Indian and Asia Pacific banks maintain stronger capital than US and European peers: Moody's

New Delhi [India], December 8 : Banks in the Asia-Pacific region, including those in India, have built stronger capital positions compared to their counterparts in the United States and Western Europe, Moody's highlighted in its latest survey report.

The survey pointed out that a comparison of the largest banks in Asia-Pacific systems with peers in the US and Western Europe shows they generally have built strong capital positions under prudent regulatory supervision.

Further, it noted that large Asia-Pacific banks' risk-weighted asset (RWA) densities reflect their underlying asset risks, consistent with their credit losses for the past 10 years. It also added that the banks' RWA densities vary across the Asia-Pacific.

Risk-weighted assets (RWAs) represent a bank's assets adjusted for risk levels, meaning loans or investments considered riskier are assigned higher weights. A bank with higher RWA density indicates that a larger part of its assets carries higher risk.

Explaining the capital strength, Moody's highlighted, "Large private sector banks in India have high CET1 capital adequacy and leverage ratios because their internal capital generation has outpaced their RWA growth in the past couple of years, and they can raise equity easily from capital markets when needed."

CET1, or Common Equity Tier 1 capital, refers to a bank's core capital, primarily common shares and retained earnings, which serves as the first line of financial protection against losses. A higher CET1 ratio indicates a stronger ability to absorb shocks without affecting depositors.

The report mentioned that as of the end of 2024, the average reported CET1 capital adequacy ratios of the large banks in Hong Kong, India, Korea in the sample stood at 18.0 per cent, 14.7 per cent, and 14.5 per cent, respectively, all above 13.5 per cent for the four largest banks in the US and 13.8 per cent for the top six banks in Western Europe.

According to the survey, these banks can also raise equity easily from the capital markets when required. However, it stated that their government-owned peers remain weaker than private banks in both metrics.

The report attributed the higher RWA densities in India, Vietnam and among certain Chinese banks to the use of the standardized approach, a regulatory method that assigns fixed risk weights rather than relying on banks' internal risk assessment models.

It added that regulators in India have announced plans allowing banks to transition to the more advanced IRB (Internal Ratings-Based) approach by 2028, a move expected to lower RWA densities if successfully implemented.

For India, the sample included State Bank of India, Axis Bank, ICICI Bank and HDFC Bank, together accounting for approximately 50 per cent of system assets.

Overall, the report assessed a total of 35 banks across eight key Asia-Pacific banking systems, representing 75 per cent of total assets of all rated banks in these markets.

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