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abc Asia-Pacific Equity Research Financials – banks July 2012 Financials – banks Banks team Todd Dunivant* Head of Banks Research, Asia-Pacific Focus: China banks, Hong Kong Banks The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 [email protected] York Pun* Analyst Focus: Hong Kong Bank, Exchanges, HK/China Brokers The Hongkong and Shanghai Banking Corporation Limited +852 2822 4396 [email protected] Xiushi Cai* Analyst Focus: Thailand and Philippines Banks The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0624 [email protected] Sachin Sheth* Anslyst Focus: India Banks & NBFCs HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1224 [email protected] Kar Weng Loo* Analyst Focus: Singapore, Indonesia and Malaysia Banks The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch +65 6658 0654 [email protected] Eric Mak* Analyst Focus:China Banks The Hongkong and Shanghai Banking Corporation Limited +852 2996 6585 [email protected] Tejas Mehta* Analyst Focus: India Banks & NBFCs HSBC Securities and Capital Markets (India) Private Limited +91 22 2268 1243 [email protected] Bruce Warden* Analyst Focus: Taiwan Financials HSBC Securities (Taiwan) Corporation Limited +886 2 8725 6028 [email protected] Sector sales Matthew Robertson +44 20 7991 5077 [email protected] Jonathan Weetman +44 20 7991 5939 [email protected] Kathy Park* Analyst Focus: Korea Banks, Brokers and Monolines The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch +822 2 3706 8755 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations 1 2 Asia-Pacific Equity Research Financials – banks July 2012 Sector structure Asian Financials HK China Taiwan Korea Singapore Indonesia Malaysia Thailand Philippines India BOCHK BEA WHB DSF DSBG ICBC CCB ABC BOC BOCom CMB CITIC CMBC CQRCB PDB IndB Cathay Chinatrust Fubon Shin Kong Sinopac E. Sun Yuanta Mega First HFG IBK KB SFG WFG DB BS DBS OCBC UOB BBCA BBRI BDMN BMRI MAY CIMB PBK AMM HLBK RHBC SCB BBL KBANK KTB BAY TCAP BDO BPI MBT BOB Canara HDFCB ICICI PNB SBIN UTI HDFC Union Yes IndusInd BOI LICHF LTFH GTJAI HKex CITICS Haitong SGX MAS SS KIH SC Banks/Holding Companies/NBFCs Capital Markets Monolines Source: HSBC abc FEH 250.0 Sub-prime crisis Greece dow ngrade; Start of European crisis LTRO 2 Bear Stearns sold 200.0 EFSF created LTRO 1 Asia-Pacific Equity Research Financials – banks July 2012 Sector price history Fannie Mae, Freddie Mac taken ov er 150.0 Asian Financial crisis Dotcom bust 100.0 9/11 Lehman bankruptcy ; Merill Ly nch sold 50.0 May -97 Nov -97 May -98 Nov -98 May -99 Nov -99 May -00 Nov -00 May -01 Nov -01 May -02 Nov -02 May -03 Nov -03 May -04 Nov -04 May -05 Nov -05 May -06 Nov -06 May -07 Nov -07 May -08 Nov -08 May -09 Nov -09 May -10 Nov -10 May -11 Nov -11 May -12 MSCI Asia x JP MSCI Asia x JP Banks Source: MSCI, Thomson Reuters Datastream; rebased to May 1997, HSBC abc 3 4 Asia-Pacific Equity Research Financials – banks July 2012 Asian banks PE, PB and ROE comparison for 2012 20.0 18.0 Taiwan FHCs India Banks & NBFCs 16.0 Indonesia Banks Philippine Banks 14.0 Singapore Banks Malaysia Banks Hong Kong Banks 12.0 FY12e PE Thailand Banks 10.0 8.0 Korean Banks China A-share Banks China H-share Banks 6.0 4.0 2.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 FY12e PB Source: Thomson Reuters Datastream, HSBC sector estimates; size of the bubble represents 2012e ROE abc Asia-Pacific Equity Research Financials – banks July 2012 Financials is Asia’s largest sector, almost twice as big as technology, the second biggest sector. It has outperformed MSCI Asia by 1.6x in the last decade. Given its size, we break the sector into three subsegments – banks, property and insurance – and dedicate a chapter to each. Sector description The bank sector functions as an intermediary between sources of capital (investors and depositors) and users of capital (individuals, corporations and governments). In providing this function banks take on