TGB Regional Banking Monitor: Asia Pacific — Q1 2024

The regional picture

The defining policy event of the first quarter was in Japan. On 19 March 2024 the Bank of Japan judged that its framework of Quantitative and Qualitative Monetary Easing with Yield Curve Control, together with the negative interest rate policy, had fulfilled its roles. It set the uncollateralised overnight call rate at around 0 to 0.1% and said it would guide the short-term interest rate as its primary policy tool. China moved in the opposite direction, towards easier credit conditions: the PBOC cut the reserve requirement ratio by 0.5 percentage points on 5 February, and on 20 February the five-year-plus loan prime rate fell by 25bp to 3.95% while the one-year rate stayed at 3.45%.

Elsewhere, central banks held restrictive settings. The Reserve Bank of India kept its repo rate at 6.50% on 7 June 2024, the Reserve Bank of Australia kept its cash rate target at 4.35% on 18 June and the Bank of Korea kept its Base Rate at 3.50% on 23 May. Bank Indonesia tightened further in the second quarter, raising the BI-Rate by 25bp to 6.25% on 24 April 2024 and holding it there in May. The spread of settings is wide: India's repo rate stood 6.40 percentage points above the ceiling of Japan's call-rate target. For banks, these differences shape funding costs, margins and credit demand in different ways.

Banking-system indicators are published on different calendars, so the comparisons that follow mix reference dates: Chinese, Korean and Australian data refer to the first quarter of 2024, Indian data to end-March 2024, and Indonesian data to February and March 2024. Japanese supervisory capital data in the Bank of Japan's April 2024 report refer to the first half of fiscal 2023. Capital ratios in the two largest systems are also in transition: Japan's internationally active banks began applying the finalised Basel III rules from end-March 2024, and China's revised capital rules took effect on 1 January 2024.

Japan: the exit from negative rates

The 19 March decision on the overnight call rate was taken by a 7-2 majority vote. From 21 March 2024 the Bank of Japan applied an interest rate of 0.1% to current account balances held by financial institutions, excluding required reserves. It decided, by an 8-1 majority vote, to continue buying Japanese government bonds in broadly the same amounts as before. It also discontinued purchases of exchange-traded funds and Japan real estate investment trusts. Purchases of commercial paper and corporate bonds are to be reduced gradually and discontinued in about one year. The Bank said it anticipated that accommodative financial conditions would be maintained for the time being.

The second step came on 14 June 2024. The Policy Board unanimously kept the call-rate guideline at around 0 to 0.1%, but decided by an 8-1 majority vote to reduce its purchases of Japanese government bonds so that long-term interest rates would be formed more freely in financial markets. It said that, after collecting views from market participants, it would decide at its next meeting on a detailed reduction plan for the next one to two years or so. The Bank noted that the year-on-year rate of increase in the consumer price index excluding fresh food had been in the range of 2.0-2.5% recently. The sequence suggests that normalisation will proceed through the balance sheet as well as through the policy rate.

The Bank of Japan's April 2024 Financial System Report described a banking system that entered the new regime in good shape. It said Japan's financial system had been maintaining stability on the whole and that banks had sufficient capital bases and stable funding bases to withstand various types of stress, while warning that vigilance against tail risks continues to be warranted. The annual growth rate of domestic loans by private banks had remained around 3%. The common equity Tier 1 ratio of internationally active banks and the core capital ratio of domestic banks substantially exceeded regulatory requirements in the first half of fiscal 2023. Banks' net income had remained on an uptrend, and losses such as credit costs had been limited.

Regulatory change ran alongside the policy shift. Internationally active banks and domestic banks using the internal models approach started applying the finalised Basel III regulations from end-March 2024, while domestic banks using the standardised approach will apply them from end-March 2025. The finalised package contains factors that raise capital ratios, such as lower risk weights for corporate exposures, and factors that lower them, such as the output floor and higher risk weights for stockholdings. The report also flagged two areas for supervisors. Foreign investors became net sellers of Japanese real estate in the second half of 2023 for the first time in four years, and banks have increased their common exposures to metropolitan real estate, although the Bank's macro stress test found that banks' losses from a real estate shock would be limited on a macro basis. Listed banks have been increasing dividends and raising their payout ratios, and the report noted that this tendency had also been observed among banks with low loss-absorbing capacity, such as those with low profitability.

