Asia Banks
Entering an NPL Cycle?
Last decade was good for Asian banks, with credit
costs declining structurally. This was helped by
strong GDP growth and low rates – both are turning.
Banks to avoid are in CAD economies with strong
trailing loan growth – India, Indonesia. Relatively,
we would own banks in DM Asia – HK, Taiwan.
Banks in EM Asia (especially India and Indonesia)
have been under pressure over the last month – The
question being asked is whether investors should buy
them, given the structural growth embedded into these
names. We would stay away for now. Real rates are
likely on a structural uptrend with global liquidity ebbing.
This is coming in the backdrop of slowing GDP growth,
generally not good for the NPL outlook.
All the ingredients of an NPL cycle are present in
Asia – strong trailing loan growth, slowing economy,
higher rates and tightening credit standards. Corporate
leverage has increased meaningfully and the changing
economic backdrop will likely cause some losses. The
way out for banks would be a decline in interest rates – if
the global liquidity situation turns buoyant.
Which banks are most exposed – We run four
screens across countries: 1) Current account balance;
2) unseasoned loan book (loans created in the last two
years), as these loans are riskiest when the cycle turns;
3) profitability (PPoP margin) – how much credit costs
banks can take before hitting book value; and 4) loan-to-
deposit ratios, given rates are rising. The most affected
are in India and Indonesia, while the best-placed banks
on these screens are in Taiwan, Malaysia and HK.
Stocks we would own – We continue to like Taiwan
banks (strong liquidity, exposure to US improvement
and low asset quality risk). The top picks are Fubon,
Mega and Chinatrust. BOCHK should also do well, given
its balance sheet strength – even Hang Seng would
make the cut if it reduced its China exposure (through
Industrial Bank). We also like Singapore, despite the
strong loan growth, given their access to liquidity and the
strength of their government’s balance sheet
��
Entering an NPL Cycle?
Last decade was good for Asian banks, with credit
costs declining structurally. This was helped by
strong GDP growth and low rates – both are turning.
Banks to avoid are in CAD economies with strong
trailing loan growth – India, Indonesia. Relatively,
we would own banks in DM Asia – HK, Taiwan.
Banks in EM Asia (especially India and Indonesia)
have been under pressure over the last month – The
question being asked is whether investors should buy
them, given the structural growth embedded into these
names. We would stay away for now. Real rates are
likely on a structural uptrend with global liquidity ebbing.
This is coming in the backdrop of slowing GDP growth,
generally not good for the NPL outlook.
All the ingredients of an NPL cycle are present in
Asia – strong trailing loan growth, slowing economy,
higher rates and tightening credit standards. Corporate
leverage has increased meaningfully and the changing
economic backdrop will likely cause some losses. The
way out for banks would be a decline in interest rates – if
the global liquidity situation turns buoyant.
Which banks are most exposed – We run four
screens across countries: 1) Current account balance;
2) unseasoned loan book (loans created in the last two
years), as these loans are riskiest when the cycle turns;
3) profitability (PPoP margin) – how much credit costs
banks can take before hitting book value; and 4) loan-to-
deposit ratios, given rates are rising. The most affected
are in India and Indonesia, while the best-placed banks
on these screens are in Taiwan, Malaysia and HK.
Stocks we would own – We continue to like Taiwan
banks (strong liquidity, exposure to US improvement
and low asset quality risk). The top picks are Fubon,
Mega and Chinatrust. BOCHK should also do well, given
its balance sheet strength – even Hang Seng would
make the cut if it reduced its China exposure (through
Industrial Bank). We also like Singapore, despite the
strong loan growth, given their access to liquidity and the
strength of their government’s balance sheet
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