Monday, 11 December 2023

Hong Kong banks prove balance sheet resilience as Asia Pacific players suffer credit and profit stress

5 min read

By Wendy Weng

Bank of China (Hong Kong) emerges as strongest bank by balance sheet in Asia Pacific in 2020. While the majority of banks in the region maintained adequate capital and liquidity buffers, profitability has weakened amid the COVID-19 crisis.

  • Banks in Australia, South Korea and Hong Kong demonstrated the strongest asset quality, while those in countries such as Indonesia, Pakistan, and Thailand saw deterioration in asset quality
  • The pandemic has exerted negative impact on the profitability of Asia Pacific banking sector
  • Overall, capital and liquidity buffers remain relatively resilient across most markets

Bank of China (Hong Kong) topped the annual ranking of The Asian Banker 500 (AB500) Strongest Banks by Balance Sheet, as it fared well on most indicators. The top 20 strongest banks in Asia Pacific comprise eight Hong Kong banks, four Chinese banks, three Japanese banks, two Malaysian banks and one each from Australia, Singapore and South Korea. Hong Kong banks occupy the first four places.

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. This year, financial information in the first half of financial year 2020 (1H FY2020) was collated and incorporated into the assessment of how banks performed during the COVID-19 pandemic.

Overall, Hong Kong banks have once again achieved the highest strength score in this year’s AB500 Strongest Banks evaluation. 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). The 500 largest banks in Asia Pacific recorded an average strength score of 3.27.

Hong Kong banks achieved high strength score in the areas of scale, risk profile, asset quality and liquidity. They have remained well capitalised and highly liquid. In 1H FY2020, their weighted average capital adequacy ratio (CAR) was 20.6% and liquid assets to total deposits and borrowings ratio stood at 49%. Their asset quality was also strong, with average gross non-performing loan (NPL) ratio of 0.66% and average loan loss reserves to gross NPL ratio of 133% at the end of 1H FY2020. However, their profitability weakened. The return on assets (ROA) of Hong Kong banks on the list averaged 0.9% in 1H FY2020, down from 1.2% in 1H FY2019.

The AB500 scorecard allows banks to reflect on the factors that underpin the strength of their balance sheets 

Figure 1: Criteria of the AB500 scorecard

Deterioration in asset quality

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. Apart from banks in these markets, New Zealand banks also reported average gross NPL ratio below 1%. Banks in China continued to record the highest average loan loss reserves to gross NPL ratio, followed by banks in Australia, Taiwan and New Zealand.

Some banking sectors in the region have already seen some deterioration in average gross NPL ratio in 1H FY2020, such as Indonesia, Pakistan, and Thailand. The average gross NPL ratio of Indonesian banks on the list was up from 3% in 1H FY2019 to 3.8% in 1H FY2020. In March 2020, Indonesia’s financial services authority, Otoritas Jasa Keuangan (OJK), relaxed requirements for bank in determining asset quality of borrowers affected by COVID-19. Pakistani banks posted an increase in average gross NPL ratio from 7.5% to 8.4%. 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. For instance, the ratio was up from 120% at the end of 1H FY2019 to 151% in Indonesia, and from 76% to 91% in Singapore.

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. YES Bank is one of the Indian banks that still reported gross NPL ratio more than 10%. YES Bank had substantial exposure to several troubled borrowers and failed to raise sufficient capital, and thus the Reserve Bank of India took control of YES Bank to avoid the collapse of the bank in March 2020.

Weaker profitability

The pandemic has exerted negative influence on the profitability of Asia Pacific banking sector. On average, the 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. The cost to incomer ratio of Japanese banks averaged 64.5%, the highest in the region, and their average ROA only stood at 0.2%. The average ROA of banks in Australia and Sri Lanka was also at the low level of 0.53%.

Banks in Indonesia, Thailand, Singapore and the Philippines saw their average ROA drop the most. Indonesian banks’ average ROA was down from 2% to 1.4% in 1H FY2020, although it’s only second to that of banks from Kazakhstan. On the contrary, average ROA of Indian banks was higher at 0.62% from 0.35%, partially due to easing credit costs.

Hong Kong-based banks outranked peers on balance sheet strength

Figure 2. Top 20 Strongest Banks By Balance Sheet in Asia Pacific

Adequate capital and liquidity

Overall, capital and liquidity buffers remain relatively resilient across most markets. Hong Kong and Indonesia have the highest average 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%. Banks in countries like the Philippines, Pakistan and Thailand saw improvements in liquidity. Deposit growth outpaced loan growth in 19 out of 23 economies, resulting in a drop in average loan to deposit ratio.

On the contrary, banks in Vietnam face the challenge of maintaining sufficient capital levels. The application of Basel II standard has been slow in Vietnam. Banks were required to meet the CAR requirement of at least 8% starting from January 2020. However, in December 2019, the State Bank of Vietnam made the decision to extend the implementation deadline to 2023, as a number of banks were struggling to meet Basel II deadline.

Click here to see the 2020 Strongest Banks Ranking


Keywords: Scorecard, Asset Quality, NPL, Profitability
Institution: Bank Of China (Hong Kong), Otoritas Jasa, Reserve Bank Of India, YES Bank, State Bank Of Vietnam
Region: Asia Pacific, North America
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