APAC Bank Profit Celebrations Could Be Short-Lived
Although global banks saw strong profitability in the first half, limited to no income growth coupled with a surge in delta variant-related Covid cases in Asia threatens to make the celebrations short-lived.
Asia continues to be a key source of growth for global banks with profits up across the board in the first half including for Credit Suisse which posted a 28 percent increase in regional pre-tax profit despite global losses caused by the twin collapses of Greensill supply chain funds and family office Archegos.
But celebrations could be short-lived.
The outlook remains challenging as banks grapple not only with the continued low interest rate environment but also the surge in infection cases caused by the emerging delta variant.
No Income Growth
Banks’ non-interest income continues to benefit from a strong trading environment as global markets grind higher (MSCI World is up more than 15 percent year-to-date). But a low interest rate environment continues to act as a drag on net interest income, resulting in flat total income generated, and such conditions could prolong as the U.S. Federal Reserve is now eyeing 2023 as the next earliest rate hike.
In the first half, major global banks with significant exposure in Asia – including UBS, Credit Suisse, HSBC, Standard Chartered and Citi – registered an average of less than 0.03 percent of income growth, according to data compilations by finews.asia. UBS led the pack with a 9.6 percent increase in total income during the period.
Even with an all-time high in first-half fee income, driven by a strong showing in fixed income fees and trading, DBS saw overall income drop 4 percent year-on-year.
Continued Cost Increase
Meanwhile, operating expenses continue to grow with the aforementioned global banks posting a 9 percent increase.
And this is unlikely to slow as continued investments in areas like technology and compliance are necessary to adapt to ongoing disruptions such as the emergence of fintech challengers or the changing regulatory landscape in Asia.
More Challenges Ahead
Although almost global banks thus far have reported positive pre-tax income growth in Asia – HSBC is amongst the exceptions with a 5.9 percent dip – this has been driven primarily by a reduction in loan loss provisions.
This could be set to reverse as the delta variant surge threatens to derail the economic recovery in regions like China and Southeast Asia. OCBC’s newly appointed chief executive Helen Wong, for example, announced a boost in provisions due to growth concerns in Malaysia and Indonesia.
Headwinds are also growing for trading income as China cracks down on internet platforms, education and, most recently gaming which state-backed media called decried as «spiritual opium».
