T H E AS IA N B A N K E R
A show of emerging
market strength
Developed markets are not exerting their
strength, even if they are finally emerging
out of chronic loss-making
By Chan Pheng
T he Asian Banker has been publishing its strength
ranking of Asia Pacific banks since 2003, using a
scorecard to assess the financial data of a pool of the
300 largest banks by assets and assign them strength
ranking. From this year, the survey has increased this
pool to 500 banks, pitting banks in the asset size
range of 301-500 against banks in the 1-300 range
for the first time. There have also been some adjust-
ments and modification to the scorecard, including an
increase in the term of assessment of variations of
ROE in its risk index, which raises the historical view
to 10 years from only five years in our 2009 survey.
In addition to this, total deposits and borrowings have
been utilized for the liquidity ratio instead of total as-
sets, which gives the results a slightly different shape
from the previous year.
Despite these minor changes, it is clear that
developing market banks are showing their strength
over weak developed market lenders in this year’s
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strength ranking, a trend that seems to follow last
year’s relatively closely. This year’s top 20 contains a
very high ratio of developing market banks to devel-
oped market lenders (14:6 this year, 16:4 last year),
compared to previous years like 2008 when half of
the banks were from developing markets, or 2007,
when only four of them were.
This year, one bank from the lower 200—which
was not assessed in 2009 when the pool of banks
assessed for strength comprised only the 300 largest
by assets, and not the 500 largest as is being done
this year—has made it into the top 20, namely Eastern
Bank of Bangladesh; greater displacement occurs
moving down the list, however, as there are 11 ‘lower
200’ banks in the top 50, and 27 in the top 100.
There has been a lot of movement within the
ranks, some of it quite sudden. Unsurprisingly, the
fact that Singapore is getting out the recession quickly
compared with neighbouring countries effectively con-
10/11/10 7:09:30 PM
 tributed to one of the biggest moves, pushing OCBC
to third place, up from its 2009 position in the 26th
spot. This was mainly supported by the growth in
operating profit, increasing from -23.5% last year to
35% this year. In conjunction with this, other Singa-
porean banks UOB and DBS also have the operating
profit picking up year on year to -7% and -6% from
-9.7% and -12.1% respectively. Indian banks HDFC
Bank and Punjab National Bank with Malaysian lender
Public Bank, which stood at the top three positions in
2009 ranking, this year still appear in the top 20 at
the 1st, 7th, and 17th positions respectively, proving
that HDFC Bank in India still remains sound with the
These years, the top 20 has contained
a very high ratio of developing market
banks, compared to preceding years,
when less than half were
rise in net loans, risk aversion, and ROA being the
three mains factors in it sitting at the top strength
position over the past two years.
Developing market banks that are benefiting from
the scorecard are other banks in the top 20 from Bang-
ladesh (one), China (eight), India (four), and Malaysia
(one), which have been pushed to higher positions by
growth in assets and deposits, capital adequacy ratio
(CAR), loan loss reserve to gross NPL ratio and, most
importantly, their strong liquidity ratios.
However, asset and deposit growth is not the main
factor in the strength story, which also places a great
deal of importance on loan loss reserve to NPL ratio. In
this area, 14 banks out of the top 20 received full score,
augmented by high marks for their CAR, an indicator
that has in recent years been given the highest impor-
tance by governments, regulators, shareholders and
the general population alike; this has been especially
the case in China, where a vigilant regulator imposes
some of the world’s highest CAR requirements, as well
as in Europe, where regulators conducted stress tests,
and among financial regulators and supervisors around
the world in general, as seen by the establishment of
new Basel III rules that demand upward revisions in
minimum CAR requirements.
The assessment of last year’s and this year’s
rankings of the AB500 strongest banks range from
the individual indicator’s score to the aggregate
score awarded to the respective banks, which reveal
relatively positive progress year on year. One of them
is the rise in the average aggregate score from 2.4 to
ABJ ISS-101(PG1-116).indd 69
2.44 over the year by not making any amendments to
the weight assigned to each element. So what are the
main indicators driving these discrepancies?
Basel III to hit capital adequacy ratios
Basel III, the new global banking capital rule initiated
by Basel Committee on Banking Supervision, has
demanded banks increase capital not only quantita-
tively but also qualitatively, further reinforcing their
preparations for emergency situations. The core Tier
1 capital ratio, consisting mainly of retained earn-
ings and ordinary stock, has been revised upward to
4.5% from 2% and must be accomplished by 2015,
while the Tier 1 capital ratio and minimum total
capital, plus the capital conservation buffer, are
at 6% and 10.5% respectively. So what is the
implication of this structural modification?
Given this development, we are likely to
recognize the banks in the top 20 having both
higher Tier 1 and total CAR simultaneously,
distinct from banks in the year 2008 and 2009,
though they have been jumping around the top
50 in the ranking.
The most essential question remaining is whether
this maintenance of high CAR is sustainable across the
banks in Asia Pacific after Basel III has been in place, or
if the ratio will drop to the minimum ratio required by
the legislation after the health of the financial industry
has improved. This is because banks tend to increase
and engage in more profit-generating activities because
there could be high opportunity cost of these high
ratios. If our prediction is correct, this could result
in lower capital outstanding, and we would like to see
whether this reaction will affect which banks are in the
top 20 in the AB500 2011 Strongest Banks ranking.
Out of the 500 banks being evaluated in the 2010
ranking, the lowest total CAR is 0.8%, in contrast to
a negative 11.7% in 2009. By the same token, the
fluctuation in the ratio tended to be more aggressive
in 2009, ranging from negative 11.7% to 79% as
compared to 0.8% to 48.1% in 2010, showing that
banks are now more cautious in terms of raising their
capital while maintaining stability.
Taking a glimpse of developed markets as a whole,
we can see that Singapore’s local banks, on average,
display the highest Tier 1 CAR at 14.05% compared
to Australia (8.69%), Hong Kong (13.43%), Japan
(9.74%), South Korea (8.05%), Taiwan (8.6%), and
New Zealand (9.25%), while the emerging markets
hold their ratios at similar levels.
However, emphasizing CAR alone is not adequate,
as we need to take into account NPL and liquidity
ratios, which continue to be a proper gauge towards
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 T H E AS IA N B A N K E R