China: easing at the margin, earnings flat

The PBOC's first-quarter moves were incremental. The one-year and five-year-plus loan prime rates stood at 3.45% and 4.20% on 22 January 2024. After the 20 February cut, the five-year-plus rate was 3.95%, and both rates were unchanged on 20 March. The cut applied only to the longer-term rate, leaving the one-year rate unchanged. On 25 January the PBOC also cut the rates on its relending facilities for rural development and for small and micro businesses, and its discount rate, by 0.25 percentage points. The medium-term lending facility rate stayed at 2.5% throughout the quarter. Liquidity provision through the facility shifted, however: the PBOC injected RMB995 billion against RMB779 billion of maturities in January, but rolled over only RMB387 billion of RMB481 billion maturing in March. That was a net withdrawal of RMB94 billion through the facility in March. In the second quarter, a PBOC and National Financial Regulatory Administration notice dated 17 May 2024 set the minimum down payment for commercial personal housing loans at no less than 15% for first homes and 25% for second homes.

Data from the National Financial Regulatory Administration show a large system growing steadily. Banking institutions' total assets reached RMB429.6 trillion at the end of the first quarter, up 8.1% year on year. Large commercial banks held RMB185 trillion, or 43.1% of the total, after growth of 11.2%, while joint-stock banks' assets grew 4.1% to RMB71.8 trillion. The large banks therefore grew faster than the system as a whole and gained share over the year. Inclusive loans to small and micro enterprises reached RMB31.4 trillion, up 21.1% year on year.

Asset quality was stable on the headline measure. Commercial banks' non-performing loans totalled RMB3.4 trillion at the end of the quarter, up RMB141.4 billion on the previous quarter, and the NPL ratio was 1.59%, basically flat. Special-mention loans, which are performing loans where the borrower can currently repay but faces factors that may affect repayment, stood at RMB4.6 trillion within normal loans of RMB208.2 trillion. The provision coverage ratio was 204.54%, down 0.6 percentage points on the quarter, and the loan provision ratio was 3.26%.

Earnings were the weak spot. Commercial banks made a net profit of RMB672.3 billion in the first quarter, up 0.7% year on year, with an average return on capital of 9.57% and an average return on assets of 0.74%. At end-Q1 2024 the capital adequacy ratio was 15.43%, the Tier 1 ratio 12.35% and the core Tier 1 ratio 10.77%. From 2024 these ratios are calculated under China's revised capital rules, in force from 1 January 2024, and the regulator said they are not directly comparable with historical data. Liquidity was ample: the liquidity coverage ratio was 150.84% and the net stable funding ratio 125.33%.

India: strong balance sheets, policy on hold

The Reserve Bank of India's Monetary Policy Committee kept the repo rate at 6.50% on 7 June 2024, with the standing deposit facility rate at 6.25% and the marginal standing facility rate and Bank Rate at 6.75%. The vote was four to two, with the minority favouring a 25bp cut, and the Committee remained focused on withdrawal of accommodation so that inflation progressively aligns with the target while supporting growth. Headline CPI inflation had eased from 5.1% in February to 4.8% in April 2024, and core inflation to 3.2%, the lowest in the current series. Growth was strong: real GDP grew 8.2% in 2023-24. The Committee projected CPI inflation at 4.5% and real GDP growth at 7.2% for 2024-25.

The Reserve Bank's June 2024 Financial Stability Report showed banks with low impaired assets and solid capital. Scheduled commercial banks' gross NPA ratio fell to a multi-year low of 2.8% at end-March 2024, and the net NPA ratio to 0.6%. Their capital to risk-weighted assets ratio was 16.8% and their common equity Tier 1 ratio 13.9%. In the central bank's macro stress tests, the system-level ratio in March 2025 would be 16.1% under the baseline, 14.4% under medium stress and 13.0% under severe stress. The severe scenario would take the system ratio 3.80 percentage points below its end-March 2024 level, and the Reserve Bank said banks would still be able to comply with minimum capital requirements. Non-banking financial companies had a capital ratio of 26.6%, a gross NPA ratio of 4.0% and a return on assets of 3.3%. The split vote on rates therefore took place against bank balance sheets with a multi-year low in gross NPAs and capital above minimum requirements even under severe stress.

Australia: capital at a new high, softer profits

The Reserve Bank of Australia left the cash rate target at 4.35% on 18 June 2024, with the rate on Exchange Settlement balances at 4.25%. The monthly CPI indicator rose by 3.6% over the year to April in headline terms and by 4.1% excluding volatile items and holiday travel. The Board said inflation remained above target and was proving persistent, and that it was not ruling anything in or out.

APRA's data for the quarter to March 2024 showed capital rising while profits fell. Authorised deposit-taking institutions' net profit after tax for the year to March 2024 was A$39.4 billion, down 4.3% from A$41.2 billion a year earlier. Their total capital ratio rose 0.9 percentage points over the year to 20.5%. APRA said capital ratios reached a new high, despite narrowing margins and slowing profit growth, and that profit levels remained in line with those seen over the past decade. Capital has therefore continued to build even as profits softened, leaving more room to absorb losses if arrears keep rising. The liquidity coverage ratio eased to 136.5% from 137.7% and the net stable funding ratio to 118.2% from 121.7%. APRA said liquidity positions remained strong ahead of the final repayments of the Term Funding Facility in the June 2024 quarter.