three major risks: credit risk (the risk that a borrower will not repay a loan), interest rate risk (changes in the yield curve may change funding costs and asset yields) and liquidity risk (the risk, usually in a crisis, that assets cannot be liquidated quickly enough to cover any short-term funding deficiency). abc Todd Dunivant* Head of Banks Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited +852 2996 6599 [email protected] *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Within the financials sector, banks represent the biggest share, with a combined market cap in excess of USD1.4trn. The large Chinese banks (Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China and Bank of China) account for about 40% of the combined market capitalisation of banks in Asia, excluding Australia and Japan. Asia’s banking sectors are a study in contrasts in terms of government/regulator invention, product sophistication and business model evolution. More developed sectors, as in Hong Kong and Singapore, may look more like developed market counterparts, with less government intervention. Other banking sectors range from more developed (say, Korea) to earlier-stage emerging markets (say Indonesia), with China and India somewhere in between. Key themes The global financial crisis was a stark reminder that financial markets have become increasingly linked. While the export-centric economies of Asia have long depended on the spending power of western consumers, recent growth cycles have increased western banks’ exposure to financial and economic risks in Asia. Banks globally are linked through counterparty transactions, credit risks and currency volatility. Another consequence of the crisis has been new regulations, including higher provision costs, limiting yield on some lending assets and the introduction of Basel III capital and liquidity rules. The low interest rate and flush liquidity environments that have emerged since the crisis, plus the expectation of greater regulations, will put pressure on bank earnings. Banks are leveraged entities, so lower leverage in a low rate environment tends to lead to lower returns on invested capital (ROE). Banks, particularly in emerging markets, can be a proxy for economic expansion. Earnings are often closely correlated to economic growth in the countries where they operate; volume growth is often a function of GDP growth, whilst provisions/losses can be linked to both domestic and global economic risks. Other than GDP, the main sector themes are lending and deposit volumes, interest rates and asset quality. Sector drivers How a bank manages the complexity of its balance sheet and mitigates the key risks (credit, interest rate and liquidity risk) drives the profitability and return on assets. Key factors to watch are the following: Net interest income (NII) – the difference between the total interest earned from assets (loans, investment assets) and total interest rate paid on liabilities (deposits, interbank borrowings, funding debentures, debt capital). For Asian banks, NII typically represents 65-80% of operating income. 5 Asia-Pacific Equity Research Financials – banks July 2012 Fee and commission income – includes product/agency fees, account fees, overdraft fees, payments, arrangement fees, guarantees and asset management fees. Fee income is typically 15-30% of operating income in Asia. Trading income – gains/losses from disposal of assets held as investments or to manage key risks (primarily interest rate and liquidity risks). In addition, some banks may have businesses that derive trading income by transacting in securities/derivatives/forex for customers. This component of income is the most volatile and typically accounts for less than 10% of operating income across Asia. Provision expense – including charges to cover potential/actual losses on risk assets. There are two main asset groups to consider: loans and investment securities. Banks set aside a proportion of current