Banks in Hong Kong and Singapore are likely to improve their operating efficiency in the coming months as higher net interest margins provide a buffer against potential increases in operating costs.
Hong Kong banks saw their aggregate cost-to-income ratio, a key measure of operating efficiency, improve to 45.60% for the 12 months ended June 30, 2023, from 48.63% in full-year 2022, according to S&P Global Market Intelligence data. The efficiency ratio at their peers in Singapore improved to 40.53% from 42.56% over the same period.
The cost-to-income ratio measures a bank's operating expenses as a percentage of its income. A lower ratio indicates higher efficiency.
More gains ahead
"The trend is likely to continue for a while until the global interest rate environment reverses, which may only happen in 2024," said Gary Ng, a senior economist at Natixis CIB. "Banks in Hong Kong and Singapore both see the tailwinds of higher net interest margin, outpacing the increase in costs."
Banks in the two Asian financial hubs have gained from the increase in US interest rates since March 2022, resulting in income growth outpacing increase in costs. Hong Kong pegs its interest rates and currency to the US, while Singapore was among the first in Asia to tighten its monetary policy after the COVID-19 pandemic to counter high inflation.
DBS Bank Ltd., the largest lender in Singapore by assets, saw its cost-to-income ratio drop to 36.52% in the quarter ended June 30, down from 43.72% in the same quarter a year-ago, according to Market Intelligence data. Oversea-Chinese Banking Corp. Ltd., the second-largest Singapore bank, improved the metric to 36.57% from 40.97%.
Highly efficient
Bank of Shanghai Co. Ltd. emerged as the most efficient lender among the region's 50 largest banks by total assets in the second quarter, with its cost-to-income ratio falling to 14.51% from 20.41%. In total, 23 Mainland Chinese banks featured on the list, with cost-to-income ratios of 20 of those banks under 36%, the data shows. Industrial and Commercial Bank of China Ltd., the world's largest bank, ranked sixth on the list, with a ratio of 27.12%.
"Most [mainland] Chinese banks have lower salary expenses than [regional] peers, and the small reliance on branch networks and digitalization trends have also helped to control costs," Natixis' Ng said.
Cost pressures
Ng, however, warned that the pressure on mainland Chinese banks' cost-to-income ratios may increase if asset growth remains stable and net interest margins fall further, especially as the government pushes for more lending to support the economy.
Mainland Chinese banks have been "able to utilize their fintech advantage, which could support their businesses in a large scale with minimal increase in costs," said Michael Zeng, a banking analyst at Daiwa Capital Markets, and "at the same time stepped up lending to achieve sizable income growth" amid efforts to boost economic growth.
Three out of five least-efficient banks in Asia-Pacific were in Japan, with Sumitomo Mitsui Trust Bank Ltd.'s ratio surging to 73.34% in the April-to-June quarter, from 53.62% a year ago, Market Intelligence data shows. The ratios of other megabanks, including Mizuho Financial Group Inc., remained elevated.
"Japanese banks probably tend to have more physical branches at home than their overseas peers, leading to higher costs from labor charges," said Toyoki Sameshima, a senior analyst at SBI Securities Co. At the same time, "they have been mired in low interest rates, hindering a growth of their interest income."
