TGB Regional Banking Monitor: Asia Pacific — Q2 2024

The regional picture

Asia-Pacific central banks did not move together in the middle of 2024. The Bank of Japan ended its negative interest rate policy on 19 March 2024, guiding the overnight call rate to around 0 to 0.1%, and raised that guidance to around 0.25% on 31 July 2024. The new level is 0.15 percentage points above the top of the previous range. The People's Bank of China moved the other way on 22 July 2024, cutting the 7-day reverse repo rate from 1.80% to 1.70%. The one-year loan prime rate fell from 3.45% in June to 3.35% in July and the over-five-year rate from 3.95% to 3.85%, and both were unchanged at the 20 August fixing.

Elsewhere, the decisions of July, August and early September were holds. The Reserve Bank of Australia left its cash rate target at 4.35% on 6 August 2024. The Reserve Bank of India kept its repo rate at 6.50% on 8 August 2024, although two of the six members of the Monetary Policy Committee voted for a 25bp cut. Bank Indonesia, which had raised the BI-Rate by 25bp to 6.25% on 23–24 April 2024, held it there on 20–21 August. The Bank of Thailand held its policy rate at 2.50% on 21 August 2024 by a 6–1 vote, and Bank Negara Malaysia kept its Overnight Policy Rate at 3% on 5 September 2024.

The split reflects different inflation positions. Australian trimmed-mean inflation was 3.9% over the year to the June quarter, and the Reserve Bank of Australia noted that underlying inflation had been above the midpoint of its target for 11 consecutive quarters. Indian headline inflation rose to 5.1% in June 2024. By contrast, Indonesian inflation fell to 2.13% in July 2024, and Malaysian headline and core inflation both averaged 1.8% in the first half. Even so, the Indian and Thai votes show that the timing of cuts was already being debated.

Banking-system statistics arrive on different calendars, so the country sections below mix reference dates. Chinese, Korean and Indonesian data refer to June or July 2024, Indian supervisory data to end-March 2024 with credit data to July 2024, Australian data to March 2024 and Hong Kong data to the first quarter of 2024.

Policy decisions in the Asia-Pacific economies covered, March to September 2024

Source: Bank of Japan, Changes in the Monetary Policy Framework, 19 March 2024; Bank Indonesia, BI-Rate Increased to 6.25%: news release (Board of Governors Meeting, 23-24 April 2024), 24 April 2024; People's Bank of China, Announcement on Open Market Business No.4 [2024], 22 July 2024; People's Bank of China, 2024年6月20日全国银行间同业拆借中心受权公布贷款市场报价利率（LPR）公告, 20 June 2024; People's Bank of China, 2024年7月22日全国银行间同业拆借中心受权公布贷款市场报价利率（LPR）及调整发布时间公告, 22 July 2024; Bank of Japan, Change in the Guideline for Money Market Operations and Decision on the Plan for the Reduction of the Purchase Amount of Japanese Government Bonds, 31 July 2024; Reserve Bank of Australia, Statement by the Reserve Bank Board: Monetary Policy Decision (media release 2024-15), 6 August 2024; Reserve Bank of India, Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) August 6 to 8, 2024, 8 August 2024; Bank Indonesia, BI-Rate Held at 6.25%: Strengthening Stability and Maintaining Growth from Impact of Global Spillovers, 21 August 2024; Bank of Thailand, Monetary Policy Committee's Decision 4/2024 (BOT Press Release No. 33/2024), 21 August 2024; Bank Negara Malaysia, Monetary Policy Statement (5 September 2024), 5 September 2024.

China: thinner margins, stable asset quality

The People's Bank of China said its 22 July 2024 reverse repo cut was intended to further strengthen counter-cyclical adjustments and enhance financial support for the real economy. The loan prime rates followed on the same day, with the one-year rate at 3.35% and the over-five-year rate at 3.85%. Both benchmark rates were therefore 10bp lower than at the June fixing. The cuts were small, but they came when bank earnings were barely growing.

