BANKING
Asian Banks: Stable Despite Challenges
December 11, 2008
Christopher Bjorke

While banks in the United States and Europe amassed write-downs in the billions, Asian banks weathered the crisis while taking steps to shore up their stability.

According to a recent statement by Fitch Ratings, “years of very benign economic conditions have generally enabled Asian banks to strengthen their balance sheets in terms of loans quality and capitalization.”

James Barth, of Auburn University and the Milken Institute, has compiled numbers on bank write-downs worldwide through June 2008. Of the $396.7 billion in losses since the start of the credit crisis in mid-2007, Asian banks accounted for only $21 billion. European banks piled up $200 billion in losses and the Americas $175.

“They didn’t suffer much relative loss,” Barth said. The Bank of China had some exposure to the subprime-backed securities, as did a few Japanese and Taiwanese banks, most have not. “So far, at least, the banks in Asia have not participated in any major way in the problems that have plagued some of the European banks and American banks.”

Similar to the Fitch report, Barth said that Asian banks have been helped by the growth that has kept Asia strong despite the downturn in the West.

“The other part of it, of course, is that their economies have been doing fairly well, when you look at China and India, and until recently Vietnam,” he said. “They haven’t been dragged down, yet, at least, by the problems of the United States.”

The Fitch report stated that, despite changing economic circumstances, banks have improved overall.

“Indian banks, for instance, would find themselves in a more challenging operating environment this year, with NPL (Non-performing loan) ratios likely to rise from their historic lows. At the same time, most banks’ loss absorption capabilities have also improved; thus on balance, the outlook on their ratings remains mostly stable.”

In China, the government has been aggressive in promoting risk management within banks and restraining the growth of new credit and channeling it toward productive investments. Reserve requirements have been set near 17% and the government is allowing more investment overseas. At the same time, encouraging lending to profitable enterprises can reduce the ratio of performing to nonperforming loans, which have been a concern as the country has modernized.

“China has done a lot to try to contain growth in the credit sector,” Barth said. “But when one looks back, one has to realize that China has grown enormously rapidly despite the problems of the banks. China can do even better, operate more efficiently, get more productive growth if indeed the banks can fully implement the controls within the banks that make sure the loans are going to the most productive firms and enterprises.”

Fitch notes that, while the past year has been good for Chinese banks, the coming year could present challenges.

“While banks enjoyed a stellar 2007, they will face a more difficult environment ahead as borrowers begin to feel the strain from the government’s tightened monetary stance, the weakening global economy and rising input and operating costs from 12-year-high domestic inflation,” according to the Fitch report.

Barth, who has been an advisor to the People’s Bank of China on reform issues, said that despite remaining problems, Chinese banks have made great progress.

“Chinese banks have to do a better job of getting highly qualified financial people into the banks and better accounting systems to better control risks,” he said. “But China’s banks have come a long way in a relatively short period of time, and indeed, some of what they’ve done has been unprecedented.”

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