Asia Pacific’s Strongest Banks Scorecard

Measurement range

Weight Parameters for comparison 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
- Scoring #

Scale 12.5% Assets > US$100 Bn US$50-100 Bn US$35-50 Bn US$30-35 Bn US$25-30 Bn US$20-25 Bn US$15-20 Bn US$10-15 Bn US$5-10 Bn < US$5 Bn n.a.

Balance 5.0% YoY Growth in Loans No. 1-25 No. 26-50 No. 51-75 No. 76-100 No. 101-125 No. 126-150 No. 151-175 No. 176-200 No. 201-225 No. 226-250 No. 251-300
sheet
growth
5.0% YoY Growth in Deposits No. 1-25 No. 26-50 No. 51-75 No. 76-100 No. 101-125 No. 126-150 No. 151-175 No. 176-200 No. 201-225 No. 226-250 No. 251-300

15.0% Risk Index > 80 60 - 80 45 - 60 35 - 45 30 - 35 25 - 30 20 - 25 15 - 20 10 - 15 5 - 10 <5

Risk profile
10.0% Capital Adequacy Ratio (CAR) > 18% 16 - 18% 14 - 16% 12 - 14% 11 - 12% 10 - 11% 9 - 10% 8 - 9% 6 - 8% 0 - 6% < 0%

7.5% YoY Growth in Operating Profits > 50% & L-P 40 - 50% 35 - 40% 30 - 35% 25 - 30% 20 - 25% 15 - 20% 10 - 15% 5 - 10% 0 - 5% < 0% &
P-L & L-L

