In this year’s The Asian Banker Strongest Banks By Balance Sheet evaluation, Hong Kong banks demonstrate sustained financial strength. Their weighted average strength score stood at 3.97 out of 5, followed by Singapore banks (3.67), Chinese banks (3.40) and Australian banks (3.36). Bank of China (Hong Kong) topped the annual ranking of Strongest Banks by Balance Sheet, as it fared well on most indicators.This year, financial information in the first half of financial year 2020 (1H FY2020) was collated and incorporated into the assessment of how commercial banks and financial holding companies (banks) performed during the COVID-19 pandemic.
Profitability and asset quality weigh on Asia Pacific banks' balance sheet strength. On average, the return on assets (ROA) of banks on the list was down from 0.82% in 1H FY2019 to 0.66% in 1H FY2020 and the cost to income ratio edged up from 40.2% to 40.9%. The weakened profitability was largely triggered by compressed net interest margins and the rise in loan loss provisioning. Hong Kong, Pakistan and the Philippines achieved the highest average score in profitability, while Japan, Australia and Sri Lanka the lowest, except for the markets with only three banks or less on the list. Banks in Indonesia, Thailand, Singapore and the Philippines saw their average ROA drop the most.
Some banking sectors in the region have already seen some deterioration in average gross non-performing loan (NPL) ratio in 1H FY2020, such as Indonesia, Pakistan, and Thailand. Meanwhile, banks boosted loan loss reserves in response to expected losses from the economic slowdown, resulting in higher average loan loss reserves to gross NPL ratio in most economies. On average, banks in Australia, South Korea and Hong Kong achieved the highest score in asset quality, at 4.82, 4.72 and 4.65 out of 5, respectively. Indian banking sector reported asset quality improvement, with the average gross NPL ratio of Indian banks down to 7.4% at the end of September 2020 from 8.5% a year ago. This can be largely attributed to moratorium offered by the Reserve Bank of India, recoveries and higher write-offs.
Capital and liquidity buffers remain relatively resilient across most markets. Hong Kong and Indonesia have the highest average capital adequacy ratio (CAR), at 20.6% and 20.4% respectively. The average CAR of banks in Pakistan, Thailand and Malaysia was also above 18%. Liquidity levels are most adequate in Pakistan, Japan, Hong Kong and Kazakhstan. Their average liquid assets to total deposits and borrowings ratio were above 45%. Deposit growth outpaced loan growth in 19 out of 23 economies, resulting in a drop in average loan to deposit ratio. However, banks in Vietnam continue to face the challenge of maintaining sufficient capital levels. The application of Basel II standard has been slow in Vietnam.
This year’s ranking only reflects some of the impact of the pandemic on the financial performance of banks. The pandemic is expected to weigh heavily on their financial results in 2H FY2020 and FY2021. Nevertheless, most banks are better positioned to weather this crisis than during the global financial crisis.
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Notes: (1) 5 = Highest score, 0 = Lowest score. (2) * & # FY2019 data. (3) ** FY2019 data; adjusted for scale.
Source: Asian Banker Research