Hang Seng judged world's strongest bank for second straight year

Across Asia, the International Monetary Fund expects gross domestic product growth to average 5.6 per cent this year, triple the European Union's 1.8 per cent. And Asia's rich are getting richer. The 4.69 million individuals in the Asia-Pacific area with at least $US1 million in assets boosted their combined wealth11 per cent last year to a total of $US15.8 trillion, the fastest pace in the world, Royal Bank of Canada and Cap Gemini say. "Asian banks stand out because of the huge wealth creation in the region," says Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners in Hong Kong. "A lot of the banks are well capitalized."

Asia's strongest lenders, and their global counterparts, are improving the quality of their capital. Cooperative bank Norinchukin lost 572 billion yen ($US4.6 billion) in the fiscal year that ended in March 2009 when it bet the cash of its members, mostly farmers and fishermen, on toxic US mortgage- backed securities. Today, CEO Yoshio Konois investing in high-grade bonds at home and abroad, including sovereign debt. "Our goal is to keep capital at a level that's sufficiently above what is required globally," says Shinichi Saitoh, a senior managing director at Norinchukin. The bank has a 17.6 per cent ratio of Tier 1 capital to risk-weighted assets for the ranking period, putting it fifth in the high-quality-capital category that includes equity and some subordinated debt.

The Basel Committee on Banking Supervision has been pushing all banks to improve capital standards. The latest measures, known as Basel III, more than triple the minimum amount of core capital lenders need to at least 7 per cent of their risk-weighted assets. National regulators can set stricter rules. Bloomberg's ranking considers capital strength among its five ranking criteria. The others are non-performing assets, loan-loss reserves, deposits, and efficiency.

If Hang Seng has a weakness, it's mainland China. Its Shanghai-based unit has about 50 outlets in major cities. The bank focuses largely on Hong Kong companies that want to do business on the mainland rather than on retail customers. Those companies are facing slowing growth: China's GDP increased 7.4 per cent last year, down from an average of 9.8 per cent during the past four decades. Chinese banks' bad loans surged in the first quarter by the most since at least 2004, with defaults spreading to state-owned giants. Because of China, Hang Seng more than doubled its provision for bad loans last year to HK$1.14 billion ($US147 million). Even so, it isn't retreating from the world's second-largest economy. "We won't scale back our China business," Lee said during an earnings press conference in February. "Instead, we will focus more on customers that are doing business in both China and Hong Kong."

Capital strength buoyed the top banks of Europe. No.13 Swedbank suffered the biggest losses of any major lender in the Nordic countries in 2009. CEO Michael Wolf took the helm that March and raised a total of 27.5 billion kronor ($3.2 billion) in two share sales to improve the bank's capital ratio. Today, Swedbank is the ranking's best capitalised, with a 22.4 per cent Tier 1 capital ratio.

Europe tied Asia with six lenders in the top 20-thanks primarily to Nordic banks. Sweden's regulator has been raising capital requirements for the biggest banks since 2011. Swedbank and two other Swedish banks posted the highest capital ratios in our ranking. "Nordic banks are as safe as they could be," says Wilhelm Heinrichs, a fund manager at Allianz Global Investors in Frankfurt.

It wasn't always that way. Annika Falkengren, chief executive of No. 12 SEB, is focusing on high-quality capital and cautious domestic lending after leading the bank through the financial crisis. When Ms Falkengren, 53, became CEO in 2005, she says, she knew of potential risks in the Baltic states of Estonia, Latvia, and Lithuania from a credit-fueled housing boom. But she didn't anticipate the shock that followed Lehman Brothers' bankruptcy in 2008. To shore up the bank after losses in the Baltics, Ms Falkengren raised 15.1 billion kronor in a 2009 share sale. She cut 1,500 jobs and reduced the bank's reliance on short-term borrowing to improve its funding profile. Then she began building capital buffers and has continued to bolster equity to this day. "Ever since Lehman, I had a very strong focus on creating a rock-solid balance sheet," Mr Falkengren says.

At the end of 2014, SEB had a 19.5 per cent Tier 1 capital ratio, a low ratio of nonperforming assets to total assets, and a 15.3 per cent return on equity, profitability most major European banks can only dream of. HSBC and Deutsche Bank, Germany's biggest bank by assets, are struggling to hit 10 percent.