7.5% Return on Assets Ratio (ROA) > 1.6% 1.4- 1.6% 1.2 - 1.4% 1.1 - 1.2% 1.0 - 1.1% 0.9 - 1.0% 0.7 - 0.9% 0.5 - 0.7% 0.3 - 0.5% 0 - 0.3% < 0%

Profitability
10.0% Cost-to-Income Ratio (CIR) < 35% 35 - 40% 40 - 45% 45 - 50% 50 - 55% 55 - 60% 60 - 65% 65 - 70% 70 - 75% 75 - 80% > 80%

Non-interest Income / 40 - 45% or 35 - 40% or 30 - 35% or 25 - 30% or 20 - 25% or 15 - 20% or 10 - 15% or 5 - 10% or 0 - 5% or
7.5% Total Operating Income 45 - 55% < 0%
55 - 60% 60 - 65% 65 - 70% 70 - 75% 75 - 80% 80 - 85% 85 - 90% 90 - 95% 95 - 100%

Loan Loss Reserve /

7.5% > 100% 90 -100% 80 - 90% 70 - 80% 60 - 70% 50 - 60% 40 - 50% 30 - 40% 20 - 30% 10 - 20% < 10%
Asset Gross Non-performing Loans
quality
Non-performing Loan Ratio
7.5% < 0.5% 0.5 - 1.0% 1.0 - 1.5% 1.5 - 2.5% 2.5 - 3.5% 3.5 - 5.0% 5.0 - 7.5% 7.5 - 10% 10 - 12.5% 12.5 - 15% > 15%
(NPL)

Liquid Asset /
Liquidity 5.0% > 40% 28 - 40% 24 - 28% 20 - 24% 16 - 20% 12 - 16% 9.5 - 12% 7 - 9.5% 4.5 - 7% 0 - 4.5% n.a.
Total Deposits and Borrowings

Notes:
5 = Highest, 0 = Lowest We have changed the ranking formula to include liquidity indicators.
* Risk Index = [E(ROA) + Equity / Assets] / Std. Dev. (ROA).
E(ROA) is the expected return on assets, calculated as the average ROA in the past 10 financial years provided the data are available.
Std. Dev (ROA) is the standard deviation of ROA which measures the variability of profitability.
The Risk Index measures how much a bank's earnings can decline until book value becomes negative. Expressed in units of standard deviation of ROA. The Risk Index gauges banks' ability to absorb accounting losses.

Source: Asian Banker Research

banks’ ability to meet obligations and cushion them-
selves against shortfalls.
Bad loans weigh heavily
One interesting country worth focusing on among the
developed markets for its NPL levels is Japan. With
123 Japanese banks listed in AB500 Strongest Banks
2010, the average gross NPL ratio has risen even
further to 3.69% this year from 3.59% last year—the
highest among the Asia Pacific banks—which is a
2.78% increase year on year, with one of the main
reasons being loan defaults spurred by bankruptcies
and slow economic recovery starting from the end
of the year 2009. But with the three largest banks
in Japan, Mitsubishi UFJ Financial Group, Mizuho
Financial Group and Sumitomo Mitsui Financial Group,
with gross NPL ratios of 1.64%, 2.08%, and 2.33%
respectively, it is clear that these banks—which hold
between them a huge accumulation of Japanese
assets—are well below this average, which is skewed
by small lenders.
However the environment for Japanese banks big
or small is dangerous, and starting from 2010 there
were two large-scale bankruptcies in Japan, including
the national carrier Japan Airlines, with loans amount-
ing to $4.8 billion—it was the country fourth-largest
bankruptcy ever—and the country’s fourth-largest
telecommunications provider, Willcom, which saw

