Credit Suisse Asia Equity Focus Focus on larger well-capitalized high-yielding Asian banks

Overweight Asian banks after Basel III eases capital raising risks
In our latest study of the impact of the Basel III agreement on Asian banks, we observe that most banks in Asia Pacific have capital levels that are well above the
minimum capital requirements announced by the Basel Committee on Banking
Supervision (BCBS) on 12 September. More importantly, a lengthier implementation
period for the implementation of Basel III provides more relief for Asia's banking
sector which should ease fears of capital raising activities. In our just released
Research Weekly Asia, we conclude that most Asian banks are well capitalized and
we see manageable risks of cash calls and dividend cuts. We recommend investors focus on larger well-capitalized and high-yielding Asian banks.

In our view, Basel III provides improved transparency on capital requirements and
reduces any uncertainties arising from the capital raising needs of Asian banks to
meet the new regulatory requirements. Based on our Credit Suisse Private Banking
Asia Pacific banking coverage, the Tier 1 capital adequacy ratio of Asian banks
ranges from 8.7% to 13.4%, with the Southeast Asia banks being the most
capitalized, while the Japanese banks are the least capitalized. Most Asian banks
have capital levels that are well above the 7% minimum common equity capital ratio
under Basel III as of 1 January 2019. Banks will not be required to meet the
minimum common equity capital requirement of 4.5% of risk-weighted assets until 1 January 2015.

However, we still see some regulatory risks from the local implementation of Basel
III, as selected Asian banking regulators may decide to fulfill the new capital
requirements faster than required, or even impose an additional capital conservation
buffer if the banking sector is particularly important to that country. Taking into
account Asia's more robust economic recovery momentum than that of the G3
economies, we think Asian banks could be the first in the world to be required to
meet the additional counter-cyclical capital buffer of 0%–2.5%, which banking regulators will apply during periods of excessive credit growth. To mitigate the regulatory risks from the local implementation of Basel III, investors should position themselves in banks with superior capital strength.

Driven by Asia's robust economic fundamentals, strong loan growth and the healthy capital positions of banks in the region, the MSCI Asia Pacific ex-Japan Banks has significantly outperformed the MSCI World Banks by 60 percentage points since January
2007. Hit by double-dip fears and concerns over capital raising activities before the Basel III announcement, the valuations of Asian banks have contracted to close to 1 standard deviation below the historical mean at a 12-month forward P/E of 12x.

We maintain our overweight position in Asian banks within our Asia Pacific equity portfolio, due to their undemanding valuations and attractive risk-reward profile after Basel III removed a key overhang over the capital raising risk of the sector. According to IBES estimates, Asian banks are projected to deliver healthy earnings growth of 17% in 2010 and 15% in 2011. We continue to favor larger well-capitalized banks with high dividend yields, which reflect their capital strength and valuation appeal. Our top BUY ideas are ANZ Bank (ANZ AT, BUY), BOC Hong Kong (2388 HK, BUY), China Construction Bank (939 HK, BUY), HSBC (5 HK, BUY), ICBC (1398 HK, BUY), Mitsubishi UFJ (8306 JP, BUY), National Australia Bank (NAB AT, BUY) and United Overseas Bank (UOB SP, BUY).