Ms Falkengren remains careful as she seeks to grow in the Nordic countries and Germany and slowly moves into the U.K. In corporate banking, SEB lends mainly to blue-chip clients such as Electrolux, Europe's biggest home appliance maker, and others it knows well. For retail customers, it's limiting the sum Swedes can take out in mortgage loans to five times their household's gross annual income. "We're trying to make sure our clients are not taking too much risk," she says.

Like Hang Seng and Norinchukin, Singapore's strongest banks are targeting markets they know well. That's helping them curb bad debts and build a strong capital base, says Jean-Charles Sambor, Asia-Pacific director at the Institute of International Finance. The Tier 1 capital ratio at Oversea-Chinese Banking and the other Singapore banks exceeded the Basel III guideline at the end of 2014.

Oversea-Chinese Banking, Southeast Asia's second-largest lender by market value, has ambitions beyond plain banking in Asia. It operates in 18 countries and territories from Malaysia to China and was among the first to reopen a branch in Myanmar this year after 49 years of military rule. "Our strategic direction is to become a leading, well-diversified Asian financial services group with a broad geographical footprint," CEO Samuel Tsien says. He says the ability to get funding and revenue from both developed and emerging Asian markets helps stabilise the bank's capital base when regional economies fluctuate.

Canada, which dominated the 2012 ranking that considered banks' 2011 fiscal years, has two entries in the top 20: Desjardins at No. 5 and Canadian Imperial Bank of Commerce at No. 18. CIBC is the only North American bank to appear in the ranking all five years.

The US has three entries: newcomer Capital One Financial in McLean, Virginia, at No. 6; No. 14, Citigroup; and No. 15, Winston-Salem, North Carolina based BB&T, the ninth-largest US commercial bank by assets. New York based Citigroup, the world's twelfth-largest bank in terms of assets in the ranking period, is the only large global lender among the 20 strongest. The biggest US banks by assets, led by JPMorgan Chase and Bank of America, didn't make the list.

Capital One-with its quirky ads that ask, "What's in your wallet?"-gets its strength from US consumers and their prolific credit card spending and abundant auto loans. Richard Fairbank, the only CEO of a top US lender who's still running the company he founded, has transformed the business. Starting with a credit card consulting firm in 1988, Fairbank has built one of the biggest US regional banks and consumer finance companies. His method: announcing acquisitions including Hibernia in 2005, North Fork Bancorp in 2006, and biggest US online lender ING Direct in 2011.

Capital One's consumer push helped it top the loan-loss- reserves-to-nonperforming-assets category. It's benefiting from low credit card delinquencies as U.S. banks' quarterly write- offs on the cards slid to less than 3 percent last year, the US Federal Reserve says. The bank's consumer focus has also brought scrutiny. In 2012, the Consumer Financial Protection Bureau ordered Capital One to pay $US210 million to settle charges of deceptive marketing of such credit card products as identity theft monitoring. The bank didn't admit or deny wrongdoing. The US Justice Department and others are investigating Capital One's subprime-auto-financing business. Julie Rakes, a spokeswoman for Capital One, declined to comment.

Another newcomer, National Commercial Bank, joins the top 20 at No. 4, the only Saudi Arabian lender ever to make the ranking. Controlled by the government, it's the second-largest Middle Eastern bank, with assets of almost $US120 billion. Saudi oil wealth-a projected $US172 billion in export revenue this year-buoys the bank: About 8.4 percent of its deposits, or 28 billion riyals ($US7.5 billion), come from the government.

NCB has taken a conservative approach to investments. Its rising non-performing loans, a significant portion made to the former owners, led the government to take over the bank in 1999. Since then, it's pushed into Saudi Treasuries and expanded retail outlets. "The bank has maintained a very liquid balance sheet," says Murad Ansari, director of equity research at EFG Hermes Holding in Riyadh, Saudi Arabia. "It uses its scale to its advantage, whether that's in retail, where it can attract inexpensive deposits and do more lending, or in corporate, where it uses its large equity base to do bigger deals." The bank could suffer from declining oil prices and slow loan growth amid an economic downturn, Ansari says.

Even top banks in Asia face similar risks. Sluggish credit growth, rising competition, non-performing loans, and the challenge of maintaining high-quality capital are potential problems, BNP's Kwong says. Macquarie's Pili attributes his underperform rating on Hang Seng to its declining interest margins and shrinking market share in nonconsumer loans, among other things.

For Rose Lee and Hang Seng, such issues might mean it's time to reach out to clients over a few more bowls of strength- promoting snake soup.

Bloomberg