income to cover possible losses or defaults. Non-performing loans (NPLs) tend to increase in periods of economic difficulty and rising NPLs mean higher loan loss provisions. These charges come through the P&L and reduce the current earnings power of the bank. Key segments Hong Kong The Hong Kong banking sector is mature, with the top five banks accounting for over 60% of total deposits in the system. It has the highest credit to GDP ratio in Asia, which can partially be explained by Hong Kong’s position as a regional hub for financial management and capital flows. Credit quality in mid-2012 was the best in the last decade, the result of excess liquidity, low rates and robust economic performance. Between 2009 and May 2012 Hong Kong banks’ total loans increased by nearly 50%, with around half for overseas use, probably by Chinese companies. Hong Kong banks are on the cusp of what could be a key structural change in Asia – the rise of the renminbi for off-shore banking and financial transactions. Following increased flexibility in deposit accounts and trade settlement, renminbi deposits in Hong Kong peaked at RMB627bn in November 2011 and totalled RMB554bn at end-1Q12. The renminbi is expected to be a driver of future growth, especially as more renminbi-denominated assets become available in Hong Kong. China China’s banking system comprises four main groups of banks: state owned banks (SOE banks), joint stock commercial banks (JSCBs), city/provincial commercial banks and credit co-operatives. Loans in the system essentially doubled over 2007-11 partly due to the large stimulus programme triggered by the global financial crisis. Bank lending is the primary source of capital in China and accounts for >70% of total financing as the corporate bond market remains relatively small and equity market listings have slowed in recent years. The banking system remains heavily skewed to large, SOE banks. Five banks (ICBC, CCB, ABC, BOC, and Bank of Communications) control nearly two-thirds of the deposit base. Mid-size banks (mostly JSCBs) are liquidity constrained, with a maximum loan-to-deposit ratio (LDR) of 75%. Interestingly, the largest (SOE) and the smallest (credit co-operatives) institutions are the most liquid and have the most flexibility to lend. 6 abc Asia-Pacific Equity Research Financials – banks July 2012 abc There are three specific risks associated with China’s banking sector: (1) Credit risk remains a concern as a result of robust lending since 2007, particularly to local government financial vehicles (LGFVs) for infrastructure projects. (2) Interest rate risk as regulators plan to liberalise interest rates in China. (3) Liquidity risk may rise as deposits decline, adding complexity to balance sheet management. Given the historically high level of intervention by the government in the banking system, the timing of regulatory change will influence the size of these risks. Taiwan Taiwan’s financial system has evolved from a mix of banks, brokerages and insurance companies into a core of financial holding companies (FHCs) since 2000. Some of these FHCs are more bank-centric (e.g. Chinatrust or Mega), some insurance-centric (Cathay or Fubon), and other brokerage-centric (Yuanta). Growth in Taiwan financials has been lacklustre compared with the rest of the region over the past few years. Corporate investments have been made more outside Taiwan, mainly in China. Thin spreads for bank loans have kept margins low and provide little buffer for any increase in credit costs. Cross-Strait negotiations between Taiwan and China remain a focus. The Economic Co-operation Framework Agreement (ECFA) signed in 2010 includes a tariff reduction for more than 500 Taiwan imports into China. In future, there are expectations of closer collaboration between banks that may lead to equity investments by Chinese banks in their Taiwan counterparts. Other drivers could be the availability of renminbi for onshore trade settlement in Taiwan and