Thursday, 2 December 2021

Bank of China (Hong Kong) retains strongest bank ranking in Asia Pacific despite lowest score in five years

5 min read

By Wendy Weng

The financial performance of the Hong Kong and Singapore banking sectors remained relatively strong. The COVID-related relief measures eased the short-term pressure on banks’ asset quality and capital adequacy.

  • Indonesia and the Philippines saw gross NPL ratio deteriorate the most in Asia Pacific
  • Average ROA of banks in Asia Pacific weakened to 0.64%, while Indian banks saw ROA improve the most
  • Most banks have maintained solid capital and liquidity positions despite the pandemic

Bank of China (Hong Kong) has remained top of the annual ranking of The Asian Banker 500 (AB500) Strongest Banks by Balance Sheet. The strongest bank in Australia, China, Hong Kong, Japan, Macau, Malaysia, Singapore, South Korea, Taiwan, Thailand and Vietnam ranked among the top 30 strongest banks in Asia Pacific. This is based on a detailed and transparent scorecard that evaluates commercial banks and financial holding companies (banks) on six areas of balance sheet financial performance; namely the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity

Bank of China (Hong Kong) excelled in the areas of scale, risk profile, asset quality and liquidity. The bank obtained a score of 4.21 out of five this year, the lowest in the past five years. This is mainly driven by the continued decline in its return on assets (ROA) to 0.86% compared with 1.15% in 2019, 1.16% in 2018, 1.24% in 2017 and 2.36% in 2016. The gross non-performing loan (NPL) of the bank was contained at 0.26% in 2020, and its loan loss reserves (LLRs) to gross NPLs ratio improved to 230% from 219% in 2019. It remained strongly capitalised and highly liquid, as reflected by the high capital adequacy ratio (CAR) of 22.1% and liquid assets to total deposits and borrowings ratio of 53%. 

Overall, the weighted average strength scores of Hong Kong and Singapore banks remained the highest in the region in this year’s AB500 Strongest Banks evaluation, at 3.84 and 3.66 out of 5 respectively. Meanwhile, banks in Thailand, China, South Korea and Malaysia also achieved higher strength scores than the average of the 500 largest banks in Asia Pacific, at 3.24 out of 5. The financial performance of Indian banks improved, with a(Hong Kong) has remained top of the annual ranking of The Asian Banker 500 (AB500) Strongest Banks by Balance Sheet. The strongest bank in Australia, China, Hong Kong, Japan, Singapore, South Korea, Taiwan, Thailand and Vietnam ranked among the top 30 strongest banks in Asia Pacific. This is based on a detailed and transparent scorecard that evaluates commercial banks and financial holding com higher average ROA of 0.67%, a lower gross NPL ratio of 7.5% and an improved CAR of 15.8%.

Asset quality deteriorated moderately across Asia Pacific

The average gross NPL ratio rose only moderately to 1.62% from 1.53%, as the COVID-related relief measures have led to the deferred recognition of problem loans. Banks in Indonesia and the Philippines saw average gross NPL ratio deteriorate the most in 2020. The average gross NPL ratio of Philippine and Indonesian banks on the list went up considerably from 1.8% and 3% in 2019 to 3.8% and 4% in 2020 respectively. Philippine National Bank had the worst asset quality among these banks, with a gross NPL ratio of above 10%. However, Indonesian banks have built sufficient loan loss buffers to weather asset quality risks, reflected by a significant rise in average LLRs to gross NPLs ratio from 122.3% to 179%, and the average ratio of the Philippine banks also reached 110%, from 108% in the previous year.

On average, banks in South Korea, Macau, Australia, Taiwan and Hong Kong achieved the highest score in asset quality, while banks in Sri Lanka, Bangladesh, Brunei and India underperformed. The average gross NPL ratio of Bangladeshi banks remained the highest, at 13.6%, albeit improving primarily due to the relaxation of loan classification rules, compared with 16% in 2019. Islami Bank Bangladesh registered the lowest gross NPL ratio among its peers in Bangladesh, at 3.42%. Sri Lankan and Pakistani banks also recorded a high gross NPL ratio of 9% and 7.9% respectively. In addition, banks in Brunei, Sri Lanka, Japan and India had lower LLRs to gross NPLs ratio than banks in other markets.

