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2008 marked what was easily the most catastrophic period for financial institutions in recent history. As we enter into another corporate earnings season across the globe for first quarter 2009, how are the results beginning to shape up for banks here in Asia?
We are seeing what seems to be three camps of financial performance being released. In the left corner are institutions in countries like South Korea and Malaysia which are still facing lackluster performance. In Korea for instance, whilst the banking industry has turned round the corner in 1Q2009 with most institutions returning to the black on lower-than-expected provisions (Korean banks are estimated to have logged a combined net profit of around US$146 million for the Jan-March period mainly from decreased loan-loss reserve), profit margins are expected to remain squeezed in the near-term. Banks continue to feel the sting of surging NPLs stemming from the slumping economy. We do not expect the market to achieve any form of stability till at least 2010 when loan delinquency rates get sorted out.
Meanwhile, clocking in commendable results despite the persistent global credit crunch and economic downturn are Hong Kong, mainland China and Vietnam. In the former two countries, the banks are generally coping well, being less impacted by their counterparts in the West. The Chinese government's stimulus package - with measures such as extending corporate credit and expanding bank guarantee deposits - has shored up financial stability. China's banking sector has consequently improved on the back of the stronger-than-expected corporate loans growth, deposits, domestic demand and consumption, and rebound in wealth management fees. Over in Vietnam, a recovery in overall lending activities resulted in joint stock banks performing better than expected in Q12009. Though the financial turmoil hit the Vietnamese market hard in 2008, with the government's subsidized loan stimulus program and banks relying on credit activity growth to boost bottom lines, there appears to be some modicum of stability in 2009.
Nations that are witnessing the most robust 1Q2009 results to-date include India and Indonesia. In India for instance, Yes Bank's profits leaping a stellar 40% in its fiscal fourth-quarter (Jan-March 2009), while that for HDFC Bank surged 34% from the year-earlier period, boosted by higher loans growth. Most banks in Indonesia have yet to release their numbers, though early indications likewise point to a majority still being able to report hearty profits. A number of Indonesian banks have confirmed acquisitive growth plans, including Bank Raykat Indonesia (expectations for net profit expansion of 15% in 2009, with this optimism reflected in channel investments that include rolling out 4,000 new ATMs), Bank Mandiri (targeting a general insurance company acquisition to complement AXA Mandiri's life insurance business), and Bank Rakyat (considering a second tier bank purchase to expand its SME business).
Our opinion for the remainder of 2009 from gazing into the crystal ball? Given the gravity of the economic situation globally and regionally, with the exception of developing markets driven by sterling domestic demand where banks are will still report commendable profits (e.g. China, India, Indonesia), the general expectations is for banks' operating environment to become increasingly challenging or at least remain equally taxing vis-à-vis 2008. Against such a backdrop of vulnerable economic and operating environment, institutions are identifying ways to contain cost and generate greater operational efficiencies. We also see banks focusing on fundamentals and consolidating strengths in their core business - namely by focusing on traditional banking mandates of cards, deposit taking, corporate lending, and payment facilitation. Credit risk meanwhile remains the primary concern across the region, with banks ensuring prudent risk and asset quality management practices and evaluating options to raise capital to maintain adequacy ratios to guard against escalating credit risks where necessary. Growth will come through customer centric improvements including upgrading and expansion of network franchises, enhancement of customer touch-points such as leveraging on the internet banking platform, stronger branding, and competitive product offerings. For instance, in the quest for greater customer focus, State Bank of India (which is a proxy for Indian banking) recently announced massive channel investments including the opening of branches and doubling of its ATM footprint.
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