Research Note

The big clean-up

By Wendy Weng

Regulators have intensified efforts to curb the financial and conduct risks that confront banks in the region.

  • Commonwealth Bank of Australia (CBA) overtook Australia and New Zealand Banking Group (ANZ) to become the largest bank in Australia.
  • In China, the banking regulator has made lowering corporate debt, reducing shadow banking and cleaning up financial holding groups its top priorities
  • Half of the Indian banks in AB500 posted net losses for the financial year that ended on 31 March 2018

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. Industrial and Commercial Bank of China remained the largest bank, with total assets expanding by 8.1% to $4.01 trillion as of December 2017. The Asian Banker 500 (AB 500) 2018 is an evaluation of the 500 largest banks in the Asia Pacific region for the financial year 2017.

This year’s 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 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. 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.

Commonwealth Bank of Australia (CBA) overtook Australia and New Zealand Banking Group (ANZ) to become the largest bank in Australia. CBA’s total assets 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.

Efforts to curb elevated leverage risks

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. Chinese and Indian banks face the biggest threat from corporate debt exposure, while Australia, Malaysia, South Korea and New Zealand are the most exposed to high household leverage risks.

In China, the banking regulator has made lowering corporate debt, reducing shadow banking and cleaning up financial holding groups its top priorities. The wealth management products, interbank funding and asset management business face tighter scrutiny. Meanwhile, China has also tightened controls on local government finances and household debt. The pace of growth of household debt has accelerated in recent years, although it is still at relatively low levels. Therefore, stricter housing policies were implemented to curb mortgage loans and China has also launched probes into consumer loans that are being misused for real estate investment.

China has made some progress in containing its debt burden and off-balance sheets activities have been brought under control. However, credit is simply transferred to more regulated areas, and thus the overall lending activity remains high and the banking system continues to face leverage risks. The efforts are set to continue in China, as well as other markets with high levels of leverage.

Cleaning up the balance sheets

The Reserve Bank of India (RBI) has continued to take measures to address the serious bad loan problems in India. In February 2018, the RBI tightened norms for the resolution of stressed assets by setting strict timelines for banks to take action against defaulters and the revised framework also put an end to a series of existing loan-restructuring mechanisms. This has accelerated the resolution of stress assets and will benefit the Indian banking system in the long run, but it exerted a significant impact on banks’ profitability. 

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. The weighted average gross non-performing assets (NPA) ratio of Indian public sector banks in AB500 surged to 14.6% in the financial year that ended on 31 March 2018 from 11.6% in the previous year. The scam-hit Punjab National Bank was the highest loss making public sector bank, with losses amounting to $1.86 billion, followed by IDBI Bank ($1.25 billion) and Indian Overseas Bank ($968 million).

Public sector banks also saw much slower net interest income growth amid tepid loan growth. Due to weak financial condition, 11 public sector banks are placed on the Prompt Corrective Action (PCA) framework of the RBI, which restricts them from fresh lending and expansion. 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.

Spotlight on the alleged misconduct of Australian banks

Australian banking industry has seen years of scandals. The allegations of misconduct banks have faced include poor financial advice, inappropriate lending to customers, manipulation of key interest rate benchmarks and non-compliance with anti-money-laundering rules. In late December 2017, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was established to investigate if financial services firms have engaged in misconduct.

The Royal Commission out consumer lending, financial advice and superannuation under the microscope, and has uncovered a wide range of issues of poor conduct by the nation’s banks and other financial services firms. Take Commonwealth Bank of Australia(CBA) and National Australia Bank (NAB), for example. CBA charged fees to their clients who had died and also continued to offer credit card limit increases to a customer despite knowing he was a problem gambler. In order to beat sales targets and collect bonuses, NAB staff in greater western Sydney accepted cash-stuffed envelopes to facilitate loans, and falsified documents and forged customer signatures were submitted.

Given the seriousness of the misconduct uncovered, Australian banks are facing significant challenges. They suffer reputational damage, and their businesses and operating performance will be affected. Further regulatory controls are expected to be imposed, and tougher new penalties for misconduct will be announced. Banks need to pay the costs stemming from the Royal Commission, and also face increased costs to deal with tougher regulation and scrutiny in the future.

Although the Asia Pacific banking sector as a whole has become more robust, 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. 

What is The Asian Banker 500?

The Asian Banker 500 (AB500) is an annual study of the financial and business performance of the commercial banking industry in the Asia Pacific region. The study comprises two different lists: the first ranks the top 500 banks in the region by asset size, while the second ranks the same 500 banks by strength, an evaluation that is based on a belief that a strong bank demonstrates long-term profitability from its core businesses.

Which banks are included?

The Asian Banker ranks financial institutions by asset size and focuses on Asia Pacific banks east of Iran.
We also publish an expanded version of this list online, which includes over 700 banks from the Asia Pacific region. The focus of this list is on commercial banks and financial holding companies, with a significant proportion of activity in commercial banking. The AB500 does not include central banks, policy banks, investment banks or finance companies that lack significant deposit-taking franchises or commercial lending businesses.

How do we collect and treat the data?

Bank annual reports and statistics provided by central banks or industry associations are our main sources of data. In the absence of up-to-date annual reports, we contact banks directly to source financial results. Consolidated figures are used for banking groups, except when non-banking activities form a substantial portion of the consolidated figures, in which case we look at the banking unit independent of its parent. All figures are quoted in US dollars at year end exchange rates. y-o-y growth rates are calculated based on original local currency figures.



Keywords: Largest Banks, Shadow Banking, Asset Management, Bank Rankings, Bank Evaluation
Institution: ICBC, Bank Of China, Mitsubishi UFJ Financial Group, Citibank Philippines, Commonwealth Bank Of Australia, ANZ, Shanghai Rural Commercial Bank, Bank Rakyat Indonesia, Bank Mandiri, KB Financial Group, Shinhan Financial Group, Reserve Bank Of India, IDBI
Country: Asia Pacific
Region: Asia Pacific
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