Major Japanese and Chinese banks, ranked among the biggest in the world, diverged in their ability to withstand stress in the third quarter amid subdued economic growth prospects for both the economies.
Sumitomo Mitsui Financial Group Inc.'s common equity Tier 1, or CET1, ratio in the quarter fell 223 basis points year over year to 13.69%, the steepest decline seen among a sample of 31 banks in the Asia-Pacific region with assets of more than $100 billion each, according to S&P Global Market Intelligence. Mizuho Financial Group Inc.'s CET1 ratio dropped 130 basis points to 9.30%, while The Chiba Bank Ltd., one of the Japanese regional banks, posted a 106-basis-points decline in its ratio during the quarter.
A bank's CET1 ratio indicates how well it can withstand stress. The ratio measures the proportion of most-liquid capital that banks hold against their risk-weighted assets, in which the value of their loan portfolios and other assets such as bonds and stocks are adjusted for credit and market risks. An increase in risk-weighted assets pushes down the CET1 ratio.
Volatility
Japanese banks have become more prone to be affected by the ongoing volatility in the global markets as they seek higher returns overseas to mitigate the impact of ultralow interest rates and a slowing loan market at home. The U.S. Federal Reserve has led global central banks in raising interest rates this year from record lows during the COVID-19 pandemic.
"Chances are high that the CET1 [ratio] at the banks will be on a downward trend," given that the U.S. interest rates could continue to dampen bonds and stocks, according to Takahide Kiuchi, executive economist at Nomura Research Institute.
While the three Japanese banks' CET1 ratios are still above the regulatory minimum of 4.5%, the downtrend of the ratio will likely force them to replenish their core capital more quickly or off-load assets that are deemed riskier, such as unsecured or distressed loans, analysts recently told Market Intelligence.
Global markets have been roiled by inflation, the lingering COVID-19 pandemic, the fallout from the Russia-Ukraine war and tightening financial conditions in 2022. The outlook for growth remains subdued, as the IMF expects global growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. Growth in Asia and the Pacific region is expected to moderate to 4% in 2022 and rise to 4.3% in 2023, the IMF said in October. China's growth will reach 3.2% in 2022 and is expected to rise to 4.4% in 2023, while Japan's growth is expected to remain at 1.7% in 2022 before slowing to 1.6% in 2023, the IMF said.
Mixed showing
Most major Chinese banks reported year-over-year improvement in their CET1 ratios in the third quarter. Industrial and Commercial Bank of China Ltd. came in third on the list with a 54-basis-point increase in its CET1 ratio, followed by China Merchants Bank Co. Ltd. and Bank of China Ltd., respectively.
Two smaller Chinese lenders, Chongqing Rural Commercial Bank Co. Ltd. and Bank of Ningbo Co. Ltd. held the top two slots, with increases of 70 basis points and 57 basis points, respectively, Market Intelligence data shows. China Construction Bank Corp. logged a 46-basis-point improvement in its ratio from a year earlier.
In total, 26 Chinese banks featured in the sample, with 13 each logging increases and declines in their CET1 ratios during the quarter.
As against the Chinese banks, which focus on their domestic market, Japanese banks are more exposed to volatility in the global markets, given their aggressive expansion overseas in recent years. Sumitomo Mitsui Financial's outstanding overseas loans, for example, totaled $295 billion as of June 30. The group's overseas loan book was smaller than that of peer Mitsubishi UFJ Financial Group Inc., which posted overseas loans of ￥47.645 trillion in the same period.
Elsewhere from the region, Oversea-Chinese Banking Corp. Ltd.'s CET1 ratio fell 111 basis points in the third quarter, clocking in at 14.40%. Chin Yee Goh, group CFO at the Singaporean lender, attributed the decline in the CET1 ratio partly to the payment of an interim 2022 dividend.
"Our capital remains strong. The CET1 ratio [stood] at 14.4%," Goh said in a Nov. 4 call. "The quarter-on-quarter decrease in CET1 ratio was mainly due to third-quarter profit contribution being offset by the payment of our interim 2022 dividend as well as higher credit risk rated assets associated with our asset growth."