Hong Kong/Singapore: Asian lenders are set to use surplus capital to accelerate lending in the region’s fast-growing economies or scout for acquisitions after new capital rules confirmed most will comfortably meet the global regulatory requirements.

The new Basel III rules announced late on Sunday will require banks to raise the level of top-quality capital they hold to 7% of their risk-bearing assets over the course of the next nine years. The majority of Asian banks comfortably meet that requirement already..

This means the region’s banks are sitting on an estimated surplus capital of about $400 billion, according to analysts at brokerage CLSA, which will come in handy to cope with the strong loan growth expected in the region.

“Given that growth rates in Asia are so high, they may use the excess capital to finance growth and maybe we don’t see much in the way of new capital raisings in the next 3-5 years," CLSA analyst Daniel Tabbush said.

Barring Japan, where demand for loans is forecast to drop 6.5% in 2010, most Asian countries are likely to see loan growth of between 5.7% to 18.3% over the course of 2010, according to research by Macquarie.

“The trick here is to find the well capitalized banks and match them with markets ripe for a further expansion in lending," said Ismael Pili, head of Asian financials research at Macquarie.

Pili sees banks in Indonesia - where the average common equity ratio is estimated at around 16.5% - having the best promise to deliver on growth, with PT Bank Panin and PT Bank Danamon having the most potential for balance-sheet expansion.

M&A possible

Banks could also look at M&A opportunities to deploy excess capital. Deal activity is seen higher in countries where credit growth is relatively slower or where banks have higher surplus capital.

“M&A is still a possibility, specially by the Chinese banks as they are the ones sitting with the biggest pool of excess capital," CLSA’s Tabbush said.

CLSA estimates Chinese banks having about $153 billion in surplus capital.

Australia and New Zealand Banking Group Ltd, which wants to rapidly grow in Asia, is exploring the option to buy a majority stake in Korea Exchange Bank, which is currently valued at about $4 billion..

Still, expectations about large M&As are low due to lack of assets and regulatory restrictions.

“The problem with acquisitions in Asia is the lack of availability of assets," said Sunil Garg, a banking analyst with J.P. Morgan.

“Then there are lots of regulatory hurdles. When you get regulatory roadblocks, then it basically reduces opportunities. Hostile M&A is just not popular in Asia. So you can’t do cross-border deals and you can’t go hostile," he added.

Many Asian banks were holding on to excess capital due to the uncertainty over the Basel III rules. But holding on to excess capital over a longer period is set to dilute banks’ return on equity, meaning some will look to raise dividends.