Mortgage credit outstanding rose 4.1% to A$2,230.0 billion. New residential mortgage lending in the March 2024 quarter was A$131.1 billion, down 1.2% from a year earlier. The mix shifted towards investors, whose share of new lending rose to 33.2% from 30.3%, while loans at six times income or more fell to 5.2% of new lending from 7.5%. Non-performing housing loans rose to 1.0% of credit outstanding from 0.7% a year earlier, and loans 30-89 days past due rose to 0.7% from 0.5%. APRA said potential credit losses are mitigated by high levels of well-secured loans. Commercial property exposures grew 3.8% to A$419.0 billion. The pattern is a slow rise in arrears under a high cash rate, absorbed so far by capital at a new high.

South Korea: ELS costs and the project finance clean-up

The Bank of Korea kept its Base Rate at 3.50% on 23 May 2024, with all Board members supporting the decision. Consumer price inflation had fallen to 2.9% in April and core inflation to 2.3%. The Bank raised its 2024 GDP growth forecast to 2.5% from 2.1% in February. It said it would maintain a restrictive stance for a sufficient period of time until it was confident that inflation would converge on its target.

Korean bank earnings bore a one-off charge. The Financial Supervisory Service reported domestic banks' net income of KRW5.3 trillion for Q1 2024, down KRW1.7 trillion, or 24.1%, from KRW7.0 trillion a year earlier. Non-operating income fell by KRW2.7 trillion, mainly because of KRW1.8 trillion of compensation for equity-linked securities. Return on assets fell to 0.57% from 0.79% and return on equity to 7.79% from 11.05%. Net interest income rose 1.6% to KRW14.9 trillion, but the net interest margin narrowed to 1.63% from 1.68%. Credit loss expenses fell to KRW1.1 trillion from KRW1.7 trillion, helped by a KRW0.4 trillion reversal of provisions related to Hanwha Ocean. The underlying picture is of resilient net interest income and lower credit costs, with the quarterly result driven by the compensation charge.

Supervisors also turned to real estate project finance. On 13 May 2024 the Financial Services Commission and the Financial Supervisory Service announced that banks and insurers would jointly provide a KRW1 trillion syndicated loan to finance the restructuring or liquidation of unviable projects, expandable in stages to KRW5 trillion. Viability ratings will be broken down into four grades, and projects seeking a second or further maturity extension will need the consent of three-quarters of lenders instead of two-thirds. Guarantee support for project finance loans had already been raised by KRW5 trillion to KRW30 trillion in March 2024. The Bank of Korea said project finance risks, such as rising delinquency rates, were expected to be restructured in an orderly manner under these measures.

Household borrowing rose, and the Bank of Korea said the increase in household loans was mainly driven by housing-related loans. Household loans across all financial sectors rose KRW5.4 trillion in May 2024, and household loans at banks rose KRW6.0 trillion, up from KRW5.1 trillion a month earlier. On 25 June 2024 the Financial Services Commission postponed the second phase of its stressed debt service ratio rules by two months, to 1 September 2024. The second phase will apply an additional stress rate of 0.75% when lenders calculate a borrower's debt service ratio, equal to 50% of the 1.5% base stress rate. The stressed DSR rules give the authorities a borrower-level tool to slow household credit growth while the Base Rate stays at 3.50%.

Indonesia: a rate rise and fast credit growth

Bank Indonesia raised the BI-Rate by 25bp to 6.25% on 24 April 2024, and its deposit and lending facility rates to 5.50% and 7.00%. It held all three rates at its 21-22 May 2024 meeting. Credit kept growing quickly: lending rose 12.40% year on year in the first quarter of 2024 and 13.09% in April 2024, above the 10-12% range Bank Indonesia projected for the year. Third-party funds grew 8.21% in April 2024.

Capital remained high. The banking industry's capital adequacy ratio was 27.73% in February 2024, with NPL ratios of 2.35% gross and 0.82% net. By March 2024 the capital ratio was 25.96%, and the NPL ratios were 2.25% gross and 0.77% net. That is a fall of 1.77 percentage points in the capital ratio in one month. In its May 2024 statement Bank Indonesia put the ratio of liquid assets to third-party funds at 25.62%. Credit growth that persistently outpaces deposit growth would erode that buffer over time.

