Average Capitalisation of Asia Pacific's Largest Banks Improves Even Though the Industry Faces More Bad Debts

The Asian Banker 500 (AB 500) Strongest Bank Balance Sheets Ranking 2013 found that the average capitalisation of the largest banks in the region improved in 2012 even as the industry faced more bad debts.


The AB 500 ranking is the most comprehensive annual evaluation that captures the quality and sustainability of the balance sheets of banks in the region. It tracks the relative financial strengths of banks in response to their respective market conditions, based on a common scorecard.


It is modeled on a transparent balanced scorecard approach, weighted against six crucial elements, such as: scale of operations, balance sheet growth, risk management, profitability, asset quality and liquidity.


Capital adequacy ratio of the largest 500 banks reached 14.6% in 2012

The latest ranking found that the average total capital adequacy ratio of the largest 500 banks stood at 14.6% in 2012, up from 14% in 2011, as they prepared to meet new Basel III regulatory capital requirements.


Increased capital inflows into the region over 2012 have helped shore up banks’ capitalisation. Asian markets have been awash with liquidity for the past few years. This has helped kept interest rates low, driven unprecedented credit demand and beefed up banks’ overall capital positions.


“Banks in the region have benefited from the excess liquidity in the past few years to grow their balance sheets and capitalisation. However, we have observed a slowdown in growth in 2012,” said Foo Boon Ping, managing editor of The Asian Banker.


With the improving health of the US economy, the possibility of a let-up in quantitative easing has become more certain. The end of cheap US funding will require a re-pricing of banks’ risk assets as well as an overhaul of funding strategies. Increased funding and lending costs will likely affect credit demand and growth.


Banks’ non-performing loan (NPL) ratio increased to 2.58%

Average non-performing loan (NPL) ratio of the region’s largest 500 banks increased from 2.51% in 2011 to 2.58% in 2012, whilst the average loan loss reserve to gross NPL ratio dropped from 246% to 163%.


Overall, Asian banks face the potential of asset quality deterioration in the next two years, reaching a turning point in the current relatively benign credit cycle.


Over the past few years, debt levels in the Asia Pacific region have increased, mainly due to robust economic growth and a low interest rate environment. The significant rise in property prices also poses additional risk to overall financial stability in the region.


Asset quality of banks in India is expected to be among the worst in the region.


“We found that the weighted average NPL ratio of Indian banks was up from 2.4% to 3.2% in 2012,” Foo remarked.


The weighted average NPL ratio for Chinese banks stood at around 1% based on published data, which does not reflect the actual asset quality in China. Increased credit growth while China’s economy continues to slow down is not a good sign. China faces twin challenges of sustaining its economic growth while restraining excessive increase in credit, which has caused bad debt to rise considerably.

Hong Kong’s Hang Seng Bank has strongest balance sheet in Asia Pacific
Hong Kong’s Hang Seng Bank topped the ranking this year on the back of stronger asset and profitability growth.


This year’s Top 10 strongest bank balance sheets are represented by players from Greater China and Southeast Asia, including Hong Kong (3), China (3), Macau (1), Singapore (2) and Malaysia (1).


Overall, the aggregate strength score has decreased as performance in key parameters such as profitability growth, liquidity and asset quality moderated.


Out of the 19 countries and territories covered in the rankings, 11 saw their banks’ average strength score decrease. The average strength score is down from 2.73 to 2.01 for Bangladeshi banks and from 2.44 to 1.98 for South Korean banks (against a maximum score of 5.00).


Singapore had the highest country average strength score at 3.58, followed by Hong Kong at 3.20. Japan and Australia had the lowest at 1.73 and 1.95 respectively


Average score for all 500 banks declined from 2.53 to 2.49. The strength score of Hang Seng Bank at 4.19 is lower than 4.31, the highest score last year, representing a slight decline in financial strength due mainly to lower balance sheet and profit growth.

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