The asset quality of the Indian banking sector improved slightly, with average gross NPL ratio of Indian banks on the AB500 list down to 7.5% at the end of March 2021, from 7.9% a year ago. Private sector banks had lower gross NPL ratio, averaging 5%, compared with 9% for public sector banks.

Overall ROA in Asia Pacific weakened to 0.64%

Banks in Australia, Bangladesh, Japan and South Korea achieved the lowest average score in profitability, measured by four parameters, namely operating profit growth, ROA, cost to income ratio and non-interest income to total operating income ratio. On the contrary, banks in Cambodia, Kazakhstan, Macau, Pakistan, the Philippines and Vietnam had a good showing in profitability. 

The overall profitability of the Asia Pacific banking sector weakened in 2020, primarily due to the compressed net interest margins and the rise in loan loss provisions. On average, the ROA of banks on the AB500 list was down from 0.73% in 2019 to 0.64% in 2020. Banks in Indonesia, Malaysia, the Philippines and Thailand recorded the biggest drop in ROA. Indonesian banks saw average ROA decrease to 1.29% in 2020, from 2.14% in the previous year. The average ROA in Malaysia, the Philippines and Thailand declined to 0.58%, 0.86% and 0.73% respectively.

Average ROA of Indian banks reached 0.67%, increasing from 0.29% in the previous year, bolstered by trading profits on bond portfolios that banks booked after the cut in policy rates, along with lower credit provisions. Private sector banks registered an average ROA of 1.2%, much higher than the 0.3% for public sector banks. Banks in Pakistan and Vietnam also witnessed some improvements in ROA. In addition, the average ROA of Chinese banks was only down from 0.9% to 0.81%. In June 2020, Chinese regulatory authorities had urged the financial institutions to give up RMB1.5 trillion ($212 billion) in profits in 2020 by lowering lending rates and fees, deferring loan repayments and granting more unsecured loans to small businesses. As a result, the aggregate net profit of Chinese banks on the list contracted slightly by 0.4% to $280.6 billion.

Capital and liquidity levels remained solid

Most banks in the region maintained sound capital positions. The average CAR of banks in Indonesia, Hong Kong, Malaysia, Pakistan and Thailand were above 18%, while CAR in Vietnam and Bangladesh were considerably lower than that in other markets. Indian banks’ capital positions strengthened, with average CAR of public and private sector banks up from 13.6% and 16.7% to 14.7% and 18.5% respectively.

Techcombank maintained the highest CAR among Vietnamese banks, at 16.1%, improving from 15.5% in the previous year, followed by TPBank (13%), LienViet Post Bank (12.2%) and HDBank (12.1%). By contrast, the CAR of BIDV, VietinBank, Sacombank and Vietcombank were below 10%. Bangladeshi banks failed to meet the deadline set by Bangladesh Bank to push up the minimum CAR to 12.5% by December 2019. Islami Bank Bangladesh maintained the highest CAR in Bangladesh, at 13.8%, while the CAR of Rupali Bank dropped notably from 10.25% to 7.94%.

Overall, banks in Brunei, Hong Kong, Japan, Kazakhstan and Pakistan remained highly liquid, as evidenced by the liquid assets to total deposits and borrowing ratio of over 50%. Banks in the Philippines, Pakistan and Bangladesh recorded improvements in liquidity, while banks in Sri Lanka had the lowest liquid assets to total deposits and borrowing ratio, at 14%.

With government support measures easing, the Asia Pacific banking sector will face some further deterioration in asset quality. Meanwhile, a low interest rate environment continues to weigh on banks’ profitability. The emergence of new waves of COVID-19 further poses challenges for banks, especially those in India and some Southeast Asian countries, where the pandemic continues to weigh down on the overall economy.

Click here to see the 2021 Strongest Banks in Asia Pacific Rankings



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