Banking Cycles: Upside and Downside Risks

- Room to leverage "We study how Asian banks are positioned in their respective banking cycles, by examining the range of loan growth, credit costs, ROEs and P/B multiples over the past decade. Given healthy balance sheets and economies, we generally see room for loan growth (mid/lower-end of cycle), ROEs (generally mid-cycle) and P/B valuations (mid/lower-end of cycle) to increase/re-rate through the cycle. Credit costs are generally at the lower end of the cycle."
- China (O/W unchanged): Widest ROE vs. P/B divergence "Chinese banks' ROEs are at the cycle peak but valuations are close to -1 SD; concerns over “peaked- ROEs” seem to be in the price. During 3Q, we expect positive catalysts: clarity on UDIV exposures; significant reduction in the capital raising overhang; a rate hike that is likely to be NIM positive. Book values understated by some 9% given the high levels of surplus provisions (highest in region). Top Buys: ICBC, CCB, MSB."
- Overweight Singapore, Thai banks "We expect stellar 2Q GDP growth of over 10% to be a catalyst for Singapore banks (O/W from Neutral). We remain positive on Thai banks (O/W unchanged) as the economic/banking sector impact from the political clashes is temporary/small and valuations look attractive. Top Buys UOB, OCBC, BBL, SCB."
- India (Neutral from U/W): Room to grow but not cheap "Indian banks are at the
lower end of the range on loan growth and ROEs, suggesting room for expansion. But this is somewhat priced in given cycle-high valuations. Supporting our upgraded view are improving macro environment, low credit multiplier, credit penetration and banking market cap/GDP. Buy SBI; watch ICICI, Axis."
- Indonesia (U/W from Neutral): Near peak valuations "Room for loan growth and
ROEs to expand, credit cost to decline, but valuations are close to historical peaks. We think most of the positives are in the price. Earnings expectations are high, and we see downside risks. Top Sells BBCA, BDMN, BBNI; Buy BMRI."
- HK banks (U/W from O/W) face earnings risks "Inexpensive valuations but we see
earnings downgrade risk for big domestic banks (we are 7-8% below consensus for BOCHK/HSB) on weak NIMs and fee income. We see only minor benefits from strong loan growth. We prefer Chinese banks (better growth) and Singapore banks (more resilient NIMs) over HK banks. Top Sell HSB; top Buys ICBC Asia, WHB."
- Taiwan (U/W unchanged): Cautious on insurers "Mark-to-market losses on the
investment book are likely to result in earnings disappointments for insurers. We relatively prefer private banks, with ECFA bringing cross-strait back in focus. Top Sells Cathay, Shinkong, Fubon; Buy Chinatrust, Taishin, Yuanta."
Citigroup Asian Banks Strategist 20100702