Asia banks Good ORA, Bad ORA :: Macquarie Research,

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Asia banks
Good ORA, Bad ORA
Profitability underpins a stock’s attraction
Profitability should underpin the attraction of a stock and its longer term
outperformance. Whether investors are defensive or growth focused, profitability
should fit the bill of both investment approaches. But what drives profitability? As
far as banks go, our team has extensively used Operating Return Analysis
(ORA) in our assessment of bank profitability across Asia.
Dissecting profitability under ORA
ORA is akin to the Dupont breakdown for banks. It dissects profitability into the
constituent parts that determine the profitability of a bank. Operating Return
Analysis is useful in....
􀂃 providing a better understanding of the factors and trends driving not only an
individual bank’s profitability, but the entire sector.
􀂃 allowing us to compare a bank not only with itself over time, but also against
its peers within the country and/or other banks in other countries.
􀂃 strategic applications, as banks can formulate plans around the operational
findings.
ORA findings
􀂃 Banks that generate higher returns should fetch higher multiples. As
measured under ORA, Indonesia comes in first in terms of profitability.
Individual names that have the highest returns are typically from the high
return generating countries (Indonesia, India, Philippines). Many are smaller
names in high margin businesses, such as Mahindra, Shriram, and Security
Bank. Among the bigger names, Danamon, BRI and HDFC lead the list.
􀂃 Banks that see an incremental improvement in their profitability
prospects should outperform. Our ORA findings once again find Indonesia
slated to see the best such improvement. By individual names, the banks that
lead the most improved list are Bank Mandiri, Bank of Ayudhya, Shriram,
Danamon and Bank Negara Indonesia.
􀂃 Strategic implications differ by country, as dictated by the operating trends.
Outside the general trend of rising margins and low provisions coursing
through Asia, the operating trends in each country suggest several concurrent
strategies can be adopted to enhance returns. The faster and greater impact
to profitability should come in countries where the primary drivers of margins
and provisions are the key profit determinants. In this regard, Indonesia,
Korea and Japan lead our list in terms of countries that we think will benefit
most from these two factors. Conversely, we think countries that will be
negatively affected by these same factors are Hong Kong and India.
􀂃 We note that profitability is not the sole determinant of share prices. M&A,
politics, macro factors, valuations, risk tolerance and/or the attraction of other
sectors sway the direction and magnitude of prices. Profitability is only one,
albeit important, consideration. Our regional preference takes these factors
into consideration. In this regard, we like Indonesia, Singapore and Korea
most, while we like Hong Kong, India and Taiwan the least. Specific names
we like are Mandiri, UOB and Woori.