You may be forgiven for any confusion you feel about the health of Asia's banking systems because the simple truth is that the jury deliberating Asia's financial progress is still out.

But one thing is certain: banks - even long-established players - that don't adapt to the new realities forced precipitously upon the region by the crisis will probably find themselves endangered species before long. Asian banking is beginning to emerge from the turmoil healthier and more responsive to the inevitable changes wrought by global competition and consolidation, electronic commerce, the communications revolution, and the application of new technologies. These forces for change cannot be reversed, as bankers that yearn for the halcyon days of old are discovering.

Economic Recovery
The financial crisis that began in 1997 and ensuing downturn in 1998 and 1999 will enter the history books as Asia's most significant economic event, ever. But as events in 1999 unfolded, amazingly, there were occasions when the shockwave seemed almost entirely forgotten.

We can all be forgiven for thinking more optimistic thoughts, of course. After a year and a half of wondering if the region's economic miracle was really just a mirage, economies and markets turned the corner dramatically. That alone was cause for celebration.

Asia enjoyed a "remarkable turnaround" in 1999, says the World Bank, "back from the abyss of rising poverty, falling standards of living, and the systemic contraction of its productive and financial sectors". Gross domestic product in East Asian nations rose healthily, to average about 5%, ranging from Korea's spectacular 10% increase down to at least some growth in Indonesia. Expansive fiscal and monetary policies, despite initial International Monetary Fund (IMF) prescriptions to the contrary, bore real fruit last year, with improved liquidity, low interest rates, and relative stability in exchange rates. Reserves expanded throughout the year as trade and current account surpluses blossomed, replenishing previously drained pools of national liquidity. Many governments finally began to move aggressively toward reform, updating outdated bankruptcy laws and overhauling financial regulations. A kind of virtuous cycle seemed to be forming, albeit a fragile one.

The most obvious sign of the renewed confidence appeared in the region's equity markets, which rebounded strongly off their 1998 lows. Stock indices soared: Korea's up 109%; Singapore's, 86%; Indonesia's, 66%; Hong Kong's, 63% and Malaysia's, 43%. Exports from the region grew vigorously as world demand for Asian goods like electronics surged after the lull. Overseas capital started to flow more swiftly back into the region.

Combine all these developments with Asia's perennial economic virtues - high savings rates, its patience and hard-work ethos - and the whole picture seemed more reassuring.

Challenges for Banking
But, danger for many Asian banks - perhaps even greater now than during the crisis - lies in a false sense of security. Lulled as they sometimes were by favourable economic tailwinds, and seduced by the temptation to return to the old ways, many Asian banks didn't take advantage of the improved climate last year, denying the need to restructure, reform and rethink their business strategies. They may be running out of time, whether they recognise it or not.

The most immediate issue for Asian banks last year remained asset quality, what to do about non-performing loans (NPLs).

The size of the problem remains daunting for some banks, and it's unclear whether all the bad news has yet emerged. After years of simply hiding NPLs, many banks rescheduled rather than restructured their questionable debt last year. The difference is significant. Tackling the problem through realistic debt relief is a sine qua non to long-term recovery. Superficial rescheduling accomplishes nothing. So, observers fear that many of the workouts thus far are primarily cosmetic, and may fall into default again.

But in Asia overall, the rise in NPLs began to level off and many bankers bit the bullet. Hong Kong, Singapore and The Philippines fared well in this regard. International and regional banks that dealt proactively with the problem effectively finished most of their provisioning last year. Nevertheless, difficult work remains for less soundly managed banks. In some countries, regulatory incentives to write-off NPLs have so far been limited, while creditor rights and transparent bankruptcy procedures are observed more in the breach than day to day.

With many Asian industries still experiencing excess capacity, capital raising is more focused on increasing the efficiency of debt structures and lowering costs than expanding credit utilisation. Many banks that think they can grow their way out of the problem will be left out as weak loan growth becomes more a structural than a cyclical feature.

That's why farsighted bankers in the region today pay greater attention to the man in the street, a more stable source of revenue with fewer defaults in crisis situations. In 1999, Asian banks which had already sorted out their bad-debt problems began to emphasise services for the general consumer, including mortgages, credit card facilities and - most promising - electronic banking. Although still in its early stages, some important pioneering efforts in e-banking were made last year, and we expect banks to increasingly push into this brave and promising new world. Consumer banking is undergoing dramatic change as greater competition, more demanding customers, and technological advances shake it up beyond recognition.

To respond to the changing environment, there has already been massive bank consolidation within Asia, spurred on by regulators, international organisations like the IMF, foreign banks, and post-crisis realities. The total volume of all Asian mergers and acquisitions (including Japan, and across all industries) more than tripled (to US$238 billion in 1999) compared to a year before, according to a report from Thomson Financial Securities Data. Marriages in Asia's commercial banking sector were the largest contributor to this record volume.

Leading the pack was Japan, with important alliances signalling that substantive banking reforms were at hand. South Korea's two domestic mergers and the entry of three foreign players in 1999 carried its extensive reform objectives forward. Also under government direction, Malaysia merged local banks and ordered a future consolidation into just ten domestic entities. Global banks actively bought stakes in local banks under new laws that largely removed restrictions on foreign ownership, while DBS's acquisitions in Hong Kong and The Philippines - adding to earlier acquisitions in Indonesia and Thailand - made it the most active cross-border player among Asian banks.

The level of activity is only likely to intensify. Up to half of all Asian banks will either acquire or be acquired by the time the process has run its course, U.S. consulting firm McKinsey & Co. predicted last year.