An unrelenting lack of normality

By Wendy Weng

The annual Asian Banker 500 largest banks ranking does not only measure and track the numerical changes in asset size but also the fundamental transformation of these institutions as they confront an unprecedented level of disruption on various fronts; regulation, technology, competition and customer.

Chinese banks continued to dominate the list of AB 500 largest banks and also the list of the top 20 largest banks

Basel capital and liquidity requirements have posed challenges for banks in some emerging economies, particularly the smaller banks

The Asia Pacific banking sector is facing some major challenges, particularly in meeting onerous regulatory requirements and leveraging evolving technology to increase efficiency, reduce operating costs and enhance customer experience

Industrial & Commercial Bank of China continued to be at the top of The Asian Banker 500 ranking by assets, with total assets growing 8.7% to $3.47 trillion as of December 2016. The Asian Banker 500 (AB500) 2017 is an evaluation of the 500 largest banks in the Asia Pacific region for the financial year 2016. This year’s evaluation covers 20 economies, and the 500 largest banks combined had $52.3 trillion in assets, $25.6 trillion in net loans, $36 trillion in deposits and $379 billion in net profit, as compared to $48.2 trillion in assets, $24.1 trillion in net loans, $32.7 trillion in deposits and $387.7 in net profit the year before.

Chinese banks continued to dominate the list of AB 500 largest banks and also the list of the top 20 largest banks. The eleven Chinese banks among the top 20 maintained a steady average growth of 12.5% in total assets, while four largest Japanese banks saw improved average asset growth rate from 2.0% in the previous year to 2.9%. The total assets of big four banks in Australia decreased by an average 0.8%, compared with an average increase of 9.9% in 2015. This was largely caused by 18.6% decline in total assets of National Australia Bank. The bank demerged its UK banking business and completed the sale of 80% of its life insurance business to refocus on core businesses in Australia and New Zealand.

China saw the largest increase in the number of banks in AB500, from 130 in the previous year’s evaluation to 156. As a result, their share of total assets in AB500 went up to 49.2% from 46.9% in the previous year. City and rural commercial banks in China expanded at a pace faster than larger Chinese banks, as the financial results of more of such banks became available. This led to stronger overall balance sheet growth of Chinese banks and also a higher cut-off for this year’s ranking. On average, the total assets of all Chinese banks on the list grew by 15%, compared with 8.1% in 2015.

The smallest bank in the AB500, Bank Mayapada Internasional of Indonesia, recorded $4.5 billion in assets, compared to the smallest bank in the previous year’s evaluation, which held only $3.1 billion. Thus, combined assets of the 500 largest banks surged by 9%, much faster than 3% in last year’s evaluation. Combined net profit, however, still continued to drop by 2%, which reflects significant pressures on banks’ profitability

Regulatory impact

Asia Pacific banks are facing significant challenges to comply with the latest regulatory changes, such as the new capital, leverage and liquidity standards. Although most banks are well-positioned to meet these requirements, an increasing number will face pressure to meet additional international regulations expected to be implemented locally over the coming years. Among these, International Financial Reporting Standard (IFRS) 9 is set to be implemented in 2018 across most major Asia Pacific economies.

Overall, banks in the Asia Pacific region maintain healthy capital and liquidity profiles. 2016 witnessed a general improvement in their capital and liquidity positions, on the back of increased capital and fund-raising activities. Most banks are preparing for the full implementation of Basel III framework in 2019 through the continued build-up of capital and liquidity buffers. Such building up of capital and liquidity positions also mean less is being lent to customers and the economy and less to be earned by banks from such assets. Meanwhile, this precipitates a vicious cycle of lending deceleration, that is happening in some Asia Pacific economies, that have also contributed to their higher level of capital.

The banking sectors across the region are at varying stages of development. Many Asia Pacific regulators require banks to meet tougher capital requirements than Basel III. For example, the Monetary Authority of Singapore imposed on Singapore-incorporated banks capital adequacy requirements that are 2% higher than Basel III.

Nevertheless, Basel capital and liquidity requirements have posed challenges for banks in some emerging economies, particularly the smaller banks. The faster loan growth led to pressures on their capitalisation and liquidity, and some of them are struggling to meet the requirements set by the central banks in line with the Basel regulations. Vietnam is one of the economies that lagged behind. Some Vietnamese banks saw deterioration in their capital buffers, as rapid credit growth has outpaced internal capital generation and faced difficulties in raising capital from external sources. Meanwhile, the Vietnamese banking system is facing liquidity pressures, as deposits expanded at a slower pace than loans.

Public sector banks in India are also under massive pressures, due to weak capital buffers. They are facing difficulty in meeting progressive increases in minimum capital requirements as Basel III is phased in. They have to depend on the government’s further capital infusion to comply with the new requirements, as they faced growing pressures to raise capital on their own.

New technologies

Apart from the regulatory burden, Asia Pacific banks are increasingly challenged by disruptive technologies and increasingly competitive market conditions.

Banks are investing more in new technologies and increasing their partnership with financial technology firms to reach more customers and deliver faster, cheaper and more innovative services, with the aim of turning challenges into opportunities.

The banking sector is focusing more on digitisation to stay relevant, given the rapid technological change and evolving customer requirements. Nowadays, more customers prefer digital-enabled self-service banking, particularly mobile banking, and they are continuously migrating to digital for routine transactions. Meanwhile, switching banks has become easier. To tackle falling customer loyalty, banks are paying more attentions to customer experience. They have continued to invest significantly in digital capabilities, in order to deepen customer relationships and to enhance customer’s banking experience.

In addition, banks need to improve cybersecurity, as cybersecurity issues remain a key concern for both customers who do not engage in digital banking and who are using the digital banking services. In addition, data analytics, cloud computing, blockchain, artificial intelligence and robotics are also key focus areas for banks. Chatbots are gaining wider use in the banking sector as their capabilities improve.

To conclude, the Asia Pacific banking sector is facing some major challenges, particularly in meeting onerous regulatory requirements and leveraging evolving technology to increase efficiency, reduce operating costs and enhance customer experience, leading to the fundamental transformation of their business and operating models. In order to stay competitive, banks need to adapt their business to the new regulatory and technological environments. Overall, we are cautiously optimistic about Asia Pacific banks’ ability to take preemptive actions to prepare for the future, as they face a sector that is in rapid transition and one in which nothing can be considered normal anymore.

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AB500, Asia Pacific, Basel III, IFRS9, cybersecurity, digitisation, technology

Keywords: AB500 Guest: Alicia Garcia Herrero