The National Financial Regulatory Administration's second-quarter data show a large system still growing. Total assets of banking institutions reached 433.1 trillion yuan at end-Q2 2024, up 6.6% year on year. Large commercial banks held 185.1 trillion yuan, 42.7% of the total, and grew 7.9%, while joint-stock banks held 72.1 trillion yuan, 16.7% of the total, and grew 3.7%. The gap of 4.2 percentage points between those growth rates shows the large commercial banks gaining share. Inclusive loans to small and micro enterprises reached 32 trillion yuan, up 17.1% year on year. Asset growth of 6.6% set against first-half profit growth of 0.4% means returns are being diluted as balance sheets expand.

Asset quality was steady. Commercial banks' non-performing loans were 3.3 trillion yuan at end-Q2 2024, down 27.2 billion yuan on the previous quarter, and the NPL ratio fell 0.03 percentage points to 1.56%. Special-mention loans, the category below NPLs, stood at 4.8 trillion yuan. Provision coverage rose 4.78 percentage points to 209.32%, and the loan provision ratio was 3.26%. Taken together, reported NPLs are covered roughly twice by provisions, which leaves room to absorb further recognition of problem loans.

Profitability is the weaker point. Commercial banks earned net profit of 1.3 trillion yuan in the first half of 2024, up only 0.4% year on year. Average return on equity was 8.91%, down 0.65 percentage points on the previous quarter, and average return on assets 0.69%, down 0.05 percentage points. With lending rates cut again in July, earnings are likely to stay under pressure through the second half.

Capital and liquidity remain adequate. The capital adequacy ratio of commercial banks was 15.53% at end-Q2 2024, up 0.1 percentage points, while the tier 1 ratio rose 0.04 percentage points to 12.38% and the core tier 1 ratio slipped 0.02 percentage points to 10.74%. These ratios are calculated under the new capital rules in force since 1 January 2024 and are not directly comparable with earlier data. The liquidity coverage ratio of commercial banks with assets of 200 billion yuan or more was 150.7%, and the renminbi loan-to-deposit ratio rose 1.78 percentage points to 80.59%.

Japan: the first steps of normalisation

The Bank of Japan's March decision closed a long chapter. On 19 March 2024 it said that Quantitative and Qualitative Monetary Easing with yield curve control and the negative interest rate policy had fulfilled their roles, and it set the guideline for the overnight call rate at around 0 to 0.1%. On 31 July 2024 the Policy Board voted 7–2 to raise that guideline to around 0.25%, effective from 1 August. In March the Bank had kept bond purchases at broadly the same amount as before, by an 8–1 vote, and discontinued purchases of exchange-traded funds and J-REITs.

The same meeting set a path for the balance sheet. Monthly outright purchases of Japanese government bonds, about 5.7 trillion yen in July 2024, are to be cut by about 400 billion yen each calendar quarter in principle. The schedule takes purchases to about 5.3 trillion yen in August–September 2024, about 4.9 trillion yen in October–December 2024 and about 2.9 trillion yen in January–March 2026. By that end point monthly purchases would be about half the July 2024 level.

The Bank's guidance points to further increases. It said that if the outlook in its July Outlook Report is realised, it will continue to raise the policy interest rate. It also expected real interest rates to remain significantly negative after the change, with accommodative financial conditions continuing to support economic activity.

For banks, the move from zero rates is a source of income as well as risk. The Bank's April 2024 Financial System Report concluded that Japan's financial system has been maintaining stability on the whole. It judged that Japanese banks have sufficient capital bases and stable funding bases to withstand various types of stress. Annual growth in private banks' domestic lending had remained around 3%. The same report cautioned that, from a long-term perspective, a decline in banks' loss-absorbing capacity could lead to a contraction of financial intermediation or to overheating. Higher short-term rates should lift loan yields, but they also raise deposit costs and weigh on the value of bond holdings.

India: strong balance sheets, slower services credit

The Reserve Bank of India's Monetary Policy Committee kept the repo rate at 6.50% on 8 August 2024, leaving the standing deposit facility rate at 6.25% and the marginal standing facility rate and the Bank Rate at 6.75%. Four members voted to hold and two voted for a cut of 25bp. The Committee stayed focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. Headline inflation had risen to 5.1% in June 2024 after 4.8% in April and May. Core inflation, which excludes food and fuel, was 3.1% in May and June, a new low in the current CPI series. The RBI attributed the June rise to worsening food inflation pressures, while the fuel group remained in deflation. The RBI projected CPI inflation of 4.5% and real GDP growth of 7.2% for 2024-25. Its quarterly growth path ran from 7.1% in the first quarter of the fiscal year to 7.3% in the third.

