Banks in emerging markets dethrone counterparts in developed nations

MANILA, Philippines - Although the top 11 banks in this year’s Asian Banker 300 size ranking by assets are unchanged from the previous year’s survey, the makeup of the strength ranking has changed dramatically.

The Asian Banker 300 is a project of financial publications, The Asian Banker.

This is largely due to the weightage given to asset, loan and deposit growth in The Asian Banker 300 (AB300) strength formula has put an emphasis on the growth levels enjoyed by emerging market banks and their insulation from the trauma of the global economic turmoil that has buffeted more exposed markets.

Where last year there were 10 banks in the top 20 from developed markets of Australia, Hong Kong, Singapore, South Korea and Taiwan, this year only Citibank (Hong Kong) and Westpac Banking Corp. from Australia made it onto the list from these markets (two banks from New Zealand also crept up). Hongkong and Shanghai Banking Corp., Oversea-Chinese Banking Corp. and Hang Seng Bank, which last year were in the top three spots, are this year at positions 39, 24 and 30, respectively.

This rearranging of these three banks has occurred because of their low scores in loan growth and deposit growth, and they have been replaced in the top 20 by banks that have grown aggressively in these areas, such as the fastest-growing financial institutions in India (six, including the top two), China (six), Malaysia (three) and Indonesia (one). Banks in these markets scored high in asset growth, loan growth, deposit growth, profit growth or all four indicators.

But important questions remain now about whether strong growth in assets and loans will remain a sign of true strength going forward as the economies of the region react to the global economic slowdown.

Given the emphasis that liquidity has played in the way markets view banks, it would be impossible to keep it out of the strength ranking, and The Asian Banker have decided to introduce an evaluation of banks’ percentage of liquid assets to total assets into the scorecard.

But liquidity ratios are also a double-edged swords; they may give clients and investors reassurance that a bank is watertight, but investors are now beginning to wonder when banks are beginning to deploy their capital more efficiently (or strategically) instead of using it as a buffer against potential troubles. The banks in Singapore, Thailand, India, Vietnam and Hong Kong, which lead the region in the level of liquid assets to total assets, will see their profitability affected as long as they continue to sit on expensive capital cushions.

“But given the general behavior of banks around the region, we expect capital and liquidity to remain important priorities for banks and may even see the liquidity ratio of Asia’s banks grow by the end of the year,” it said.

Similarly, banks around Asia have kept very high capital. And while the country in the region with banks holding the highest total CAR is Indonesia, where the average is 14.6 percent, it is closely followed by Singapore, at 14.4 percent.

Other markets where the banks hold very high capital averages are Hong Kong (14.3 percent), the Philippines (13.9 percent), and Malaysia and Thailand (both with 13.3 percent).

With emerging market banks that still have strong loan and deposit growth forming the top of the ranking, the more developed markets are filling out more of the bottom rankings. Given their low growth in any of the asset, loan, deposit or profit growth, it is no surprise that Japanese banks fill out the bottom of the strength ranking – 76 banks in the bottom 100 are from Japan – as they do with other indicators such as cost to income ratio, non-interest income to total income, return on assets and return on average equity.

Taiwanese banks are also particularly weak, with 14 of the 26 banks in the AB300 sitting in the bottom 100 for strength ranking.

Profits for banks all around the region will also be highly affected by the expected rise of fresh non-performing loans (NPLs) resulting from the effect of trade contractions on Asia’s many export-driven economies, or from the impact a fall in commodities prices will have on the regions natural resources producers.

Bad loans are expected to crop up in China, where banks in a single quarter in 2009 have given out nearly as many loans as they have in all of 2008.

But NPLs have yet to rear their ugly head in this ranking, with only five banks reporting bad loan ratios in the double digits (one each in Japan, Malaysia, Pakistan, Thailand and Vietnam).

When they do, they will come from a low base and are not expected to impact core capital significantly. It is mostly the banks of Australia and Hong Kong that are at the top end of the NPL chart, with sharp rises in Korea as well, although it is clear that the numbers are creeping up steadily around the region as a whole – the banks at the 20th position in the NPL chart this year have levels of 0.6 percent, while one year ago they showed half of that figure. – TAB