Why is Asia home to the world’s biggest banks?

How Asian Governments Make It So Banks Are the Big Winners

How Asian Governments Make It So Banks Are the Big Winners

Banks in Asia are big. The five largest banks in the world are all located in Asia; four of which are Chinese.

Asian banks are seeing their highest ever returns right now – attracting investors from around the world. But you need to know that the growth of the banking industry is government driven, and ahead, we’ll show you how credit distribution is manipulated and what that means for your portfolio.

What really drove the so-called “Asian Miracle”?

Was it innovative entrepreneurs toiling night and day that built the region’s giants?

Nope, not in Asia…

It was the banks.

The prosperity of Asia’s banking industry is the sole source for domestic business growth. How did this happen and how do these institutions differ from their counterparts in the west?

Banking assets balloon in the East

Between 1980 and 2010 the Chinese banking industry’s assets grew 20 fold. Japan and South Korea also saw their assets grow 15 and 13 fold respectively.

Since 2010, Asia’s banking market has grown every year, as the graph shows below.

Between 2010 and 2013 it grew on average 10.5 percent every year. And in each of the following three years, it grew on average 6.9 percent.

That’s huge compared to the rest of the world.

As you can see in the graph below, total asset and revenue growth in Asia Pacific countries (APAC) dwarfs growth seen in other places around the world.

Interestingly, emerging Asia Pacific countries have seen the most growth.

As the graph shows below, commercial banking assets coming from emerging Asia Pacific countries — places like China, Indonesia, Vietnam and Thailand — are the third largest in the world.

The symbiotic relationship between assets and credit

When banks accumulate more assets, they can lend more money. In fact, there is a strong correlation between credit growth and economic growth rates. On average, a 1 percent increase in credit growth could produce 0.57 percent increase in economic growth.

You can see this robust relationship occur in China in the graph below.

And not only is GDP growth responsive to credit growth, but it also affects the amount of money (M2) in an economy as well.

Money supply and GDP climb together

In past articles, we’ve talked about how an increase in credit increases the money supply in an economy.

When we talk about money supply, here, we’re referring to something that economists call M2. That’s a measure of M1 (liquid portions of the money supply like cash) plus “near money”, which refers to “less” liquid assets, like savings accounts or mutual funds.

When the money supply (M2) in an economy goes up, investment and consumption go up too, leading to increases in GDP growth.

China, for example, has seen its money supply soar in the past decade.

And as we’d expect, China’s GDP went up over the same period, too.

By all measures, Asia’s banking sector is big, relative to the rest of the world. But do they have returns to match their size?

Asian equities have high returns

Banking equity, on average, is seeing the highest returns in Asia.

While the global average return on equity was stuck in single digits between 2007 to 2014, banks in Asia Pacific averaged double-digit returns – 13 percent to be exact.

From 2008 and 2015, China and Indonesia have offered the highest average return on equity (ROE) in the region.

So why are returns in the banking industry high in Asia relative to the rest of the world?

Businesses, including banks, generate higher returns when they become more efficient or increase their profitability.

Let’s look at how banks do this in Asia.


Giving large amounts of money to a small number of people is the most efficient way to lend. For example, lending $1,000 to one person is more efficient (takes less time and money on your part) than lending $100 to 10 people.

The same logic applies to Asian banks. In Asia, banks prefer to lend to a small number of very large companies rather than lots of small companies.

As we’ve said before, through window guidance, Asian governments channel large amounts of cheap credit to a few state-owned conglomerates – instead of to many smaller companies. This creates “national champions” and makes the lending process very efficient.

But efficiency only plays a small role in higher returns. Wide interest rate margins do the heavy lifting to generate high returns.

Increasing profitability: the magic of margins

Interest rate margins are at the heart of Asia’s banking profits.

The interest rate margin is the difference between the lending rate and deposit rate. And the bigger the margin, the more profitable a bank can be.

In Asia, market forces do not determine interest rate margins. The governments set them. And margins in Asia are set much higher than in Western countries.

In the West, the interest rate margin is under 1 percent. But Asian countries like China, Japan and South Korea have average interest rate margins of 3 percent, 2.5 percent and 1.5 percent respectively.


Asia’s “economic miracle” was no accident. It was planned by the region’s governments and executed by each country’s banking system. Wide margins combined with the natural efficiency of lending to fewer borrowers created, and continues to generate, huge profits in Asia’s banking industry.

Right now, at One Road Research, we’re diving deep into Asia’s banking industry to find the most promising opportunities. In an upcoming report, we’ll tell you which banks are exploiting window guidance for huge profits… and how you too can make a buck from these too-big-to-fail entities.