The banking system enters this phase in strong shape. The RBI's June 2024 Financial Stability Report put scheduled commercial banks' capital to risk-weighted assets ratio at 16.8% and the common equity tier 1 ratio at 13.9% at end-March 2024. The gross non-performing assets ratio fell to a multi-year low of 2.8% and the net ratio to 0.6%. Non-banking financial companies reported a CRAR of 26.6%, a gross NPA ratio of 4.0% and a return on assets of 3.3%. In the RBI's macro stress tests, system-level capital in March 2025 was projected at 16.1% under the baseline, 14.4% under medium stress and 13.0% under severe stress. Even the severe scenario implies a decline of 3.8 percentage points from the end-March 2024 level.

Credit growth remains fast but its mix is shifting. Excluding the effect of the merger of a non-bank with a bank, non-food bank credit grew 15.1% year on year in July 2024, against 14.7% a year earlier. Credit to industry accelerated to 10.2% from 4.6% in July 2023. Credit to services slowed to 15.4% from 19.7%, mainly because of lower growth in lending to non-banking financial companies and trade. Personal loans grew 17.8%, against 18.4% a year earlier. The shift towards industry and away from lending to non-banks changes the composition of bank risk without slowing overall credit growth.

Australia: high rates, high capital

The Reserve Bank of Australia kept the cash rate target at 4.35% on 6 August 2024 and left the rate paid on Exchange Settlement balances at 4.25%. Its central forecasts had inflation returning to the 2–3% target range late in 2025 and approaching the midpoint in 2026. The Board said that data had reinforced the need to remain vigilant to upside risks to inflation and that it was not ruling anything in or out. At the same time it noted that momentum in economic activity had been weak, with slow GDP growth, a rise in the unemployment rate and reports that many businesses were under pressure. That combination of persistent inflation and a soft economy means borrowers face high rates for longer while activity is weak.

The Australian Prudential Regulation Authority's statistics for the March 2024 quarter show a well-capitalised system with falling profits. Authorised deposit-taking institutions earned net profit after tax of $39.4 billion in the year to March 2024, down 4.3% from $41.2 billion a year earlier. The total capital ratio rose to 20.5% from 19.6%, and APRA noted that capital ratios reached a new high despite narrowing margins and slowing profit growth. The liquidity coverage ratio was 136.5% and the net stable funding ratio 118.2%, down 3.5 percentage points over the year.

Total assets of the sector were $6,205.3 billion in March 2024, up 1.9% year on year. Mortgage credit outstanding reached $2,230.0 billion, up 4.1% year on year, while new residential mortgage loans funded in the March 2024 quarter fell 1.2% to $131.1 billion. Loans with a loan-to-valuation ratio of 80% or more made up 31.1% of new mortgages funded in the quarter, against 29.0% a year earlier. Arrears are rising from low levels: non-performing residential mortgages rose to 1.0% from 0.7%, and loans 30–89 days past due to 0.7% from 0.5%. The RBA's March 2024 Financial Stability Review judged that the share of borrowers unable to keep up with their mortgage repayments had increased from low levels but was unlikely to pose a financial stability risk. It also judged that risks from commercial real estate to the broader financial system were limited because of domestic banks' low exposures to the sector and conservative lending practices. A cash rate held at 4.35% keeps that pressure on household borrowers.

