THE BOTTOM LINE, PLEASE
Shareholders of Asia’s banks reward tighter control of costs over robust revenue growth.
By Niles Lo

Asian banks that deliver the best total shareholder returns (TSR) - a measure of share prices and dividend payments - have a lot in common with all companies that succeed in the same way: they combine strong revenue growth with equally strong cost-control measures. This virtuous pair is benefiting Hong Kong’s banks, which emerged as the top performers for TSR in Asian banking in a recent study by consultancy Bain & Co. Of the 62 listed banks polled in the study, Hong Kong banks generated TSRs of 11 to 12 percent and an average return on assets of 1.2 percent. The worst performers were Japanese institutions, which tallied a negative 9 percent TSR and an average return on assets of negative 0.09 percent.

Hong Kong’s higher marks reflect shareholders’ interest in better cost control throughout Asia. Top performers garnered growth of more than 11 percent while at the same time delivering a cost-to-income ratio of 50 percent or under. Banks with modest revenue growth but tight cost control earned a TSR of 11 percent. Banks that showed strong revenue growth and a good grip on costs earned 12 percent. Hong Kong’s banks earned healthier share-price growth because they matched robust expansion with tight cost management. In contrast, banks in India and Thailand outpaced Hong Kong’s lenders substantially in revenue growth, but under-performed them in cost.

Japan’s bottom number mirrored its banks’ long-term struggle with slow growth and very high costs. The Philippines and South Korea showed the poorest TSRs after Japan. In Korea, where banking reform has been underway for some time, Bain partner Oliver Stratton says that the result showed the effect of poor management of the many banking mergers that have occurred in the last four years.

“Shareholders recognize that, in banks that don’t have an efficient cost structure, growth is very challenging,” says Stratton. “In order to grow well, you need to know which customer segments are the most profitable, how you build business around those customers, and which channels are high-cost and inefficient.” He adds: “Otherwise you end up growing costs faster than revenue, and then lose the customers not satisfied with the service they’re getting.”

In this respect, “Hong Kong and Malaysian banks turned out to have the best match of profitable growth and cost control - despite variable revenue growth across the sector in both markets.”

Shareholders’ focus on costs in Asian banking fits with the boom-bust cycles of the region’s banks, which has taught investors caution over the years. But Ryan Tsang, director of financial services ratings at Standard & Poor’s, warns that some costs associated with expansion are not necessarily a waste. “In developing markets, you would expect banks to expand quite fast,” says Tsang, “but expansion comes with costs, and a lot of these costs could be on investment in IT or infrastructure, which aren’t recurring.” Stringent cost control can often depend on local economic conditions, he says. In the tough economic environment of Hong Kong in the last few years, “banks had to focus on maintaining certain business flows, so they had to either diversify outside of Hong Kong or to other products, or focus on cutting costs to deliver performance.” He adds: “There’s no one right strategy for banks.”

However, an intense focus on costs probably is the right approach for China’s fast-growing banks. On average, the Chinese banks in the Bain study generated a TSR of 7 percent, despite high revenue growth amid ongoing market liberalization. Stratton cited a difference between the China Big Four, which, he says, were struggling on all operating measures. Other financial institutions, such as Minsheng Bank,
the Pudong Development Bank, and China Merchants Bank, had higher return on assets, averaging 0.45 percent. In contrast, the Big Four averaged 0.16 percent. Across Asia, the banks in the study averaged 0.7 percent ROA.