• Bank of China (Hong Kong) is the strongest bank in Hong Kong and Asia Pacific in 2016
• Overall financial performance of the Asia Pacific banking sector continued to weaken in financial year 2015 reflecting the challenging operating environment
• Banking sector consolidation gathers pace as asset quality and capital come under pressure.

Hong Kong-based banks continued to dominate the top spots on the annual ranking of Asian Banker, AB 500 Strongest Banks in 2016, based on a very detailed and transparent scorecard that ranks commercial banks on six areas of balance sheet financial performance; namely the ability to scale, balance sheet growth, risk profile, profitability, asset quality and liquidity. 

Hong Kong led the list of top 20 strongest banks in the Asia Pacific region with seven banks, and the rest of the top 20 included three Chinese banks, three Singapore banks, two Malaysian banks, two New Zealand banks, one Australian bank, one Brunei bank and one Macau bank.

Bank of China (Hong Kong) is the strongest bank in Hong Kong and Asia Pacific in 2016

The bank continued its strong balance sheet financial performance amid a challenging operating environment. It maintained its asset quality and overall profitability, while capital and liquidity positions remained strong. With a strength score of 4.14, Bank of China (Hong Kong) held the top spot for the third year in a row.

>HSBC placed third at 4.00 and Hang Seng Bank fourth at 3.98. China Construction Bank (Asia) moved up from 76th to eighth position. Industrial & Commercial Bank of China and Malaysia’s Public Bank tied for the fifth place. Singapore-based OCBC Bank dropped five spots to be ranked seventh.

Hong Kong and Singapore banking industry remained the strongest in the region. On an asset-weighted basis, banks in Hong Kong and Singapore achieved an average strength score of 3.80 and 3.67 respectively out of 5.00, followed by China (3.36), New Zealand (3.35) and Australia (3.32). The average strength score of banks in Macau and Malaysia was just over regional average of 3.10. By contrast, Bangladesh, India and Vietnam continued to underperform, with average strength score below 2.5.

Financial performance weakened

The overall financial performance of the Asia Pacific banking sector in financial year (FY) 2015 reflected the challenging operating environment for banks throughout the year. Bank asset quality and profitability were the two areas that suffered the most.

Figure 1. AB500 strongest banks by balance sheet in the Asia Pacific region 2016

Rank	Bank	Country	Score
1	Bank of China (Hong Kong)	Hong Kong	4.14
2	Industrial & Commercial Bank of China (Macau)	Macau	4.06
3	HSBC	Hong Kong	4.00
4	Hang Seng Bank	Hong Kong	3.98
5	Industrial & Commercial Bank of China	China	3.80
5	Public Bank	Malaysia	3.80
7	OCBC Bank	Singapore	3.79
8	China Construction Bank (Asia)	Hong Kong	3.75
8	United Overseas Bank	Singapore	3.75
10	Bank of China	China	3.74
11	China Construction Bank Corporation	China	3.71
12	DBS Group	Singapore	3.70
13	Industrial & Commercial Bank of China (Asia)	Hong Kong	3.68
14	Bank Islam Brunei Darussalam	Brunei	3.66
14	Hong Leong Financial Group	Malaysia	3.66
16	ANZ Bank New Zealand	New Zealand	3.64
16	Citibank (Hong Kong)	Hong Kong	3.64
16	Standard Chartered Bank (Hong Kong)	Hong Kong	3.64
19	Bank of New Zealand	New Zealand	3.58
20	Commonwealth Bank of Australia	Australia	3.53

Source: Asian Banker Research

The weighted average gross non-performing loan (NPL) ratio of the 500 largest banks in the region rose to 1.7% from 1.4% the year before. This can be largely attributed to slower economic growth and higher level of household and corporate debt that has accumulated during the past few years. Meanwhile, asset quality of banks with commodity exposure was negatively influenced by the fall in commodity prices. Overall, banks in the region maintained relatively strong loan loss reserves. In FY 2015, the weighted average provision coverage ratio fell considerably from 150% in the previous year to 129%.

Compared to their peers in the region, the asset quality of Indian banks weakened the most. Their average gross NPL ratio reached 7.5% in FY 2015, compared to 3.2% in the previous year. The average loan loss reserves to gross NPL ratio was at 52%, the lowest in the region. In late 2015, Reserve Bank of India forced banks to reclassify some troubled loans, which resulted in a surge in bad loans and higher loan loss provisions. By contrast, banks in Australia and New Zealand recorded the lowest average gross NPL ratio, and they demonstrated higher average provision coverage ratio at above 150%. Meanwhile, bank asset quality in China, Indonesia, Singapore, and Thailand also weakened in FY 2015. The average provision coverage ratio of Chinese banks fell significantly to 186% from 238% a year earlier. Compared to other commercial banks, the big four banks had a lower average provision coverage ratio at 162%.

Bank profitability levels weakened, due to low net interest margins and higher credit costs. Return on equity (ROE) and return on assets (ROA) of the 500 largest banks moderated to 12.1% and 0.8% respectively, compared to 13.9% and 0.9% in last year’s evaluation. Overall, Asia-Pacific banks maintained solid capital buffers and ample liquidity. Deterioration in bank asset quality is expected to continue in the near future, and thereby bank profitability will remain under pressure and some banks may need to raise more capital.

Banking sector consolidation accelerates

Although consolidation is not the solution to the problems that exist in the banking sector, fragmented banking sectors will profit from it in the long run. Further banking sector consolidation is expected in counties like Indonesia, the Philippines and Vietnam, as these countries’ regulators step up efforts to strengthen and clean up their banking systems, in preparing for the fierce competition expected from banks in neighbouring ASEAN member countries.

Indonesian banks had the lowest weighted average bank assets to gross domestic product (GDP) ratio at 4.3% at the end of FY 2015, followed by banks in India (7.3%), the Philippines (8.9%), and Vietnam (11.6%). In 2015, Indonesia’s regulators changed rules to allow foreign buyers to own more than 40% of local banks, if they buy stakes in two separate local banks and merge them into one entity. In the Philippines, Consolidation Program for Rural Banks (CPRB) was launched in August 2015 to encourage more rural banks to consolidate.

State Bank of Vietnam plans to shrink the total number of banks to 15-17 by 2017. Large state-owned banks have been encouraged to absorb smaller and weaker lenders in Vietnam. Meanwhile, State Bank of India has received approval to commence a merger plan in August 2016, which signals the beginning of consolidation among public sector banks in India. Despite implementation challenges, consolidation is inevitable and we are expecting larger and stronger banks coming from these countries in the near future.

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Asia Pacific, Asian Banker 500, Retail Banking, Transaction Banking

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Asia Pacific,Asian Banker 500,Retail Banking,Transaction Banking,

Keywords:BOCHK, HSBC, Hang Seng Bank, ICBC, Public Bank, Asia Pacific, TAB Strongest Bank 2016