Asian banks still strong

The Straits Times
Dec 11, 2008 | 3:54 PM
Asian banks still strong

TOKYO - THE global financial crisis may have ravaged banks in the West, but look East for a different story.

In Asia, banks are bruised but not collapsing. Governments haven't had to resort to massive bailouts. And some are even expanding while their Western counterparts fold, another sign that the world's economic center of gravity may be shifting east.

Their resiliency, however, and the region's ambitions to become the world's next financial leader face major tests ahead. Volatile equity markets are eroding bank assets, the global slump is battering Asia's export-driven economy, and a jump in bad loans from failing firms looks inevitable.

For now, Asia is keeping banks in business by embracing less risk and drawing on experience fighting its own financial problems of the past, including the region's 1997-98 crisis. Public finances, external balances and corporate balance sheets are on sounder footing due to smarter macroeconomic policies, tighter bank supervision and better risk management systems.

None of the major banks in the region is expected to need big bailouts such as the ones Citigroup Inc. and insurance giant American International Group have received from the U.S. government, analysts say.

Moreover, Asian banks stand to benefit from the high savings rates of their domestic depositors, which gives them a deep pool from which to lend and invest.

The milder impact of the financial crisis thus far means that Asian banks 'may have relatively more resources to capture market opportunities when the market stabilizes and then look for the next stage of growth,' said Jerry Chien, managing director of the financial institutions group at Moody's Asia Pacific.

Central banks in the region also have responded aggressively since September by introducing various monetary measures, including liquidity injections and interest rate cuts.

'Thanks to the quick action of policy makers from virtually every East Asian country, banking systems have been able to deal with the crisis so far,' said Jim Adams, World Bank vice president for the East Asia and Pacific region.

South Korea's banking system is probably the most vulnerable with low capital adequacy ratios and high loan-to-deposit ratios. Balance sheets could be hurt further by an expected spike in bad loans as economic growth slows.

'It depends how bad the economy is going to get,' said Kim Jae-woo, banking analyst at Samsung Securities in Seoul.

Some analysts say banks may need to raise new capital and perhaps even require government funds, though not on a large scale.

Still, South Korea's banks and economy are far stronger than they were a decade ago, when a collapse in the Thai baht sparked a wave of recessions across Asia, bankrupting thousands of companies and putting millions out of work. After getting a multibillion dollar bailout arranged by the International Monetary Fund in 1997-98, South Korea reformed its banking system and corporations pared debt levels and improved transparency, setting the stage for more stable, long-term growth.

Japan also has learned from its bad debt debacle of the 1990s, triggered by a plunge in land prices. Its mammoth financial institutions - with nearly $15 trillion in domestic household assets - have emerged from the subprime crisis with far smaller losses than their Western peers.

And in Wall Street's ruins, they saw opportunity.

Nomura Holdings Inc., Japan's biggest brokerage, snapped up Lehman Brothers' operations in Asia, Europe and the Middle East for $2 billion after the U.S. investment firm collapsed in September.

Top Japanese bank Mitsubishi UFJ Financial Group Inc. invested $9 billion for a 21 percent stake in Morgan Stanley and recently completed the purchase of UnionBanCal Corp., now a wholly owned subsidiary.

Likewise, Hong Kong's banks are considered healthy, analysts said. Most are well-capitalized, maintaining Tier 1 capital ratios above 8 percent. A key measure of financial strength, a Tier 1 capital ratio essentially measures equity against risky assets.

Australia's banking system is also holding steady compared with the teetering U.S. system, with stronger regulation and limited exposure to U.S. subprime mortgages. The country's four biggest banks, including National Australia Bank Ltd. and Commonwealth Bank of Australia Ltd., appear stable, though the global financial crisis is cutting into the booming profits that had become the norm in recent years.

In mainland China, big state-owned lenders such as Industrial & Commercial Bank of China Ltd. have undergone massive, government-financed restructuring in recent years, shedding their huge legacy of bad debt. Capital infusions from strategic foreign investors and share listings have since pushed up the bank's capital adequacy ratios to some of the highest in the region.

By contrast, many American and European banks have already turned to national authorities for major help.

The U.S. Treasury has invested so far in 52 banks, including Citigroup, Bank of America Corp., and JPMorgan Chase & Co. Inc.

The British government has nationalized two banks - Northern Rock and Bradford & Bingley - and taken large equity stakes in three others to prevent a collapse of the country's banking sector.

Germany drew up a bailout plan worth as much as 500 billion euros ($645 billion) in October.

Still, while Asia's banks may have averted the worst of the subprime mortgage crisis, they haven't been immune to pressures from the global slowdown and market turmoil.

They will likely face rising credit costs and an increase in non-performing loans, said Emmanuel Daniel, president and chief executive of The Asian Banker, a Singapore-based banking research and consulting company.

Japanese financial firms are bolstering their bottom lines after suffering massive losses on their shareholdings. They are now reassessing risk, scaling back their profit outlooks and scrambling to raise cash by issuing new shares. Mitsubishi UFJ's first-half net profit plunged 64 percent, while Nomura Holdings posted a 72.9 billion yen ($787.3 million) net loss in the third quarter.

In Hong Kong, banks with heavy exposure in China may be particularly vulnerable as slowing growth, factory closures and cooling property values could lead to more defaults, analysts say.

Moody's Chien acknowledges that the immediate road ahead looks rocky. But, he adds, Asian banks will be well positioned to take advantage of a recovery once it does emerge.

'With more experience with financial crises and risk management, we hope that banks in Asia will be better equipped with the knowledge and infrastructure to deal with the next round of prosperity,' he said.

---- AP Business writers Kelly Olsen in Seoul, Jeremiah Marquez in Hong Kong, Elaine Kurtenbach in Beijing and Rohan Sullivan in Sydney contributed to this report.