South Korea: ELS provisions weigh on first-half profit

Korean banks' earnings fell in the first half. The Financial Supervisory Service reported preliminary net income of KRW12.6 trillion for the first half of 2024, down KRW1.5 trillion or 11.0% from KRW14.1 trillion a year earlier. Specialised banks' net income fell KRW1.6 trillion, more than the total decline, partly as a base effect from the normalisation of Hanwha Ocean in the first half of 2023, while commercial banks' net income edged up to KRW7.8 trillion from KRW7.7 trillion. The first quarter was the weaker of the two: net income was KRW5.3 trillion in Q1 2024 and KRW7.2 trillion in Q2 2024. Non-operating income was minus KRW1.4 trillion, down KRW2.3 trillion: a year earlier it had been lifted by a reversal of impairment losses on investments in Hanwha Ocean, while in 2024 banks set aside provisions for equity linked securities. Return on assets fell to 0.67% from 0.79% and return on equity to 9.03% from 10.85%.

Core income was flat. Interest income edged up from KRW29.4 trillion to KRW29.8 trillion as interest-bearing assets grew 4.1%, but the net interest margin narrowed by 0.06 percentage points. The margin was 1.62% for the first half and 1.60% in Q2 2024. Loan loss expenses fell 15.9% to KRW2.6 trillion.

Capital strengthened. The total capital ratio of domestic banks rose 0.13 percentage points in the quarter to 15.76% at end-June 2024, the CET1 ratio rose 0.18 percentage points to 13.18%, and the leverage ratio reached 6.76%. That leaves the CET1 ratio 6.18 percentage points above the 7.0% requirement, before the 1 percentage point add-on for systemically important banks. The eight bank holding companies reported a lower CET1 ratio of 12.87% at end-June 2024, up from 12.77% in March 2024.

Credit quality is broadly stable but weaker than a year earlier. The delinquency rate on won-denominated loans was 0.42% at end-June 2024, down 0.09 percentage points on the month and up 0.07 percentage points on the year. The SME delinquency rate fell to 0.58% from 0.72% in May and the household rate to 0.36% from 0.42%. The rate on unsecured household loans was 0.71%, against 0.62% in June 2023. The monthly fall came as resolved loans rose by KRW2.4 trillion and newly delinquent loans fell by KRW0.4 trillion. Because the monthly improvement reflected loan resolutions, the year-on-year comparison is the better guide to the trend.

Indonesia: tighter policy, strong credit

Bank Indonesia raised the BI-Rate by 25bp to 6.25% on 23–24 April 2024, also lifting the deposit and lending facility rates to 5.50% and 7.00%. It held all three rates on 20–21 August 2024. Inflation was 2.13% in July 2024 and economic growth 5.05% in the second quarter. Bank Indonesia projected growth in 2024 in a range of 4.7% to 5.5%. The central bank said the April increase strengthened rupiah stability against the impact of deteriorating global risk. At the same time it kept an accommodative macroprudential posture to revive bank lending to businesses and households. The policy rate was therefore aimed at the currency, while lending incentives pulled in the other direction.

Lending has kept its pace despite tighter policy. Credit grew 12.40% year on year in July 2024, while third-party funds grew 7.72%. Investment loans grew 15.20%, working capital loans 11.60% and consumer loans 10.98%. Loans to micro, small and medium enterprises grew only 5.16%, while sharia financing grew 11.75%. Bank Indonesia expected credit growth to approach the upper bound of its 10–12% range for 2024. Loan growth therefore exceeded deposit growth by 4.68 percentage points.

Buffers remain large. The ratio of liquid assets to third-party funds was 25.56% in July 2024 and the capital adequacy ratio 26.09%. Non-performing loans were 2.26% gross and 0.78% net in June 2024. In April 2024 Bank Indonesia had reported a capital adequacy ratio of 27.73% for February 2024, with gross and net NPL ratios of 2.35% and 0.82%. The 1-month deposit rate was 4.73% and the lending rate 9.23% in July 2024.

Hong Kong: higher classified loans, falling lending

The Hong Kong Monetary Authority's review of banking-sector developments in the first quarter of 2024 showed a rise in problem loans. The banking sector's classified loan ratio rose to 1.79% at end-March 2024 from 1.56% a quarter earlier, and the ratio for Mainland-related lending rose to 2.77% from 2.58%. Credit card delinquency edged up to 0.33% and residential mortgage delinquency to 0.09%. The classified loan ratio rose 0.23 percentage points in a single quarter.