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 almost 80% of its $2.3 billion in debt waived. Given
this incident and the possibility of more like it under-
mining the former powerhouse’s economic prospects
going forward, we still believe that our 2011 list of
500 banks will show a sign of increasing bad loans
and overall low score for banks in Japan.
Out of Asia’s seven developed markets, Australia
is the best performer for NPLs, achieving the lowest
gross NPL ratio at 0.89%, driven by the risk manage-
ment of the leading banks: these include Westpac
Banking Corporation (0.9%) and Commonwealth
Bank of Australia (0.89%). Nonetheless, we are very
concerned with bad loans piling up in Asia as a large
percentage of it has been property loans, especially
after the recession has faded since 2009, and in the
case of a strong double dip recession, problems
will swell across households, banks and the overall
economies of the countries in the region.
To worsen the scenario, the surprising $228.5
million net loss in the second quarter of 2010 result-
ing from a $777 million one-time impairment charge
of goodwill has further put pressure on DBS Bank
Our 2011 list of 500 banks will show a
sign of increasing bad loans and overall
low scores for banks in Japan
in Singapore, and the banking industry as a whole,
which creates a warning for other banks to keep the
quality of their loans and provision in check. Recently,
China, with a system-wide NPL ratio of 1.83%, has
just gone through bank stress tests that show that
20% of all outstanding bank loans to state-owned en-
terprises failed to meet lending requirements, though
they are not yet non-performing. However, it is clear
that China’s NPLs will need to rise at some point in
response to the massive outpouring of lending in the
country, with some indicating 2012 likely to be the
year of the bad loan there.
Liquidity ratio
One major disparity between the liquidity ratio last
year and this year is the methodology we used to
calculate the ratio, which we initiated to increase the
indicator’s meaningfulness and facilitate comparisons
across banks, though the 5% scoring weight has not
been changed. We have turned to applying total de-
posits and borrowings, which play a more important
role in determining how liquid a bank is than total
assets, which could include fixed assets inconsistent
with the liquid assets at the numerator.
ABJ ISS-101(PG1-116).indd 71
Thanks to our strongest balance sheet scorecard,
we believe banks with the ratio of 40% and above
are internally liquid, and that can be observed in
Singapore with all the three local banks contribut-
ing the average liquidity ratio of 39.5%, higher than
the industry average of all the 21 countries listed in
strongest banks ranking at 22.8%. A remarkable point
to be noted is Japan, which has the lowest liquidity
ratio at 8.18% among all the developed and the
majority of emerging markets, an indicator that has
worsened since last year and given rise to the issue
of its high gross NPL ratio.
Year to come
Based on this year’s strength scores, it is clear that
banks as a whole tend to play safe and see stability as
a more important characteristic than loan growth for its
own sake. Banks across Asia on the whole seem to be
stronger than they were in 2008, and this buffering is
likely to continue into 2011. Scrutinizing banks across
countries, we can see that all the developed and emerg-
ing market lenders are still profitable, except for banks
in Japan, which show the lion’s share of bank loss-
es—10 of the 16 loss-making banks in this year’s
survey are Japanese. The banks are suffering under
the country’s slow economic recovery in the midst
of rising deflation, along with the burden of the
strongest yen in 15 years despite the commitment
of expansionary monetary policy and an $11 billion
stimulus package to intervene in the foreign exchange
market to reverse the yen’s sharp appreciation.
However, this must be taken in perspective, as
the number of loss-making Japanese banks in this
year’s survey is far fewer than last year’s, and while
10 banks have showed a least two years of losses,
50 have moved from losses into profits since last
year’s survey was conducted; if difficult economic
conditions cause some of these 50 banks to move
back into losses next year, they will still be better of
than they were last year.
A similar trend is evident in Taiwan, the market af-
ter Japan that has shown the greatest number of loss-
making banks, where only four have shown at least
two years of losses but 11 of last year’s loss-making
banks have moved into profit. We would expect this
trend to continue, and next year’s loss-making banks
will be the ones with deep-rooted organizational fail-
ings that will be in quick need of resolution if they
even make it into 2011.
The Asian Banker 500 strength ranking can be seen at
T.A.B.
www.theasianbanker.com
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