latest-news-headlines Market Intelligence /marketintelligence/en/news-insights/latest-news-headlines/asia-pacific-banks-leverage-ratios-decline-amid-strong-credit-growth-73392580 content esgSubNav
In This List

Asia-Pacific banks leverage ratios decline amid strong credit growth

Blog

Banking Essentials Newsletter: September 18th Edition

Loan Platforms: Securing settlement instructions and prioritising the user experience

Blog

Navigating the New Canadian Derivatives Landscape: Key Changes and Compliance Steps for 2025

Blog

Getting an Edge with Services: Driving optimization by embracing technological innovation


Asia-Pacific banks leverage ratios decline amid strong credit growth

Several banks in India and Singapore recorded a decline in a key leverage metric in the third quarter as lending growth accelerated, while unrealized losses on securities drove a drop in Japan.

India's HDFC Bank Ltd. recorded a 151-basis-point drop in its Basel III leverage ratio to 9.72%, while ICICI Bank Ltd. and Axis Bank Ltd., which are also private lenders, also reported a decline, according to S&P Global Market Intelligence data. State-owned Bank of Baroda's leverage ratio fell, but State Bank of India and Union Bank of India showed marginal gains.

"For Indian banks, credit growth has been very strong in recent times," Krishnan Sitaraman, senior director and deputy chief ratings officer at CRISIL Ratings told S&P Global Market Intelligence. "This has meant that the loan book and in turn total assets have grown at a faster pace as compared to their Tier 1 capital. This has caused their leverage ratios to fall."

SNL Image

A high leverage ratio, which measures common equity Tier 1 capital and additional Tier 1 capital as a percentage of total leverage exposure, indicates that banks have more capital reserves and are better positioned to weather financial crises but it also means that they have less money to loan out.

Growing loans

HDFC Bank, India's second-biggest lender by assets, reported total advances of 14.799 trillion rupees in the July-to-September quarter, up 23.4% from a year earlier. Advances at Axis Bank grew 18% year over year to 7.309 trillion rupees.

"For India, the negative impact [on leverage ratios] is more pronounced because of higher credit growth, especially among the private sector banks. On the other hand, public sector banks have been seeing fresh capital raisings, including additional Tier 1s, leading to a decrease in leverage," said Deepali Seth Chhabria, a banking analyst at S&P Global Ratings.

Public sector Canara Bank had the second-largest improvement in leverage ratio with a 69-basis-point increase to 5.46%. The bank raised 60 billion rupees in additional Tier 1 and Tier 2 bonds in the fiscal first half, Business Standard reported Sept. 25. It plans to raise a further 30 billion rupees in capital in the second half of fiscal 2022-2023.

State Bank of India, the country's largest lender by assets, saw growth of 14 basis points in its leverage ratio to 5.32%. The bank did not respond to a request for comment.

In Singapore, DBS Group Holdings Ltd. had a 70-basis-point reduction in its leverage ratio to 6.10%.

A DBS spokesperson told Market Intelligence the drop in leverage ratio is due to balance sheet growth as well as the implementation in January of a standardized approach for measuring counterparty risk that resulted in higher exposure measurement for derivatives.

"We expect the leverage ratio to be stable in 2023 with profit accretion offsetting balance sheet growth," the spokesperson said.

Unrealized losses

Some banks' leverage ratio declined due to "the negative impact on Tier 1 capital from unrealized losses on securities portfolios in the current high-interest rates environment," said Gavin Gunning, a banking analyst at S&P Global Ratings.

An example is Japan's The Norinchukin Bank, which reported a 339-basis-point drop to 7.49%, the largest of the quarter. "The impact varies by bank, however, driven by factors including the size of the securities holdings, and growth in on- and off-balance sheet exposures," Gunning said.

Japanese megabanks — Mizuho Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. — all saw declines in their leverage ratios. Spokespersons at the three megabanks declined to answer Market Intelligence's questions on leverage ratios.

"Overall, those banks have become more cautious about taking risk as a monetary policy was tightened globally and fears of a recession grew," said Takahide Kiuchi, executive economist at Nomura Research Institute. "They will continue to take such stance amid the uncertain economic outlook driven by a recession, even though rising interest rates hit [a] lull."