renminbi-denominated products (similar to Hong Kong but on a smaller scale). Korea Korea’s banking system can be divided into four main sub-segments: large, more diversified banks (e.g. KB Financial, Shinhan FG, Hana Financial, and Woori FG), mid-size/specialised banks (e.g. Industrial Bank of Korea and Korea Exchange Bank), and regional banks (e.g. Daegu Banking Group and BS Financial) and mutual savings banks. Consolidation, competition and restructuring of corporate debt have been a feature of the sector since the Asian Financial Crisis and IMF bailout of the late 1990s and early 2000s. Large corporate customers have restructured their balance sheets, deleveraged and have shifted away from the banks in Korea, relying more on global debt markets and banks in recent years. This has left the Korean banks to focus more on the domestic economy, including household borrowers, small/medium enterprises (SMEs) and singleoffice/home-office (SOHO) businesses. Following this period of restructuring, banks expanded their balance sheets at a faster rate than system deposits and became increasingly reliant on debenture funding. The ease of raising additional debt funding (often for 3-years or less) essentially offered no barrier to lending as loan demand remained strong on the back of broader economic growth. The global financial crisis hit the banks hard. Many SME loans were restructured (lower rates, interest payment holidays, extended terms) and credit costs soared well above 150bps for some banks for SME loans and troubled project financing loans (PF loans). This cycle is behind the banks and from 2012 attributable profits recovered due to sharp drops in credit costs. 7 Asia-Pacific Equity Research Financials – banks July 2012 ASEAN Banks across ASEAN were among the first affected during the Asian Financial Crisis in the late-1990s. Aside from Singapore, these banking sectors have been perhaps more prone to economic cycles simply due to the more domestic focus of the banks. Like Hong Kong, Singapore does not have a central bank. The Monetary Authority of Singapore regulates the banking system but, unlike central banks, it does not manage monetary liquidity via interest rates; instead it uses foreign exchange mechanisms to target a trading range for the Singapore dollar. In Singapore, there are three main domestic banks. DBS is the largest bank and earns more than 90% of profits from Singapore and Hong Kong. United Overseas Bank (UOB) makes c95% of consolidated profits from banking services in Singapore, Malaysia, and Indonesia. The banking unit of OverseaChinese Banking Corp (OCBC) has a similar earnings concentration to UOB, but the group’s business is more diversified through a c85% holding in Great Eastern Holdings (the largest insurer in Singapore and Malaysia) and the acquisition of ING Private Bank (rebranded Bank of Singapore). In Indonesia, credit penetration stands at only 26%, one of the lowest in the region. Assuming average 20% credit growth pa and sustained 12% nominal GDP growth it will take more than 15 years to reach the same credit penetration level as Thailand (76%) and 20 years to be where Malaysia (116%) is today. As the economy continues to expand, so should demand for credit. Large, liquid banks with strong deposit franchises such as BCA are best positioned to benefit from a cyclical pick-up in credit demand. Loan growth in Malaysia has been at an all-time high and asset quality the most stable since the 1997-98 Asian Financial Crisis. Operating costs are quite lean for most banks. Re-rating of the Malaysian banks has been driven by expanding sector ROE which has been driven more by lower credit costs than top-line income growth. In Thailand banks should benefit from rising penetration of consumer banking products such as car and motorcycle loans and mortgages. Corporate credit demand accelerated following the floods of 4Q11, and fee income is likely to remain a key driver for continued expansion of return on