MUMBAI, JULY 8: The Indian banking sector has scored over its counterparts even in developed countries such as Japan, Singapore and Australia. Indian banks posted the highest return on equity (ROE) compared to their Asian peers in the last three years.

According to Moody's Investor Services data, Indian lenders have posted highest ROE of 20.38% (system average of three years), closely followed by Indonesia at 20.19% and New Zealand 18.83%. Japan, the biggest economy in Asia posted negative returns of 6.42%, implying the banks there have made losses.

ROE as a performance indicator reveals how much profit a company generates with the money shareholders have invested in it. The ROE is useful for comparing the profitability of companies operating in the same industry.

This is despite the fact that Indian banks are known to have high non-performing assets for many years. The system average of Indian banks' bad loans as share of gross loans for last three years is 8.18%, the fifth highest in Asia. Asset quality improved in India in last three years and fared better than the Philip-pines (15.05%), Thai-land (13.08%), China (11.80%) and Malaysia (9.73%).

"Indian banks are in the best phase of the asset quality cycle. Unlike the mid-90s, corporate balance sheets are healthier today and leverage is much lower," Merrill Lynch analysts Rajeev Varma and Aashish Agarwal said in a June report.

Indian banks also fare better when compared to efficiency levels. The system average of cost to income ratio for last three years has been 44.56%, among the lower ranked ones in Asia. Banks of only three nations, Singapore (44.15%), Taiwan (42.61%) and Hong Kong (40.05%) lead India.

Banks of Philippines are the most inefficient with 77.04% efficiency and posted ROE of just 4.40% and had bad loans of 15.05%. Australian banks having problem loans of a meager 0.78% and efficiency of 63.82% posted ROE of 11.44%. Japanese banks reported an efficiency of 58.41% with a lower ratio of problem loans at 5.15%.

However, it may not be hunky dory in the future, analysts warn. "We think the non-performing loans (NPL) cycle is likely to show an upturn in 12-18 months led by retail NPLs including some mortgage NPLs. A consistent rise in rates would, in our view, result in slippages increasing, especially amongst some of the SME corporates which could begin to show up during fiscal 2008," Varma and Agawarl reported. "On the positive side, we expect the level of net NPLs to remain below 1% as banks are likely to have adequate operating earnings to set aside the higher provisions that may be required."

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