The recent bank runs at India’s ICICI and Hong Kong’s Bank of East Asia have rekindled memories of the region’s last great banking crisis of 1997-98. They have also prompted the awkward question: could it happen again?

The seeds of the Asian financial crisis were home­grown. Regional banks had benefited from several strong years of economic growth in countries such as South Korea, Malaysia and Thailand.

The crisis was triggered by pessimistic and deep-poc­keted global investors, who started to bet that the local economies – and hence currencies – were overvalued.

The sell-off quickly snowballed and the subsequent currency collapses and recessions exposed the poor financial health of the region’s banks.

This time round, say analysts, Asia’s banks are far better positioned to weather a downturn in economic activity.

The roots of the global financial crisis started in the US, and lenders’ exposure to subprime real estate. Unlike their European peers, few Asian banks have exposure to subprime assets. Of the $500bn written off by banks globally in the year to August, Asian financial institutions, including Japan, accounted for only about 5 per cent.

But while the direct exposure may be limited, Asia’s banks cannot insulate themselves from the rising cost of funds, collapsing asset values, not to mention the forecast global economic downturn, which is expected to hit the region’s exporters and domestic consumption.

Alistair Scarff, head of Asia Pacific financial institutions research at Merrill Lynch, said: “The financial health of Asian banks is very different to that of a decade ago. From my vantage point, no bank in Asia faces having to recapitalise to shore up their balance sheet at this stage.”

The banks’ improved creditworthiness has come thanks to improvements in risk management, regulatory and governance reforms, economic restructurings and solid corporate earnings after several years of strong regional economic growth.

Banks have also benefited from more people using banks, the growth of small to mid-sized enterprises and a sharp rise in intra-regional trade.

“Banks’ earnings streams are more diverse with much less reliance on interest income,” says Ritesh Maheshwari, a senior director of financial institution ratings at Standard & Poor’s in Singapore.

The turnround has been notable. In 1997 in Malaysia and Indonesia, the average Tier One capital ratio for banks – a key measure of financial health – was less than 5 per cent, says Mr Scarff. At present the ratios exceed 10 per cent.

Indian banks now boast an average Tier One ratio of
9 per cent, while the average capital adequacy ratio is
12 per cent, according to Mr Scarff.

Across the Asia Pacific region, excluding Japan, it is the health of banks in Australia and especially South Korea that are drawing the most attention, because of their comparatively higher levels of reliance on short-term wholesale funding from overseas.

The average Tier One ratio for South Korean banks is 8.4 per cent, compared to 5 per cent a decade ago, says Mr Scarff. Capital adequacy ratios are also in the 11 to 12 per cent range, significantly higher than in 1998.

However, banks in both South Korea and Australia on average boast far higher loan-to-deposit ratios than their regional rivals, making them more likely to suffer hardship in a liquidity squeeze. The average loan-to-deposit ratio across Asia is 90 per cent, while in South Korea and Australia the figure exceeds 125 per cent.

While these countries’ banking systems appear under the most obvious stress, the looming economic slowdown will provide the first real test for the region since the crisis a decade ago.

But analysts believe that, in the event bank balance sheets do start to come under serious pressure,
governments have scope to use their currency reserves to stimulate economic activity.

Asian central bank reserves, largely depleted after the 1997-98 crisis, now total about $4,300bn.

Largest Asian banks ($bn)

Market cap (current)

Market cap (1997)

Tier one capital (2007)

Tier one capital (1997)

ICBC

199.9

n.a.

66.3

11.7

China Construction Bank

131.6

n.a.

52.2

6.0

Bank of China

112.4

n.a.

56.2

10.6

Mitsubishi UFJ Financial *

86.3

n.a.

82.9

44.3

Sumitomo Mitsui Financial *

49.7

36.0

43.8

27.7

Mizuho Financial *

41.5

n.a.

48.8

39.5

Bank of Communications

39.2

n.a.

16.5

2.8

China Merchants Bank

32.4

n.a.n.a.n.a.

Hang Seng Bank

29.0

18.5

21.6

n.a.

China Citic

22.5

n.a.n.a.n.a.

State Bank of India

20.2

3.3

16.1

1.9

United Overseas Bank

17.5

4.9

8.7

3.2

DBS

16.7

4.3

11.4

4.4

* Pro forma numbersSources: Thomson Reuters; The Banker

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