assets, especially for Siam Commercial Bank. Bangkok Bank stands out in terms of asset quality and its deposit franchise; Kasikornbank is most exposed to the export cycle, as SMEs are major customers. Economic growth in the Philippines accelerated in 2011 and 1Q12 on the back of increased government spending, export growth and stronger domestic consumption. This, in turn, has seen bank credit accelerate and the general momentum of the Philippine economy should continue to drive banking sector growth. A big hurdle standing in the way of faster RoA expansion is operating costs, primarily staff wages. Operating costs are rising in a sector with some of the higher cost-to-income metrics in Asia at 55-60%. India Indian banks can be grouped into three categories: public sector banks, where the government is the sole/primary shareholder, private banks, and non-bank financials (NBFCs) that are a mix of specialised financing companies which are predominately wholesale funded as they lack strong deposit bases. The sector has experienced a period of rapid credit expansion since the global recession of 2008-09. Loan demand for corporate capital expenditure, home mortgages and personal consumption (cars and motorcycles) has contributed to this growth cycle. This has been accompanied by tight liquidity, higher 8 abc Asia-Pacific Equity Research Financials – banks July 2012 abc and somewhat stubborn inflation. In the first three months of 2012 India’s economic growth fell to its lowest level in nine years, pointing to a slower growth outlook. Valuation Implied PB/Dividend Discount/Gordon Growth/Warranted Equity Model: All these valuation techniques are basically variants of the dividend discount method. This produces a valuation which reflects banks’ long-term profitability, using the following formula: Implied PB = (ROE – g)/(COE – g), where: ROE = sustainable return on equity g = Reflects the expected growth of the bank in the long term COE= Cost of equity, computed using the CAPM method: COE = Rf + β × Er where Rf = risk-free rate, β = beta of the security, and Er = equity risk premium DCF-based methodologies: Also called the residual income or the economic value added method with some modifications to the discounted cash flow method. Residual income is calculated as (ROE – COE) × Shareholders’ Equity. This signifies the excess of income earned over the cost of equity for a bank. Implied PE can also be computed a slight change to the above calculation: Implied PE = (ROE – g)/(ROE × [COE – g]) This also has similar characteristics as the implied PB methodology. Historical trading bands: This methodology assumes that for a stable business the trading multiple is unlikely to change significantly unless there is a significant re-rating of the stock or the country. 9 abc Asia-Pacific Equity Research Financials – banks July 2012 Asian banking sector summary data ______2005 _____ ______2006 ______ ______ 2007 ______ ______ 2008 ______ _____ 2009______ ______2010 _____ ______ 2011 ______ LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) LCY (bn) USD (bn) Hong Kong Total assets Total loans % GDP Total deposits 7,247 2,312 167% 4,068 935 298 China Total assets Total loans % GDP Total deposits 30,204 20,684 112% 30,021 3,743 2,563 Taiwan Total assets Total loans % GDP Total deposits 30,366 17,158 146% 22,991 925 522 Korea Total assets 1,118,100 Total loans 756,710 % GDP 87% Total deposits 656,728 Singapore Total assets Total Loan % GDP Total deposits 425 183 88% 224 Indonesia Total assets 1,490,220 Total Loan 698,681 % GDP 25% Total deposits 1,076,113 525 3,720 700 8,306 2,468 167% 4,757 1,068 317 36,517 23,828 110% 34,802 4,679 3,053 31,928 17,599 144% 24,172 980 540 1,106 1,262,067 749 874,152 96% 650 706,715 256 110 135 508 195 84% 272 4,459 742 1,327 380 35,363 27,775 104% 40,105 4,842 3,803 32,769 18,022 140% 24,390 1,010 556 1,357 1,409,803 940 988,989 101% 760 747,886 331 127 178 583 233 88% 315 753 5,491 752 10,754 3,286 196% 6,058 