Balance sheets contracted. Total loans fell 1.0% in the first quarter of 2024 and Mainland-related lending fell 2.0%. Loans for use in Hong Kong fell 1.2%, while loans for use outside Hong Kong and trade finance each fell 0.5%. Total deposits edged down 0.2%, with Hong Kong dollar deposits up 0.1% and US dollar deposits down 0.6%. The loan-to-deposit ratio eased to 62.3% from 62.8%. Retail banks' aggregate pre-tax operating profit rose 5.0% year on year, while their net interest margin narrowed to 1.53% from 1.56%. Profit growth came mainly from income from investments held for trading rather than from lending, consistent with a shrinking loan book and a narrower margin. Buffers are strong: the average liquidity coverage ratio of category 1 institutions was 176.1% and the total capital ratio of locally incorporated institutions 21.1%.

Thailand and Malaysia: holds with different concerns

The Bank of Thailand's Monetary Policy Committee voted 6 to 1 on 21 August 2024 to keep the policy rate at 2.50%, with one member favouring a 0.25 percentage point cut. The Committee reported that SME loans had contracted because of rising credit risks and that household loans were growing more slowly, with worsening credit quality. Outstanding business loans were roughly unchanged, while loans to the automotive and electronics sectors declined, partly because of structural factors. It said it was essential to monitor deterioration in credit quality that could affect overall financial conditions and the economy. It expected inflation to return to the target range by the end of 2024. Bank Negara Malaysia maintained its Overnight Policy Rate at 3% on 5 September 2024, after the economy expanded 5.1% in the first half. It said average headline and core inflation for the year were unlikely to exceed 3%. For Thai banks, weak small-business and household credit is the risk to watch; for Malaysian banks, the backdrop is steady growth and low inflation.

Cross-country comparison

The capital comparison favours Indonesia, Hong Kong and Australia, each with a total capital ratio of 20.5% or more, while China and Korea sit at 15.53% and 15.76%. Definitions differ: Korea's figure is the share of loans past due by at least one month and Hong Kong's a classified loan ratio, so the problem-loan chart is not strictly comparable. Real policy rates also differ widely: India's 6.50% repo rate compares with headline inflation of 5.1% in June 2024, and Indonesia's 6.25% BI-Rate with inflation of 2.13% in July 2024, while the Bank of Japan expects real rates to remain significantly negative. On this simple measure the gap is 4.12 percentage points in Indonesia against 1.4 in India, so on this measure policy was tighter in Indonesia. On profitability, Chinese and Korean banks reported returns on equity of 8.91% and 9.03% for the first half of 2024. India and Indonesia combine double-digit credit growth with problem-loan ratios that are lower than a year or more earlier (India's at a multi-year low), while Hong Kong shows falling loans and rising classified loans. Liquidity is ample across the systems that report it: liquidity coverage ratios were 150.7% for larger Chinese commercial banks, 136.5% in Australia and 176.1% for Hong Kong's category 1 institutions. The weakest combination of indicators is therefore not a capital or liquidity shortfall but low returns, which limit how quickly banks can rebuild buffers from earnings if credit costs rise.

Asia-Pacific banking monitor: latest system indicators (reference dates in brackets)

Source: National Financial Regulatory Administration, 2024年二季度银行业保险业主要监管指标数据情况, 9 August 2024; Reserve Bank of India, RBI releases the Financial Stability Report, June 2024, 27 June 2024; Reserve Bank of India, Sectoral Deployment of Bank Credit – July 2024, 30 August 2024; Financial Supervisory Service (Korea), Capital Ratios of Banks and Bank Holding Companies, June 2024, 28 August 2024; Financial Supervisory Service (Korea), Delinquency Rate on Domestic Banks' WD Loans, June 2024, 20 August 2024; Financial Supervisory Service (Korea), Bank Earnings, First Half 2024, 22 August 2024; Bank Indonesia, BI-Rate Held at 6.25%: Strengthening Stability and Maintaining Growth from Impact of Global Spillovers, 21 August 2024; Australian Prudential Regulation Authority, APRA releases quarterly authorised deposit-taking institution statistics for March 2024, 11 June 2024; Hong Kong Monetary Authority, Developments in the Banking Sector (Quarterly Bulletin, June 2024), 30 June 2024.

