Asean banks such as United Overseas Bank are posting impressive growth rates
China’s dominance in Asian finance continues to grow, but banks from the Association of South-East Asian Nations (Asean) are combining good returns with high capital levels.
The ramp-up in capital and assets at China’s banks continued apace in the period covered by these rankings, as its government sought to drive investment into the economy to offset the decline in major Chinese export markets in the US and western Europe. Average Tier 1 capital in China rose by 47.2% year on year as of the end of 2009, while assets soared 34.5%.
So far, growth has been combined with quality, as China’s profits are the largest in the ranking, at more than $100bn for 2009. Return on capital remains high at 18.15%, about four times the rate of the largest Asian banking market, Japan. But capital adequacy at Chinese banks is low by Asian standards, with a capital-to-assets ratio of 5.06%. Only Taiwan, Hong Kong and Japan have lower capitalisation ratios, and these are three of the most mature markets in the region.
By contrast, the availability of reliable credit and economic data for risk management purposes, and the support of a well-tested legal framework for creditors’ rights, are all much less established in China. This means unexpected credit losses are likely to be higher than in the most developed banking markets. Banks in such emerging markets usually keep a larger capital cushion – at the other end of the scale, Cambodia’s much less-developed banking system runs with a capital-to-assets ratio of 14.84%.
In addition, profitability in China tends to be concentrated at the top end of the sector. For the top 10 Chinese banks in this ranking by Tier 1 capital, average return on equity is 25.5%. But for the bottom 10, the rate is only 6.1%. This suggests China’s smaller banks may be pushing into more marginal business, with a narrower profit margin if economic circumstances change. These banks are likely to be most vulnerable to the accelerating process of monetary tightening undertaken by the People’s Bank of China since late 2010, if it has the desired effect of slowing Chinese credit growth.
Indonesia outperforms
By contrast, growth rates in the Association of South-East Asian Nations (Asean) may be built on more sustainable foundations. There are eight Asean banks among the top 15 for return-on-capital, including four from Indonesia. This compares with only two for China. Malaysia and Philippines both have return on capital of almost 16%, while running on solid capital-to-assets ratios of about 7% and 8%, respectively.
Vietnam and Indonesia are even more dynamic markets. Both have seen assets climbing more than 25% on average, while return on capital remains high, at more than 19% for both countries. Of the two, Indonesian banks are noticeably better capitalised, averaging a capital-to-asset ratio of 8.22%, after increasing total Tier 1 by 36.7% in 2009.
The only markets with higher return on capital are India, Pakistan and Brunei. Two of these are anomalies: Brunei is a small banking market driven by soaring oil prices; in Pakistan, high return is closely associated with high risk. And between the two of them, these markets only account for one half of 1% of all bank assets in Asia.
South Asian potential
India is therefore one of the most interesting markets in terms of combining size and profitability, with Tier 1 capital rising more than 30% in 2009 while return-on-capital was held at 20.67%. Yet this is still a surprisingly small market: assets of $1112bn account for just 4.2% of the total for Asia, compared with more than 30% each shared between Japan and China.
An underbanked market? Quite possibly. But spare a thought for Bangladesh. Despite a population of 162 million, no bank in the country is large enough to appear in any of these rankings, even when China and Japan are stripped out to allow more room for smaller markets (see page 89). That may change in the near future: Bangladesh is one of the fastest-growing banking markets in Asia, with assets rising almost 25% in 2009.