1,388 424 39,558 32,005 102% 47,844 5,798 4,691 34,939 18,470 146% 26,301 1,065 563 1,506 1,714,567 1,057 1,162,141 113% 799 873,391 405 162 219 668 272 100% 348 782 7,012 801 10,635 3,288 203% 6,381 1,372 424 52,080 42,560 125% 61,201 7,628 6,234 36,711 18,599 149% 27,975 1,148 581 1,361 1,642,947 923 1,169,474 110% 693 929,143 464 189 241 707 281 106% 391 823 8,964 875 12,291 4,228 243% 6,862 1,581 544 61,530 50,923 127% 73,338 9,337 7,728 37,797 19,853 146% 29,392 1,411 1,668,553 1,004 1,198,447 102% 798 986,529 503 200 279 782 323 106% 434 13,741 5,080 268% 7,591 1,769 654 69,797 58,189 123% 82,670 11,089 9,245 39,908 20,961 152% 30,782 1,318 692 1,470 1,782,550 1,056 1,287,224 104% 869 1,072,337 1,547 1,117 883 11,129 1,296 681 1,008 610 252 339 977 13,135 1,017 931 859 420 129% 483 663 324 373 151 1,716,895 71 796,460 24% 109 1,229,133 191 2,014,242 89 1,004,177 25% 137 1,462,862 214 2,343,090 107 1,313,873 27% 156 1,682,163 215 2,571,660 121 1,446,809 26% 154 1,913,571 274 3,054,595 154 1,783,600 28% 204 2,304,875 339 3,698,294 198 2,223,684 30% 256 2,736,415 408 245 1,093 593 103% 812 310 168 1,221 644 100% 869 369 195 1,338 727 98% 972 387 210 1,426 783 115% 1,063 417 229 1,550 883 115% 1,141 503 286 1,782 1,004 118% 1,299 562 317 8,647 5,861 75% 6,479 239 162 9,005 6,130 72% 6,480 267 182 10,047 6,824 75% 7,037 289 196 10,372 6,693 74% 7,004 311 201 11,746 7,456 74% 7,365 390 247 12,981 8,585 81% 7,865 411 272 4,289 1,695 27% 3,071 88 35 4,488 1,857 27% 3,185 109 45 5,035 2,181 28% 3,703 106 46 5,484 2,379 30% 4,126 119 51 6,132 2,591 29% 4,513 140 59 6,541 3,015 31% 4,756 149 69 34,600 17,663 41% 23,884 796 406 43,262 21,481 43% 29,526 1,078 535 52,386 26,454 47% 35,694 1,033 521 60,269 30,246 47% 42,688 1,183 594 71,835 36,446 47% 48,062 1,410 715 NA 42,670 48% 56,726 NA 838 Malaysia Total assets Total Loan % GDP Total deposits 959 558 107% 693 254 148 Thailand Total assets Total Loan % GDP Total deposits 7,988 5,530 78% 6,114 195 135 Philippines Total assets Total Loan % GDP Total deposits 3,857 1,539 27% 2,628 73 29 India* Total assets Total Loan % GDP Total deposits 27,859 13,525 37% 19,407 625 303 183 149 50 435 *All data December year-end except India, which is March year-end Note: Conversion to USD done on the exchange rate as of year-end Source: CEIC, Central bank websites 10 612 10,350 2,962 183% 5,869 230 179 63 549 263 192 77 736 281 202 78 704 310 210 89 838 370 244 103 943 302 410 249 108 1,113 abc Asia-Pacific Equity Research Financials – banks July 2012 Sector snapshot Core industry driver: Loan growth and NIM (2012e) Key sector stats Financials 30% of MSCI Asia ex-Japan Trading data ADTV (USDm) Aggregated market cap (USDm) Performance since 1 Jan 2000 Absolute Relative to MSCI Asia ex Japan 3 largest stocks Correlations (5-year) with MSCI Asia ex Japan 89.6 2,421.2 2012e 25% 7% 6% 20% 5% 15% 44% 6% CCB, ICBC,BOC 10% 97% 0% 4% 3% 2% 5% 1% 0% CH HK TW KO IN SG ID TH MA PH Source: MSCI, Thomson Reuters Datastream, Bloomberg, HSBC Loan grow th(12e) (LHS) NIM (12e) Top 10 stocks (MSCI Asia x JP Banks) Stock rank Stocks 1 2 3 4 5 6 7 8 9 10 China Construction Bank Industrial & Comm Bank of China Bank of China DBS Group UOB OCBC Shinhan Financial HDFC Bank HDFC Limited KB Financial Index weight 9.96% 8.83% 6.16% 4.32% 4.13% 4.00% 3.28% 3.27% 3.03% 2.74% Note: Data represents weightage in MSCI Asia ex-Japan Bank index Source: MSCI, Thomson Reuters Datastream, HSBC Source: HSBC estimate PE band chart 35 30 25 20 15 10 5 0 CN Country breakdown China Singapore India Korea Taiwan Malaysia Indonesia Hong Kong Thailand Note: Data represents weightage in MSCI Asia ex-Japan Bank index Source: MSCI, Thomson Reuters Datastream, HSBC 32.0 12.4 10.5 10.1 7.6 7.4 6.5 6.4 6.3 TW KO 2010 Weights (%) IN SG 2011 ID 2012 TH MA PH 2013 Source: MSCI, Thomson Reuters Datastream, HSBC estimates PB vs ROE FY2012e 20 PH TW HK 15 ROE Country HK SG MA 10 IN ID TH 5 KO CN 0 0.5 1.0 1.5 2.0 2.5 3.0 PB Source: HSBC estimates 11