From Q308 we have included a new section that examines the risks associated with each country’s banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008? Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets.
Two general themes pervade the banking sectors of the Asia Pacific region. The first is that the excess savings within greater China and Japan remain enormous and are likely to grow. One expression of this will be the continuing growth in bank deposits that is, in absolute terms, considerably greater than the growth in lending. The second is that central banks have, in much of the region, been moving to tighten monetary policy. This has already had an impact on the behaviour of the banks.
Over the last year, Latin America has been a major beneficiary of the pick up in investors’ appetites for risk. Yields on bonds have been falling, and the compression of yield spreads has been larger than in other parts of the world. In every one of the Latin American countries monitored by BMI, the loan/deposit ratios have been rising. Current account and budgets are, for the most part, balanced. Collectively, the banks are sourcing funds from the rest of the world in order to lend to non-bank customers.
As in previous reports, we include a SWOT analysis for China. Taking a long-term view, the absolute size and growth potential of the banking sector are enormous. In the short-term, though, the way in which the authorities respond to mounting inflationary pressures will be crucial for the economy and, indirectly, for the banking sector. Loan growth has been markedly slower in China than in other developing countries surveyed by BMI. The clear implication is that the increase in the Reserve Requirement Ratio (RRR) and other measures to constrain the growth in credit have had an impact.
Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns. It does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall country risk, together with the regulatory and competitive environment.
China’s overall CBBER is 70.5. The banking market structure elements of the limits to potential returns have, unsurprisingly, a higher score than the country structure elements (87.5 versus 50.5). Conversely, the banking risks elements of the risks to the realisation of returns have a lower score than the country risk rating (58.3 versus 70.0).
