the aim of transforming into a regional bank, Bank of China (Hong Kong) sold 70.5% interests in Chiyu Banking Corporation in March 2017, opened the Brunei Branch and has continued to acquire its parent’s banking businesses in Southeast Asia.

Apart from six Hong Kong banks, the top 20 strongest banks in the Asia Pacific region also included four Chinese banks, three Singapore banks, two Macau banks, one Brunei bank, one Japanese bank, one Malaysian bank, one Taiwanese bank, and one Thai bank. Banks in Hong Kong and Singapore continued to achieve the highest weighted average strength score, at 3.89 and 3.67 respectively, except for Brunei and Cambodia, which have only one bank on the list. On the contrary, Bangladesh and India recorded the lowest average strength score, below 2.5.

Downward pressure on profitability

The Asia Pacific banking industry experienced weakened profitability in the financial year 2016, with the weighted average return on equity (ROE) of all the 500 banks moderating to 10.7% in 2016 from 12.1% a year earlier. Narrowed net interest margins, higher loan impairment charges combined with increased regulatory capital requirements were the main drag on profitability.

Banks’ ROE has been under downward pressures since the implementation of Basel capital requirements, although their capital and liquidity positions have strengthened. Most regulators in the region have imposed strict capital and liquidity requirements in line with Basel rules. In response to the increased requirements, banks have continued to raise their levels of capitalisation during 2016, resulting in the further decline in banks’ ROE. Banks also become more conservative in their lending, in order to meet the higher regulatory requirements. The trends are expected to continue into the foreseeable future.

The weighted average score for return on assets (ROA) of all the 500 banks was lowered to 2.1 from 2.4 in the previous year, and the average score for cost to income ratio was down to 3.5 from 3.7. Among all 20 economies we covered in the study, New Zealand and Australia saw their average ROE and ROA decline the most. Australian banks’ average ROE fell to 10.2% from 14.9 in the previous year. The average ROE of New Zealand banks was down from 18.1% in 2015 to 13.0% in 2016, which was still one of the highest in the region though. In addition to the reasons mentioned above, the non-interest income of New Zealand banks also shrank, and their average noninterest income to total income ratio fell to 21.4% in 2016 from 23.9 in the previous year. Meanwhile, their results were negatively affected by low global milk prices, which have rebounded since the last quarter of 2016.

On the contrary, the average ROE and ROA went up in India and Vietnam. The average ROE and ROA of Indian banks were still some of the lowest in the region, despite the slight improvement. Vietnamese banks continued to see strong income growth thanks to the government’s efforts to strengthen their banking system through banking reforms over the past few years. Their average ROE improved from 10.3% in 2015 to 12.1% in 2016, though high level of operating costs continued to affect banks’ profits.

Slight deterioration in overall asset quality

The overall asset quality of banks in the region weakened marginally in 2016, which also had a negative influence on banks’ profitability. The 500 banks in the region saw the weighted average gross non-performing loans (NPL) ratio inch up to 1.8% from 1.7% a year ago and the weighted average provision coverage ratio fall slightly from 129% in the previous year to 127%.

Bangladesh, India and Pakistan continued to be the countries with the highest average NPL ratios in the region, while Australia, New Zealand and Macau maintained the average NPL ratios of less than 0.5.

The Indian banking sector continued to suffer from the mounting bad debts. Banks’ profitability and capitalisation were considerably affected. The average NPL ratio deteriorated to 9.1% from 7.5% recorded in the previous year, and the average provision coverage ratio also went down to 47.6% from 52%. The further deterioration in asset quality is expected in the financial year 2017, making it hard for Indian banks to maintain the profitability.
Chinese banks are also facing increasingly higher potential asset quality risks as they continued to record strong loan growth, although the average NPL ratio of Chinese banks held relatively steady in 2016. Chinese banks accelerated bad debt write-offs and transfers to third-party asset managers, and also tried to deal with bad debt through other methods, such as the issuance of asset-backed securities products with bad loans as underlying assets.

The overall asset quality of the Asia Pacific banking sector is manageable, given the generally sound loss-absorption buffers. However, concerns over asset quality remains, further adding pressures to profitability

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Categories: Asian Banker 500, Bank stability, Financial Institutions, Industry Developments, Retail Banking, Transaction Banking
Keywords: AB500, Asia Pacific, BoCHK, asset quality, balance sheets
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