Credit Suisse Asia-Pacific Financials Sector

New report: Trim Indonesia to mild OVERWEIGHT, add to Korea banks

Since late November, Indonesian banks are up 36%, while Korean banks are down 13%. We now recommend shifting some money into Korean banks on a tactical basis.
Trim Indonesia to mild OVERWEIGHT: The best performing bank stocks in Asia YTD, Indonesian banks appear stretched on valuations both relative to own history and on our GEM strategist Sakthi Siva’s P/B-ROE relative model. We still consider Indonesia
as the most attractive banking market in Asia given its structural growth potential over the next decade, this is a short-term tactical call. We would play this by selling Danamon and BCA.

Recommend putting that money to work in Korea: We upgrade Korea to mild OVERWEIGHT from Neutral on the basis of valuations and three catalysts: 1) our belief that asset quality risks are peaking in 2Q10, 2) improvement in loan spreads and 3) rate
hike of last week. Our preferred plays are Shinhan and Hana, both having less exposure to the troubled project finance segment. We continue to like China and India among NJA financials.

We are lightening up on Indonesian banks simply due to really stretched valuations. Compared to their own history, the banks are trading at 3.8x trailing P/B (MSCI) (+1.4 sd) and 13.1x forward P/E (+0.7 sd). We recognise the structural improvement in ROEs of banks in Indonesia and also acknowledge the tailwinds from falling bond
yields, but Sakthi Siva’s PB relative minus ROE relative model shows that the Indonesian banks are trading at a 43% premium to NJA banks, the largest premium ever. We still consider Indonesia as the best banking market in Asia given its 20% plus potential growth for the next decade. This is just a tactical call given the short term over- valuation. We would play this view by selling Danamon and BCA.

Put that money to work in Korea, tactically
We upgrade Korea to mild OVERWEIGHT from Neutral on the basis of valuations, our belief that the asset quality risks are peaking in 2Q10, some improvement in loan spreads and the rate hike of last week. On valuations, Korean banks are trading at the farthest distance from their five-year average P/B and second-farthest on P/E,
and also turn out to be at second-widest discount to NJA banks on Sakthi Siva’s P/B relative minus ROE relative model. We see second quarter results as a catalyst in which banks will recognise new NPLs as well as precautionary loans following government’s SME credit review on project finance construction, shipbuilding and shipping loans. We believe banks will kitchen-sink loan loss provisions in 2Q,
as evidenced in the case of Hana FG, and earnings will improve from 2H10. The other catalyst, in our view, is the expansion in loan spreads over cost of deposits as well as CDs, which combined with the gains from rising interest rates, should underpin margins in 2H. Our preferred plays are Shinhan and Hana, both having less exposure to the troubled project finance segment.

Financial should outperform broader Asia, again
We believe Asian markets should trend higher in 2H10 and thanks to the soft landing combined with rising rates, Asian financials should outperform the broader markets for the third consecutive year. Chinese banks remain the most attractive given their valuations and the catalysts falling into place for 2H10. Indian is facing macro headwinds, but India is a bottom-up market and the growth and quality of private sector banks trumps all. We are UNDERWEIGHT on Taiwan, Australia, Malaysia,
Thailand and Hong Kong, and NEUTRAL on Singapore.

Companies Mentioned (Price as of 20 Jul 10)
China Construction Bank (0939.HK, HK$6.39, OUTPERFORM, TP HK$7.74)
Industrial & Commercial Bank of China (1398.HK, HK$5.74, OUTPERFORM, TP HK$6.59)
China Life Insurance Co. (2628.HK, HK$33.65, OUTPERFORM, TP HK$42.00)
China Taiping Insurance Holdings Co Ltd (0966.HK, HK$25.90, NEUTRAL [V], TP HK$30.00)
HDFC Bank (HDBK.BO, Rs2037.00, OUTPERFORM, TP Rs2154.00)
Axis Bank Limited (AXBK.BO, Rs1361.00, OUTPERFORM [V], TP Rs1510.00)
Shinhan Financial Group (055550.KS, W47,100, OUTPERFORM, TP W61,000)
Bank Rakyat Indonesia (BBRI.JK, Rp9750.00, OUTPERFORM [V], TP Rp11000.00)
Oversea-Chinese Banking Corporation (OCBC.SI, S$8.96, OUTPERFORM, TP S$10.25)
Bank Danamon (BDMN.JK, Rp5600.00, OUTPERFORM [V], TP Rp6700.00)
Bank Central Asia (BBCA.JK, Rp5950.00, NEUTRAL, TP Rp6000.00)