Asia's banks will likely need to raise hundreds of billions of dollars in the coming years to meet new capital requirements that may not fit their circumstances particularly well, a full room of delegates at FinanceAsia's Borrowers & Investors Forum, Southeast Asia, heard on Thursday.
As of this year the Basel Committee of Banking Supervision requires banks to have a minimum core equity tier-1 ratio of 6% of risk-weighted assets plus an additional 2% of tier-2 capital, for a minimum combined ratio of 8%. But by 2019 banks need to raise their tier-1 ratios to at least 8.5%.
Asia's well-capitalised banks generally don't have a problem meeting these Basel III capital adequacy requirements. Many national financial regulators require far higher levels of tier-1 capital than is required currently and lenders typically boast ratios well in excess of what is needed.
However, regional credit growth is set to expand robustly in the years ahead. That promises to make the task of complying with Basel III more challenging.
The primary goal of the Basel III bank capital rules is to ensure banks are strong enough to avoid the need for government bailouts with taxpayer money. However, that goal does not necessarily sit well in Asia, the forum in Singapore was told.
“The premise that governments shouldn't bail out senior creditors doesn't work well here because of the importance of banks to the financial system and depositors,” said Ritesh Maheshwari, head of financial institutions ratings for Asia Pacific at Standard & Poor's.
“You have to bail that bank out if you want to get funded,” he added, noting how banks provide the vast majority of debt funding in Asia. “There is no political backlash to such bailouts here, and so no compulsion among Asian regulators to tie their hands behind their backs and rule out a bailout. In fact some are keeping bailouts as a tool on the table while they discuss bail-ins.”
Maheshwari predicted regulators in Asia would as a result be far more relaxed about the bail-in features attached to new capital raisings than in other regions.
The chief headache for regional banks is how best to safely expand their balance sheets to keep up with growing economies.
“The key agenda for Asia Pacific banks is to manage credit growth, rather than cushion against losses,” Maheshwari said. “This is the distinctive feature [that accounts for] the capital raising that Chinese banks, Indian banks, and Indonesian banks are doing. But regulators need to keep track of Basel III so that these banks can do these issues. So with bail-in, the motivation and premise is absent [in Asia.]”
Capital costs, complications
The Basel III capital rules are designed to ensure banks can cope against sudden rises in non-performing loans.
But Asia’s banks are finding managing their capital requirements to be much more complicated than anticipated.
Madhur Mehta, managing director and head of financial institutions debt capital markets at Standard Chartered, said many Asian banks now employ dedicated capital management teams, sometimes with as many as five people.
Risk weightings are sometimes also proving to be a difficult hurdle.
Vijay Chander, executive director for fixed income at the Asia Securities Industry & Financial Markets Association, or ASIFMA, said Basel III's complex risk-weighted asset rules can force banks to hold more capital when lending to perceived riskier corporates or when conducting certain types of lending.
As a result, the banks are increasingly focused on offering safer but lower-yielding loans or investments, which reduces revenues just as capital costs rise.
“Banks risk ending up with low-yielding assets on the one hand and high yielding liabilities on the other, which is the opposite of what they should be doing,” Chander said.
Asian banks will have to become accustomed to paying more for their capital, given how much more they are expected to need in the years ahead.
One Standard Chartered estimate cited by Chander puts the new capital needs of Asian banks at around $350 billion by 2019. Maheshwari referenced a similar figure.
A large chunk of that will originate from China, which has the region's largest banks operating in the biggest economy.
For Maheshwari, Chinese banks don't need the new capital to help plug rising bad debts – “banks have a more than sufficient cushion to cover NPLs,” he said – but to continue growing in tandem with the Chinese economy.
Most of their funding needs will likely be conducted onshore, the speakers predicted. However, Maheshwari predicted that China's larger banks could look offshore to raise most of their hybrid or equity capital funds.
Local liabilities
Lenders in countries with less-developed capital markets may need to look offshore too, given the limitations of their local markets.
Kittiya Todhanakasem, first senior executive vice president and managing director for the financial management group of Krung Thai Bank, said her institution had adopted Basel III standards at the beginning of 2013.
The Bank of Thailand has taken a strident attitude towards the capital rules, requiring all qualifying banks in Thailand have a minimum capital adequacy ratio of 12%.
Thai banks have traditionally helped to meet their capital ratios by issuing tier-2 applicable subordinated bonds to retail investors, who constitute the majority of demand in the local bond market.
Kittiya said these investors have been happy to buy the bonds as “they see them as higher yielding investments for banks they don't think will ever go out of business.”
However, under newer rules Thai banks need to issue sub debt with loss-absorption and and step-up coupon features.
“The SEC decided these features are difficult to understand, so it rules that only institutional investors or high net worth individuals could buy them,” Kittiya said. “However, our institutional investor base is not very well developed in Thailand.”
To meet its needs KTB had to look internationally. It conducted a $700 million 10.5 year bond in June 2014, just three weeks after Thailand's army conducted a coup.
The deal was successful. It was also by far the highest-yielding Thai dollar-denominated bond ever issued.
“One certainty is the whole management of [Asian] bank liquidity and capital is demanding a lot more strategic and tactical planning,” Mehta said.
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