Within the region, HK’s banking sector has the highest CAR, but Australia, Taiwan, India and China fall far behind. Yet with tighter capital requirements looming, banks in Hong Kong must raise between an estimated $80m to $100m by 2018
April 27, 2015 | Colin SavageBased on The Asian Banker 500 (AB500) – an annual study of the financial and business performance of the commercial banking industry across Asia Pacific – the banking sector in Hong Kong grew capital ratios well over Basel III minimum requirements between 2010 and 2014. Despite this accomplishment, Asian Banker Research expects the regulatory authority, the Hong Kong Monetary Authority (HKMA), to further tighten capital requirements and forces banks in Hong Kong to achieve even higher minimum standards on Core Equity 1 Capital and Tier 1 Capital by the beginning of 2019.
Banks in Hong Kong raised $48.8 billion of capital in the domestic market (2010- 2014)
Fig. 1: Total Capital Gains in Hong Kong for top 12 commercial banks since 2010
Source: Asian Banker Research
With tighter capital requirements looming, banks in Hong Kong must raise between an estimated $80 and $100 million by 2018
Asian Banker Research believes that the HKMA may require banks to achieve the minimum core equity capital ratio (CET1) and the Tier 1 Capital Adequacy Ratio (Tier1 CAR) of 11-13% and 12.5-14.5% by 2018. While total capital adequacy levels are sufficiently addressed in the Hong Kong market, Asian Banker Research perceives that the structure and quality of capital will need closer management, particularly with rising requirements for CET1 and Tier1. As a result, Asian Banker Research estimates that the sector must raise an additional $80 to 100 billion by 2019 to satisfy tougher minimum levels – a figure more than double what was raised in the past four years (2010- 2014).
Capital adequacy ratios are rising, but detailed classifications misinterpret higher levels
Fig. 2: Average CET 1 and Tier 1 for Commercial Banks in Hong Kong (N=12)
Source: Asian Banker Research
*Note: With effect from 1 January 2013, a revised capital adequacy framework (Basel III) was introduced for locally incorporated AIs in Hong Kong. The capital adequacy ratios from March 2013 onwards are therefore not directly comparable with those up to December 2012.
Based on Asian Banker Research’s perceived developments in regulatory obligations, we estimate that most commercial banks must increase their Tier 1 CAR by 2018.
Strong now, future regulatory changes could challenge Hong Kong banks’ capital holdings
Fig. 3: CET 1 and Tier 1 for Commercial Banks in Hong Kong (Dec 2014)
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Source: Asian Banker Research
While the banking sector in Hong Kong has one of the highest capital adequacy ratio in the Asia Pacific, banking sectors in Australia, Taiwan, India and China have the lowest levels.
Overall, banks in Asia Pacific lead the world in capital strength with Hong Kong banks amongst the highest in the region. That said, several markets stand out in Asia Pacific for weaker attempts to meet regulatory capital requirements. Notably, Taiwanese officials, who require banks to maintain a CAR 12.3%, alongside those in Australia (12.4%), India (12.8 %) and China (13.2%), all stipulate that banks hold levels of capital markedly below competitor markets like the Philippines (16.7%), Hong Kong (16.8%) and Indonesia (19.6%) – each market reporting levels in excess of the upcoming Basel III requirements (CAR of 10.5% with a 2.5% buffer = 13%). Despite these variations, the strongest as well as middle-tier banks across Asia Pacific are well capitalised following lessons learnt from the Asian Banking Crisis in 1997-98.
Exceptions do exist, as the graph above shows, Asian banks, especially those in Hong Kong, are better capitalised and benefit from historical lessons and a tradition of conservativism – a characteristic that banks worldwide would do best to learn from and adopt.
Categories:
Asia Pacific, Databook, Hong Kong, Liquidity Risk, Operational Risk, Risk and RegulationKeywords:CAR, HKMA, CET-1, Capital Gains
