MAS Chief Salutes Asian Banking Resilience, Notes Partial Retreat By European Players

Tom Burroughes

30 May 2017

The managing director of Singapore's financial regulator has given an upbeat assessment of the region's banking sector, and says the large number of Asians who currently don't have a bank account represents a huge future growth market.

Ravi Menon, MD of the , noted how Asian banks have greatly increased their market share of non-local lending to the region; in 2007, such banks accounted for a third of all international claims the region, but now they account for more than 60 per cent.

"This increase comes on the back of a decline in lending by Euro-area banks – over the same period, their share decreased from around a third to less than 15 per cent as they pulled back from the region," Menon, speaking at a conference in the MAS's offices, said yesterday.

Menon also noted how "Asian banks have been acquiring the Asian business lines from global banks, especially in wealth management", citing examples such as, in 2013, Sumitomo Mitsui Banking Corporation's purchase of SocGen’s Japanese private banking arm, and last year's move by OCBC to buy Barclays’ wealth and investment management business in Singapore and Hong Kong. (A number of other non-Asia banks, such as ABN AMRO and Royal Bank of Scotland have spun off Asian wealth businesses to local players. See this article for more analysis.)

Menon went on to state that while Asian banks are growing, their prudential standards remain high: he said the average Tier 1 capital ratio of Asian banks - a way of measuring banks' capital resilience in the face of shocks - was 13.4 per cent as of 2016, up from 10.6 per cent in 2008 and comfortably above the Basel minimum requirement of 6 per cent.

"The major Asian banks’ sound prudential standards position them well to face the challenges in the current environment - ranging from geopolitical risks to heightened policy uncertainty in the advanced economies," Menon continued.

However, Menon said that Asian banks have been able to escape problems in the global financial services sector; return on equity among such banks has been falling, and is now about 8 per cent, although significantly higher than European banks' RoE of below 3 per cent.

Menon, citing a recent MAS study, said three cyclical forces have pushed down Asian bank profitability: weaker global growth, which has hit credit demand and loan growth; prolonged ultra-low, or even negative, interest rates, which cuts interest income, and deteriorating asset quality, as seen in rising non-performing loans.

But Menon added that it would be odd, even concerning, if NPLs did not rise during diffcult periods because that might show that banks were not taking on sufficient risk to promote business expansion and enterprise.

Untapped potential
The Asia region is expected to continue logging relatively high growth rates in the medium term, such as about 6 per cent on average over the next five years, beating the global average of 3.7 per cent, Menon said. Higher Asian incomes will boost banking as demand for financial services goes up.

Menon also pointed to a 2015 World Bank study finding that of the 2 billion adults on the planet with no bank accounts, more than half were in East and South Asia. He said a more recent study by the ADB covering Cambodia, Indonesia, Myanmar and the Philippines found "significant gaps between demand and supply in several financial services, including payments, savings, and credit".

The use of digital channels to improve banking coverage will boost gross domestic product by 9 to 14 per cent in large countries such as Indonesia and Philippines, and by as much as 32 per cent in Cambodia, Menon said.

"Global banks will continue to play an important role in the region, especially in wholesale banking and the intermediation of US dollar flows. But the onus largely falls on Asian banks to expand financial inclusion, especially at the retail and small business level," he added.