Cross-country comparison

Asia Pacific banking monitor: policy rates and system indicators

Source: Bank of Japan, Statement on Monetary Policy (14 June 2024), 14 June 2024; Bank of Japan, Financial System Report (April 2024), 18 April 2024; People's Bank of China, Highlights of Monetary Policies in Q1 2024, 27 June 2024; National Financial Regulatory Administration, 2024年一季度银行业保险业主要监管指标数据情况 (Main regulatory indicators of the banking and insurance sectors, Q1 2024), 31 May 2024; Reserve Bank of India, Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) June 5 to 7, 2024, 7 June 2024; Reserve Bank of India, RBI releases the Financial Stability Report, June 2024, 27 June 2024; Reserve Bank of Australia, Statement by the Reserve Bank Board: Monetary Policy Decision (Media release 2024-12), 18 June 2024; Australian Prudential Regulation Authority, APRA releases quarterly authorised deposit-taking institution statistics for March 2024, 11 June 2024; Bank of Korea, Monetary Policy Decision & Opening Remarks to the Press Conference (May 23, 2024), 23 May 2024; Financial Supervisory Service, 2024년 1분기 국내은행 영업실적(잠정) (Domestic banks' business results, Q1 2024, preliminary), 17 May 2024; Bank Indonesia, BI-Rate Held at 6.25% Strengthening Stability and Maintaining Growth from Impact of Global Spillovers (Board of Governors Meeting, 21-22 May 2024), 23 May 2024.

Among the systems with published capital ratios, Indonesia's headline capital adequacy ratio was 25.96%, against 20.5% in Australia, 16.8% in India and 15.43% in China. Definitions differ across jurisdictions, and China's ratio is calculated under rules that changed on 1 January 2024. On profitability, Chinese and Korean banks reported returns on assets of 0.74% and 0.57% for the first quarter, both below 1%. On asset quality, India's gross NPA ratio fell to a multi-year low of 2.8%, while China's NPL ratio was basically flat at 1.59%.

Outlook risks

For Japan, the main risk is the transition itself: the reduction plan for bond purchases will shape long-term yields, and the Bank of Japan has already highlighted banks' rising common exposures to metropolitan real estate. For China, the question is whether profits growing by 0.7% a year can absorb further rises in non-performing loans, after the NPL balance rose by RMB141.4 billion in the first quarter. For India, the risk is low on the Reserve Bank's own stress tests, which keep the system capital ratio at 13.0% even under severe stress. For Australia, the rise in non-performing mortgages to 1.0% is the indicator to follow while the cash rate stays at 4.35%. For Korea, the test is whether the project finance clean-up stays orderly and whether household lending accelerates further. For Indonesia, the question is how long credit growth of 13.09% can run ahead of third-party funds growth of 8.21%.

Primary sources: National Financial Regulatory Administration, 2024年一季度银行业保险业主要监管指标数据情况 (Main regulatory indicators of the banking and insurance sectors, Q1 2024), 31 May 2024; Bank of Japan, Changes in the Monetary Policy Framework (19 March 2024), 19 March 2024; People's Bank of China, Highlights of Monetary Policies in Q1 2024, 27 June 2024; Reserve Bank of India, Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) June 5 to 7, 2024, 7 June 2024; Reserve Bank of Australia, Statement by the Reserve Bank Board: Monetary Policy Decision (Media release 2024-12), 18 June 2024; Bank of Korea, Monetary Policy Decision & Opening Remarks to the Press Conference (May 23, 2024), 23 May 2024; Australian Prudential Regulation Authority, APRA releases quarterly authorised deposit-taking institution statistics for March 2024, 11 June 2024; Financial Supervisory Service, 2024년 1분기 국내은행 영업실적(잠정) (Domestic banks' business results, Q1 2024, preliminary), 17 May 2024; Bank Indonesia, News release No. 26/80/DKom: BI-Rate raised to 6.25% (Board of Governors Meeting, 23-24 April 2024), 24 April 2024; Reserve Bank of India, RBI releases the Financial Stability Report, June 2024, 27 June 2024; Bank Indonesia, BI-Rate Held at 6.25% Strengthening Stability and Maintaining Growth from Impact of Global Spillovers (Board of Governors Meeting, 21-22 May 2024), 23 May 2024; Bank of Japan, Statement on Monetary Policy (14 June 2024), 14 June 2024; Bank of Japan, Financial System Report (April 2024), 18 April 2024; People's Bank of China and National Financial Regulatory Administration, 中国人民银行 国家金融监督管理总局关于调整个人住房贷款最低首付款比例政策的通知 (Notice on adjusting minimum down-payment ratios for personal housing loans), 17 May 2024; Financial Services Commission, FSC and FSS Announce Measures to Seek an Orderly Soft-landing in the Real Estate Project Finance Market, 13 May 2024; Financial Services Commission, Household Loans, May 2024, 12 June 2024; Financial Services Commission, FSC Announces Plans for Implementing Stressed Debt Service Ratio Rules in H2 2024, 25 June 2024.