ASEAN banks' profitability feared to trend lower in 2016

High CASA deposits could serve as an important buffer.

According to BBVA, Return on Equity of Indonesian banks tops the world at a remarkable 21.5%, with Chinese banks coming a distant second at 17%. Even excluding Indonesia, ASEAN banks average ROEs is above the world average (12.6% vs. 12%).

"Such high profitability levels bode well for ASEAN banks, and in particular for Indonesia, in absorbing credit losses over and above what they have already provisioned for. Although still high in level terms, profitability of the bulk of ASEAN banks’ has been dampened by slowing credit growth, elevated operating costs and moderate deterioration in asset quality over the past three years."

Here's more from BBVA:

Return on Assets ratios have declined most significantly for Indonesian banks’ from 3.1% in 2013 to 2.3% in Q3 2015, followed by the Philippines, Malaysia and Thailand, while remaining stable in Singapore and in fact picking up in Vietnam. In level terms, ROA’s of Vietnamese banks are lowest in the region at just 0.9%, while Indonesian banks have significantly high ROAs at around 2.3%.

Reassuringly, with the exception of Malaysian banks, the sharp decline in net interest margins (NIMs) as seen across ASEAN banks since 2010 saw a modest reversal over Q3 2015. NIMs have rebounded sharply for Indonesian banks (5.3% in 3Q15 vs. 4.2% in 2014), followed by the Philippines, Vietnam and Singapore.

Malaysia banks are suffering from a secular decline in NIMs, from 2.6% in 2010 to 2.0% in 3Q15, while Thai banks’ NIMs have been largely flat at 2.6% over the past three years. The recent pick-up in NIMS across ASEAN banks’ can, in part, be attributed to the rise in short term inter-bank interestrates over 2015 across Singapore, Indonesia, Philippines and marginally for Vietnam as concerns over the impact of imminent Fed rate lift-off weighed on banking system liquidity.

Another key factor aiding NIMs of ASEAN banks’, particularly major banks in Indonesia, Philippines and Vietnam has been the relatively high share of current and savings (CASA) deposits in their overall funding mix.

In Indonesia for instance, the five large banks have average CASA ratio of 62%. Interest rates on CASA deposits are low and less sensitive to the rise in interest rates as compared to that on term deposits. The high CASA deposits helped keep overall deposit costs low even as interest rates on term deposits went up sharply over the past year.

Looking ahead, even as ASEAN banks’ profitability may trend lower over the next year, dragged by a tighter operating environment, the moderate deterioration in asset quality and domestic growth headwinds, we expect the high CASA deposits to serve as an important buffer for overall NIMs of major ASEAN banks against contraction.