In this year’s The Asian Banker Strongest Banks By Balance Sheet evaluation, banks in Hong Kong and Singapore remained the strongest in Asia Pacific, with the weighted average strength score at 4.06 and 3.61 out of 5, far above the average strength score of 3.2. 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.
On the contrary, Bangladesh and India continued to record the lowest average strength score among the 20 countries and territories, at 1.71 and 2.14, respectively, which is mostly triggered by their poor asset quality and low profitability. On average, the ROA of Indian banks remained negative, and their cost to income ratio was higher at 53.3% from 50.6%. The average gross NPL ratio of Bangladeshi banks stood at 20.3%, the highest in the region.
Across Asia Pacific, banks’ balance sheets grew at a slower pace. Banks 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 (SBV)’s tighter controls over credit growth in the banking system, along with the state-owned banks’ capital shortage.
Indian banks on the list managed to lower gross non-performing asset (NPA) ratio to 9.5% in financial year ended 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 as players and regulators seek to increase efficiency, scale and stability. In Japan, many regional banks have faced difficulty remaining profitable, and some of them have merged. However, consolidation has been slow in the country due to current anti-monopoly. The government is expected to ease antitrust rules that will enable regional banks to consolidate more easily. In India, with the announcement of mergers of ten 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.
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.
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