Banks across the region continued to grow in 2014 but with headwinds in the horizon, conditions are expected to worsen
October 30, 2015 | Wendy Weng
The Asian Banker 500 2015 (AB 500) is an evaluation of the 500 largest banks in the Asia Pacific region for the financial year 2014. This year’s assessment shows that the banking sector in the region continued to grow, albeit at a slightly slower pace. Overall, the 500 banks in the list reported better-than-expected results, although the situation in 2015 is expected to worsen.
The combined assets of the 500 banks expanded at a more moderate rate of 4.4% in FY2014, compared to 7.9% in the previous year. The growth in combined loans, deposits and profits showed a similar trend, driven largely by the stronger US dollar.
With continuous asset growth, Industrial & Commercial Bank of China holds the top spot for the third year in a row. Its assets totalled $3.37 trillion in 2014, which was 23% more than that of China Construction Bank, the second largest bank, and 46% more than that of Mitsubishi UFJ Financial Group.
The top four largest banks are Chinese banks. The assets of both Agricultural Bank of China and Bank of China surpassed that of Mitsubishi UFJ Financial Group, which was placed third in last year’s evaluation. Though the assets of Mitsubishi UFJ Financial Group grew at a higher rate of 10.7% than China’s big four banks, its ranking was affected by depreciation of the Japanese Yen against the US dollar. As such, the 10 largest banks were the same as last year.
Combined assets of Japanese banks dropped by 8% and the share of assets also fell from 26.8% in 2013 to 23.6% in 2014, although the number of Japanese banks in the list went up to 109 from 102 last year. Meanwhile Chinese banks saw an increase in their share of assets from 43.8% in the previous year to 46.9% in 2014.
In general, the largest bank in each country remained unchanged from last year, except for South Korea. Shinhan Financial Group became the largest banking group in South Korea in terms of assets, as Woori Bank was absorbed into Woori Finance Holdings in November 2014 after some key affiliates were sold off. The South Korean government has been trying to privatise Woori since 2010 to recoup the bailout fund injected in the aftermath of the 1997 Asian financial crisis. Attempts to sell its controlling stake failed four times, largely due to a lack of bidders. The Financial Services Commission is considering dividing the stakes into smaller portions in its fifth bid in order to attract more investors. However, it’s highly likely that it may fall through again, as the Korean banking sector is not deemed to be attractive.
On an asset-weighted basis, the 500 largest banks maintained growth in areas such as assets, loans and operating income in 2014. They also held steady on average return on assets, loan-to-deposit (LDR) ratio, capital adequacy ratio and non-performing loan (NPL) ratio.
Average return on equity (ROE) declined slightly from 14.6% to 13.9% in 2014. Operating profit growth went up from 9% to 12.2%, while net profit growth fell considerably from 13.7% to 7.5%. Cost-to-income (CIR) ratio improved from 46.9% to 44.8%.
Although banks across the region achieved growth, the performance of the banking sector varied by country. Overall, banks in Japan, South Korea, Taiwan and Vietnam performed better than last year, and the banking sector of Hong Kong and Singapore outperformed their peers.
The Chinese banking sector saw double-digit balance sheet growth in 2014, which is not expected to continue in 2015. Banks reported average ROE of 18.4%, down slightly from 20% in the previous year. The growth in deposits for Chinese banks fell from 11.9% to 9.2% in 2014, due to the surge in the stock market in the second half of 2014 and the rapid development of internet finance. LDR increased to 67.5% from 65% in the previous year.
The Philippines has seen a drop in asset growth from 31% in 2013 to 14.9% in 2014, which is still much stronger than that of its counterparts in the region. Operating income growth fell to 8.2% from 18% in the previous year. The Philippine government changed its laws in 2014 to allow foreign banks to own 100% of local banks and up to 40% of overall assets in the banking system. This is expected to spur activity in the sector and increase efficiency.
Average ROE of South Korean banks in the list went up from 2.8% to 6.6% in 2014, which was the lowest among APAC countries. However, balance sheet and income growth which were negative last year returned to positive growth in FY2014. Average gross NPL ratios improved to 1.5% from 2.2% a year earlier. Banks in South Korea have been expanding overseas to search for new growth engines, mainly because of the record low interest rates at home following four rate cuts.
Profit threat from increased non-bank competition
The financial performance of Asia Pacific banks is under pressure in 2015 due in part to the rising competition from non-banks. Commercial banks have been increasingly challenged by non-traditional competitors, which have the potential to erode a significant portion of banks’ income. Banks need to respond quickly to changing market conditions in order to remain competitive.
In China, due to guidelines issued by the authorities to encourage innovation in internet finance and protect investor rights, Chinese banks have been facing fierce competition from internet finance companies and private online banks.
Technology firms such as Alibaba Group Holding and Tencent Holdings have large customer bases and vast amounts of customer and transaction data, because of the surge in online and mobile payments, as well as their internet-based fund products. Their services include deposits, lending and online transfers, and they have also obtained licenses in 2014 to open China’s first private banks. WeBank, China’s first internet-based bank, was launched by Tencent, targeting small and medium enterprises.
What is The Asian Banker 500?
The Asian Banker 500 (AB500) is an annual study of the financial and business performance of the commercial banking industry in the Asia Pacific region. The study comprises two different lists: the first ranks the top 500 banks in the region by asset size, while the second ranks the same 500 banks by strength, an evaluation that is based on a belief that a strong bank demonstrates long-term profitability from its core businesses.
Which banks are included?
The Asian Banker ranks financial institutions by asset size and focuses on Asia Pacific banks east of Iran. We also publish an expanded version of this list online, which includes over 700 banks from the Asia Pacific region and 300 banks from the Middle East and Central Asia. The focus of this list is on commercial banks and financial holding companies, with a significant proportion of activity in commercial banking. The AB500 does not include central banks, policy banks, investment banks or finance companies that lack significant deposit-taking franchises or commercial lending businesses.
How do we collect and treat the data?
Bank annual reports and statistics provided by central banks or industry associations are our main sources of data. In the absence of up-to-date annual reports, we contact banks directly to source financial results. Consolidated figures are used for banking groups, except when non-banking activities form a substantial portion of the consolidated figures, in which case we look at the banking unit independent of its parent. All figures are converted into US dollars using the rate held on December 31st 2014; y-o-y growth rates are calculated based on original local currency figures.
Categories: Asia Pacific
, Asian Banker 500
, Banks We Like
, Hong Kong
, Operational Risk
, Risk and Regulation
Keywords: Asia Pacific
, Asian Banker 500
, Banks We Like
, Hong Kong
, Operational Risk
, Risk And Regulation