瑞士信贷：2009年亚洲金融行业展望

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Asia Financials Sector
STRATEGY
Be afraid
■ Asian banks outperformed the broader non-Japan Asia market in 2008,
and eight of the 11 banking sectors did better than their domestic
markets. However, lately banks have begun to underperform in the
current (bear?) rally even as credit markets seem to be thawing. We are
worried about the extreme variability in banks’ earnings in 2009-10.
■ While NPLs kept falling in most markets in 9M08, we believe the asset
quality cycle has turned and will be the key driver in 2009-10. Although
we expect the cycle to be milder than in the Asian financial crisis,
credit costs are projected to rise sharply in 2009. Still, the current
assumptions about loan losses could turn out to be too low.
■ We are upgrading India to a trading OVERWEIGHT from Underweight: it
has the second-best macro in the region, the regulator is helping by
relaxing NPL recognition norms, lowering reserve requirements and we
expect aggressive rate cuts. Yes, defaults are likely to eventually hit
the banks but in the near term, earnings should also be boosted by
gains on government bond holdings.
■ We maintain our OVERWEIGHT on China, but now through an OW on
banks and MW on insurance, given the recent outperformance of
insurers. China offers the best macro in the world, aggressive fiscal
and monetary stimuli, well-capitalised banks and attractive valuations.
■ Net net, we maintain our OW on China, mild OW on Singapore (relative
safe haven) and upgrade India to a trading OW. We keep Korea, Taiwan
and the rest of South-East Asia as MW, but note Indonesian banks are
looking costly after their recent run-up. Hong Kong is our only UW for now.

2009 themes and outlook
Asian banks outperformed the broader non-Japan Asia market in 2008, and eight of the
11 banking sectors did better than their domestic markets. However, banks have begun to
underperform lately in the current (bear?) rally, even as credit markets seem to be thawing
gradually (based on LIBOR, TED and credit spreads). We are very worried about the
extreme variability in banks’ earnings in 2009-10.
Asset quality the key variable this year
We experienced the destructive power of asset quality first hand in many markets during
the Asian financial crisis of 1997-98. Although NPLs kept falling in 9M08 in most markets,
we believe the cycle has turned and defaults will jump materially in 2009-10. Our analysts
are projecting credit costs will rise sharply in 2009, but nowhere close to the 1998-99 peak.
We do believe the cycle to be milder this time, but clearly the current assumption about
loan losses could turn out to be too low. In four out of ten countries, our economists are
forecasting a contraction in GDP in 2009 without a significant rebound (unlike in 1999). We
believe our forecast earnings, already below consensus, have further downside risk.
Other earnings drivers likely to be very soft
Loan growth is projected to decelerate sharply but still remain positive through 2009, partly
aided by re-intermediation. Margins are likely to compress due to falling liability spreads
despite the anticipated widening of loan spreads. Fee income should remain under
tremendous pressure, not only capital market related but also traditional commercial
banking fees due to reduced economic activity.
Upgrading India to a trading OVERWEIGHT
The 60% fall in price and underperformance through 2008 has finally pulled down Indian
bank valuations. Despite a limited fiscal stimulus ability, India has the second-best macro
outlook in the region based on projected GDP growth and expected aggressive declines in
interest rates. The regulator is also trying to help by relaxing NPL recognition norms
(allowing banks to restructure loans until June without calling them NPLs) and lowering the
reserve requirements. Yes, defaults are expected to eventually hit the banks but in the
near term, earnings should be boosted by gains on government bond holdings.
China OVERWEIGHT maintained, but with changes
China offers the best macro in the world, sizeable fiscal and monetary stimuli by the
government, liquid and well-capitalised banks that have been restrained in their lending,
and attractive valuations for their expected ROEs. We had shifted banks to MW on
29 September 2009 and raised insurance to OW. Now we reverse that given the
outperformance of insurers in the past few weeks.
What about Korea and Taiwan?
Korean banks are inexpensive but for good reason: they have extreme sensitivity to a rise
in NPLs (NPLs rising by just 1-2% of loans would destroy all profits) and cash calls are
highly likely although they stand to gain from the easing of the credit markets. Taiwan
banks are expensive given their weak profitability and extreme sensitivity to any NPL rise.
Net net
We maintain our OW on China, mild OW on Singapore (safe haven) and upgrade India to a
trading OW by drawing on cash and trimming our China OW. We keep Korea, Taiwan and
the rest of South-East Asia as MW, but note that Indonesian banks have run up strongly in
the past four to five weeks and are looking costly. Hong Kong is our only UW for now.

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