Most of the Asia-Pacific's largest banks are poised for lending income growth in 2023 and 2024, as they continue to gain from a combination of higher interest rates and positive growth prospects.
In a sample of the region's 21 largest banks by assets, 12 are expected to log year-over-year increases in net interest income (NII) — the difference between interest revenues and interest expenses — in 2023, according to analyst consensus estimates compiled by S&P Global Market Intelligence. Industrial and Commercial Bank of China (ICBC), the world's largest bank by assets, is expected to report the highest NII, at $103.39 billion in 2023 compared to $103.25 billion in 2022.
"We anticipate that NII growth for banks in most jurisdictions in APAC, and indeed globally, should increase in 2023 and 2024," said Gavin Gunning, a banking analyst at S&P Global Ratings. This is mainly driven by the likelihood of higher interest rates in many banking jurisdictions and generally positive economic growth prospects in the region, Gunning said.
Asia-Pacific banks have gained from an increase in policy interest rates as many of the central banks in the region followed in the footsteps of the US Federal Reserve by tightening monetary policies to dampen inflation following Russia's invasion of Ukraine. However, The People's Bank of China moved in the opposite direction by cutting rates in an attempt to boost the country's slowing economic growth. Japan's central bank, meanwhile, maintained its ultra-loose monetary policy.
Divergent trends
Six Chinese and three Japanese lenders in the sample are expected to post year-over-year declines in NII in 2023, while all of the five banks in the sample from other Asia-Pacific markets will book increases, according to consensus estimates. The remaining Chinese banks are estimated to log increases in lending income.
"Strong credit growth to support economic recovery will underpin NII growth for most Chinese banks," said Ming Tan, a banking analyst at S&P Global Ratings. "But lending rate cuts to stimulate demand could pressure their margins and impact NII's growth momentum this year."
China's central bank on June 20 cut its one-year and five-year Loan Prime Rates (LPRs) by 10 basis points each, to 3.55% and 4.2%, respectively. While the rate cuts are seen as an effort to revive economic growth, they could impact banks' lending income and margins. The cuts came after China's GDP grew 4.5% in the first quarter, below the government's target of "around 5%."
For 2024, though, 17 of the 21 Asia-Pacific banks in the sample are expected to record growth in lending income year over year, with State Bank of India and three Japanese banks — Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Resona Holdings Inc. — bucking the trend, the analyst estimates show.
Margins, loan loss provisions
Analysts estimate that most of the region's largest banks will see declines in net interest margins (NIMs) as interest rates peak. All 11 of the largest Chinese banks in the sample are expected to log NIM declines as they face lower rates and higher term deposits. The four biggest Chinese banks all reported a decline in their NIMs in the quarter ended March 31.
China's Ping An Bank Co. Ltd. is expected to have the highest NIM in 2023 among the sampled Asia-Pacific banks, at 2.61%, even as the margin is lower than the bank's 2022 reported NIM of 2.75%. Other Chinese banks are also expected to have lower NIMs in 2023, including China Merchants Bank Co. Ltd. and Postal Savings Bank of China Co. Ltd.
Australia's ANZ Group Holdings Ltd., Westpac Banking Corp. and National Australia Bank Ltd. are likely to see NIM expansion in 2023, according to estimates, even as the banks warn that margins may have peaked. Joining the Australian banks are Singapore's DBS Group Holdings Ltd. and Mitsubishi UFJ Financial, which are expected to log increases of 29 basis points and 32 basis points in their NIMs in 2023, respectively.
In addition, China's four largest banks are estimated to record the largest loan loss provisions in the region, with ICBC expected to report provisions totaling $25.25 billion in 2023 and $26.70 billion in 2024. In total, 12 of the sampled banks are estimated to reduce their loan loss provisions in 2023, with the remaining nine to keep more capital for loan losses.
