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UBS Investment Research
Asia Financials
Alpha Preferences
�� Most preferred: Add Bangkok Bank, CQRCB; remove TISCO and CIMB
Most: Bangkok Bank, CQRCB and OCBC. We remove TISCO as most preferred
due to elevated short-term rates in Thailand. We remove CIMB due to its relative
outperformance. Bangkok Bank is a primary beneficiary of Thailand corporate releveraging
cycle. The stock is trading at an attractive 1.2x ‘10E P/B with 11.4%
ROE and 19%/9% ‘10/11E EPS growth. CQRCB is one of the most liquid (LDR at
62%), well provided (LLR/loans 4.4%; NPL ratio 2.6%) and best capitalized
(YE10e Tier 1 at 15%) Chinese banks, allowing it to achieve loan growth target at
+30% in next 2-3 years. It is trading at 1.8x ‘10 P/B with ‘11 ROE of 14% (and
rising). OCBC is a UBS Key Call. We view OCBC’s acquisition of ING Asia
Private Bank (IAPB) last year as a significant milestone in its strategy to build up
its wealth management business. The stock is currently trading at 1.8x ‘10EP/B,
with ‘11E ROE of 12.6%.
�� Least Preferred: Add LIC; remove UOB
Least: LIC Housing Finance, Minsheng-H and First FHC. We remove UOB as
least preferred due to the stock’s relative underperformance. We believe LIC is
negatively impacted by tight liquidity and rising wholesale rates (100% of its
funding is wholesale), intense competition in mortgages and hike in standard
provisions which can hurt pre-tax earnings by 5-10%. It is trading at 2.1x FY11
P/B with FY12e ROE of 22%. We think First FHC will encounter the largest
provision shortfall among TW financials thus is exposed to the highest earnings
risk. It is at 1.6x ‘10E P/B with ‘11E ROE of 6.5%. Minsheng has the highest LDR
in China banking sector (avg LDR of 84% 1H10) and capital constraints (8.3%
Tier 1 YE10E). It’s at 1.5x ‘10E P/B with ‘10/11E ROE of 16.4%/15.6%.
Least Preferred
LIC Housing Finance (LICH.BO)
Sell
India
Diversified Financial
LIC Housing Finance is one of our least preferred stocks in India financial sector. We believe
there are fundamental headwinds for the stock in terms of 1) tight liquidity and rising
wholesale rates, 2) intense competition in mortgages and 3) hike in standard provisions can
impact pre tax earnings by 5-10%. Nearly 100% of LIC’s funding is wholesale (2% retail
deposits), 80% of funding comes directly/indirectly from banks and insurance companies.
40% of liabilities are floating while 70% of assets are floating. In Nov. 2010, Central Bureau
of Investigation (CBI) arrested 8 officials including CEO of LIC Housing Finance on charges
of corruption and bribery which a private finance company offered in lieu of sanctioning of
loans for corporate. However, we expect LIC HF stock to underperform further post these
bribery charges given the management disruption and fresh questions on quality of the loans.
The stock is currently trades at 2.2x FY11E P/B with FY12E ROE of 22% (with risk to this
given the pressure on wholesale funding rates).
— Valuation: Our price target of Rs 160 is based on 1.5x FY12E book (at premium to 5
year average PBR due to improved RoE).
— Risk: We believe a sustained economic slowdown could impact the banking and
finance sector on several fronts: lead to a slowdown in credit, increase NPL risk,
impact fee income, and exert pressure on NIM.
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