Barclays releases banking report

Barclays releases banking report

HONG KONG (Dow Jones): Banks in Hong Kong, the Philippines and Malaysia are in the best shape in the region, and those in Indonesia and South Korea in the worst, Barclays Capital said yesterday.

In its latest regional analysis, Barclays said "many Asian banks are losing cash every day they stay open," due to the ongoing regional financial markets crisis.

In the report, which examines which banking systems around the region are most at risk of widespread disruption or default, Barclays noted that some Asian banks are still doing well, despite the markets crisis. Risks associated with these banking systems aren't as high as in regional hot spots.

In South Korea, Kookmin Bank, Shinhan Bank and the Housing and Commercial Bank all generated strong cash flows and had increasing yields while their non-performing loans were kept at relatively low levels.

But Barclays said risks are increasing for the banks, which were forced to absorb weaker banks by the government. Though the government said it will take care of the weaker banks' problems, "the acquiring banks are unlikely to be taking these banks on commercial terms."

Barclays concluded that South Korea's government, "rather than isolating the problem...has spread it, undermining stronger banks" and leaving it harder to attract foreign capital, increasing uncertainty in the country's economy and banking system and leading to increased risk.

Barclays Capital minced no words about the state of the Indonesian banking system, saying systemic risks remain extremely high.

"We consider Indonesia to be the worst of any banking sector in Asia," Barclays said. "With a few exceptions, most banks are likely to default if they have not already done so. Systemic risk will not only affect the banks, but every issuer out of the country."

Even at the height of the Asian markets crisis and despite growing uncertainties, Hong Kong's banking sector "at worst, should make small cash profits," Barclays said.

Barclays said Hong Kong's "reliable and efficient legal system" enables quick liquidation of security and that the recovery rate of loans should be better overall, because underwriting standards are relatively high compared to the rest of Asia and write-offs should be lower than anywhere else.

"Also, we believe Hong Kong banks will find it easier to pass on higher spreads to customers given the cartel-like nature of the market," Barclays said, rating systemic risk as low.

While Philippine banks are about to see a sharp rise in non- performing loans, the sector "is far more profitable than most other banking sectors in Asia," Barclays said. Interest margins are wide and improving, helping better banks with strong cash flows in the face of deteriorating asset quality.

"Furthermore, in a perverse way, the notorious inefficiency of Philippine banks is a positive," Barclays said.

Shrinking profitability will encourage a lowering of overhead costs, thus offsetting income lost from non-performing assets. Still, some banks in the region are at risk, and if they fail, confidence will be eroded. Systemic risk there is low to moderate.