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The Asian financial crisis of 1997-98 led to bank closures and mergers across the Asia-Pacific. Kym Brown and Michael Skully examined banks in 12 of the region’s economies post meltdown to see how they’ve bounced back. Despite their natural contrariness, most economists agree that the 1997-98 Asian crisis started with the devaluation of the Thai baht on 2 July 1997 which set off a domino effect of Asian-investor panic and a subsequent flight of funds. Financial regulations and practices were tightened in the aftermath to prevent another occurrence; however a gap remains in understanding the regions’ banks in the post-crisis period.
Australia’s banking market has grown on the back of increased house prices and increased borrowings from overseas to source adequate domestic funding for growing portfolio investments. By the end of 2002 Australian banks borrowed the largest proportion via international debt securities in the region at 26.7 per cent of GDP followed by Hong Kong at 17.2 per cent and Singapore at 12.1 per cent. Australian bank borrowings via international debt securities at the time of the crisis were only equivalent to 15.5 per cent but it still leads the region in using such sources of funds.
In Thailand, where the crisis began, domestic lending remains at pre-crisis levels while international borrowings by banks and corporates have declined. Meanwhile the government-issued domestic debt securities were equal to 22.9 per cent of GDP by December 2002, in part to revitalise the banking system. The government has tried to minimise foreign currency borrowings in a bid to avoid another crisis and in 1997 Thai banks had the worst return on equity figures, of negative 56.7 per cent. Returns on equity were positive by 2002, however the returns on assets were zero. Costs within the Thai system remained high by 2002 at nearly 70 per cent of income, meaning further cost control is required.
China’s subsequent wave of non-performing loans (NPLs) since the Asian crisis was due to the poor risk assessments that come with politically directed lending. Today its banking system is massive, with assets of at least $US2bn at the end of 2002. Some 100 regional and city commercial banks have emerged as competitors since the People’s Bank of China split into four banks in 1979. China’s banking sector is second in size to Japan ($US4.8bn end 2002) in the region and domestic lending by banks in the Chinese economy was the largest in the region by December 2002 at 170 per cent of GDP. The cost-to-income figure for Chinese banks was only 16.4 per cent in 1997.
New Zealand banks averaged very high profitability levels especially in relation to equity. As at 31 March 2003, only two out of 18 registered banks were New Zealand-owned. Australian banks had some 66.3 per cent market share and British banks 22.3 per cent. Domestic lending has grown since the crisis due also to increased property prices. Interestingly, at the time of the crisis the costs for New Zealand banks were quite high at 68.1 per cent indicating the negative impact of the crisis, although profitability remained positive, and by 2002 costs had been greatly improved
At the time of the crash the Malaysian government pegged the ringgit to the US dollar to minimise currency speculation and attempted to keep the economy buoyant by expanding government spending on infrastructure projects and maintaining interest rates at artificially low levels. Despite this, the crisis hit Malaysia hard, bursting its equity bubble. Since then the size of the banking market has increased by $US 50m and performance data suggest banking has performed well with adequate levels of credit risk.
The banking markets of Indonesia and the Philippines remain depressed with domestic lending by Indonesian banks steady at about 60 per cent of GDP and international borrowings down to just 19 per cent of GDP by end 2002. The net interest margin (the interest rate charge less the cost of funds) is the highest in the region, indicating a continued perceived high credit risk. The risk return trade-off with investments of any type is that higher risk investments require a higher return. The return on equity level was negative in 2002, perhaps indicative of continued crisis resolution costs, and political and economic issues reflected in their high cost to an income figure of 57.9 per cent.
Regardless of negative effects from the crisis, the banking sector remains extremely important in Indonesia given a poor equity market, 15 per cent of GDP by end 2002, and debt market only 5 per cent of GDP by end 2002. The government responded to the crisis by closing 16 banks and then, when bank runs threatened the surviving banks, it was forced to guarantee all bank liabilities. Before the crisis, banks were able to borrow foreign currencies at low interest rates, with investment grade banks saving around 7 to 10 per cent compared with domestic rupiah funding. The government had previously kept the exchange rate at a predictable level but when the crisis took hold, foreign debts expanded proportionately with the declining rupiah making repayment more difficult.
In the Philippines, banks remain the main funding conduit; however, the levels based to GDP are low and have not recovered since the crisis. Although profitability measures remained positive, costs and the net interest margins were very high. The Philippines market was plagued by crises in the 1980s such as the assassination of President Aquino in 1983. Deregulation in the early 1990s saw improvement, with the government encouraging banks to borrow unhedged in the overseas capital markets by the mid-1990s. Then the Asian crisis hit and a collapse in property prices led to further NPLs and deflated loan portfolios. Mergers have occurred since and the government has had to support some banks; however, this market remains depressed.
At the time of the crisis costs were actually higher than income but by 2002, the cost-to-income ratio was excellent at 46.8 per cent. Domestic lending had increased to 108 per cent of GDP or $US544m by 2002 while international borrowings had declined. The negative profitability measures of 1997 improved to positive territory by 2002; however, the leverage multiplier remains high indicating a high level of capital risk. Banks increased borrowings via domestic debts securities to 26.6 per cent of GDP by 2002.
Taiwan’s domestic banking system and population are similar to those in Australia although state ownership continues. Profitability for the year 2002 was negative due in part to a sharp rise in competition to 47 banks and no ability to expand into mainland China. Calls to consolidate the market are only now being addressed with government plans to reduce its 12 state-owned banks down to six and to enforce further efficiency by privatising, and selling shares in these banks on the stock market.
The massive Japanese banking industry lent $US5.9 trillion domestically at the end of 2002 but during the 1990s struggled to cope with deflationary pressures that led to many NPLs. Despite the fact that these banks have often made net losses, government financial support has increased share prices, leading the government to borrow heavily to help support bank losses. They often finance their efforts through domestic debt (bond) issues that crowded out corporate borrowings. The capital risk of Japanese banks is extreme, although reduced slightly by the end of 2002, and without government assistance, a number of banks would no longer exist.
Although Singapore and Hong Kong remain regional financial centres, Singapore’s international bank borrowings halved from the time of the crisis to the end of 2002. Meanwhile domestic and foreign bank borrowings have declined in Hong Kong as China opens up to the business world and businesses becomes more confident dealing with it directly instead of through Hong Kong satellite offices. Both Hong Kong and Singapore effectively recovered their negative return on asset figures at the time of the crisis. Singaporean banks operated with a very low net interest margin by December 2002; however, the return on equity figure was a healthy 9.3 per cent.
Banking sectors in all the economies except Hong Kong, Malaysia, the Philippines and Thailand have returned to pre-crisis domestic lending levels as a percentage of GDP or better. Across these recovered economies, total banking assets in US-dollar terms now exceed pre-crisis figures which is reflected in a general decline in gearing with the exception of the Philippines which remains the same, and Australia, Taiwan and Thailand with modest increases. The net interest margins have also generally declined with only Hong Kong and Korea showing a modest increase. Aside from the Philippines and Taiwan, the Asia-Pacific banking sector has largely recovered and so it is hoped the respective experiences of national regulators will enhance both skills and regulations as well as, to a lesser extent, various legal systems.
To view the full paper email mbr@buseco.monash.edu.au.
Kym Brown is Lecturer in Banking in the Department of Accounting and Finance, Faculty of Business and Economics, Monash University.
Professor Michael Skully is Professor of Banking in the Department of Accounting and Finance, Faculty of Business and Economics, Monash University.
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URL: http://www.austlii.edu.au/au/journals/MonashBusRw/2006/25.html