Outlook risks

In Japan, each further step in the policy rate and each quarterly reduction in bond purchases will test how quickly banks can reprice loans against deposits. In China, lower loan prime rates will add to margin pressure on banks whose return on equity was already 8.91%, even with provision coverage of 209.32%. In Korea, provisions for equity linked securities pushed non-operating income into deficit in the first half, and any further losses on such products would hit the same line. In Hong Kong, the rise in classified loans, especially in Mainland-related lending, is the indicator to follow. In Australia and Thailand, household credit quality is the main concern, with Australian mortgage arrears rising and the Bank of Thailand warning about worsening household credit. India's risk is the reverse: rapid credit growth, at 15.1% in July 2024, with the Monetary Policy Committee divided on when to ease. In Indonesia, if loans keep growing faster than deposits, as in July 2024 (12.40% against 7.72%), banks will draw further on liquid assets, although their ratio to third-party funds was still 25.56%. In Thailand, the expected return of inflation to the target range by the end of 2024, together with one vote for a cut, keeps easing under discussion. Malaysia offers a settled picture by comparison, with the policy rate at 3% and average inflation for 2024 expected not to exceed 3%. Across the region, the common thread is that capital and liquidity are not the binding constraint; earnings and borrower resilience are.

Primary sources: National Financial Regulatory Administration, 2024年二季度银行业保险业主要监管指标数据情况, 9 August 2024; Bank of Japan, Change in the Guideline for Money Market Operations and Decision on the Plan for the Reduction of the Purchase Amount of Japanese Government Bonds, 31 July 2024; People's Bank of China, Announcement on Open Market Business No.4 [2024], 22 July 2024; People's Bank of China, 2024年6月20日全国银行间同业拆借中心受权公布贷款市场报价利率（LPR）公告, 20 June 2024; People's Bank of China, 2024年7月22日全国银行间同业拆借中心受权公布贷款市场报价利率（LPR）及调整发布时间公告, 22 July 2024; Reserve Bank of Australia, Statement by the Reserve Bank Board: Monetary Policy Decision (media release 2024-15), 6 August 2024; Reserve Bank of India, Monetary Policy Statement, 2024-25 Resolution of the Monetary Policy Committee (MPC) August 6 to 8, 2024, 8 August 2024; Bank Indonesia, BI-Rate Held at 6.25%: Strengthening Stability and Maintaining Growth from Impact of Global Spillovers, 21 August 2024; Bank of Thailand, Monetary Policy Committee's Decision 4/2024 (BOT Press Release No. 33/2024), 21 August 2024; Bank Negara Malaysia, Monetary Policy Statement (5 September 2024), 5 September 2024; Reserve Bank of India, RBI releases the Financial Stability Report, June 2024, 27 June 2024; Financial Supervisory Service (Korea), Bank Earnings, First Half 2024, 22 August 2024; Bank Indonesia, BI-Rate Increased to 6.25%: news release (Board of Governors Meeting, 23-24 April 2024), 24 April 2024; Financial Supervisory Service (Korea), Capital Ratios of Banks and Bank Holding Companies, June 2024, 28 August 2024; Hong Kong Monetary Authority, Developments in the Banking Sector (Quarterly Bulletin, June 2024), 30 June 2024; Australian Prudential Regulation Authority, APRA releases quarterly authorised deposit-taking institution statistics for March 2024, 11 June 2024; Bank of Japan, Changes in the Monetary Policy Framework, 19 March 2024; People's Bank of China, 2024年8月20日全国银行间同业拆借中心受权公布贷款市场报价利率（LPR）公告, 20 August 2024; Reserve Bank of India, Sectoral Deployment of Bank Credit – July 2024, 30 August 2024; Bank of Japan, Financial System Report (April 2024) – Summary, 18 April 2024; Bank of Japan, Financial System Report (April 2024), 18 April 2024; Reserve Bank of Australia, Financial Stability Review – March 2024: In Brief, 31 March 2024; Financial Supervisory Service (Korea), Delinquency Rate on Domestic Banks' WD Loans, June 2024, 20 August 2024.