<P><FONT size=5><EM><STRONG>CS 瑞士信贷：亚洲银行业 深度研究报告</STRONG></EM></FONT></P>
<P><FONT size=5><EM><STRONG>          (44页) 07.10      10 July 2007</STRONG></EM></FONT></P>
<P><FONT size=5><EM><STRONG>Asia Banks Sector  SECTOR REVIEW</STRONG></EM></FONT></P>
<P><FONT size=5><EM><STRONG>         Revisiting banking sector stress levels</STRONG></EM></FONT></P>
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<P>Revisiting banking stress levels<BR>The date most associated with the last Asian financial crisis is 2 July 1997, the day of Thai<BR>currency devaluation. Affecting five Asian countries (Thailand, Malaysia, Indonesia,<BR>Philippines and Korea), the crisis turned almost half of the loans into bad and caused<BR>untold damage to bank shareholders. The destruction in value was exemplified by the Thai<BR>banks whose loan loss provisioning in the ensuing period work out to 2.5x the pre-crisis<BR>equity. Ten years on, we dust up our old models to reassess the riskiness of banks.<BR>Factors behind banking sector stress<BR>Based on research conducted by BIS, IMF, etc., nine factors usually threaten banking<BR>sector stability: 1) rising real effective exchange rate (= stronger currency), 2) a<BR>deteriorating trade balance, 3) slowing industrial production, 4) accelerating real credit<BR>growth, 5) accelerating non-productive loans, 6) plunging asset prices (stock market and<BR>real estate), 7) a rising loan-deposit ratio, 8) an expanding money multiplier (M3/M1) and<BR>9) a rising monetary aggregates-to-forex reserves ratio. Back testing has shown the<BR>relevance of these factors and proves its validity in predicting the 1997 Asian crisis.<BR>Thailand, Malaysia, Indonesia very low risk: too low<BR>for comfort?<BR>These three worst-hit markets have come a long way from the stratospheric levels of<BR>banking sector stress to very low levels. Soft real credit growth (Thailand zero, Malaysia<BR>around 5%, Indonesia 10%, up from minus 4% six months ago) and decelerating industrial<BR>production growth (Thailand 5%, Malaysia minus 0.5%, Indonesia 6.9%) are reflecting the<BR>poor investment climate although corporate balance sheets have been repaired. Interest<BR>rate cuts by the central banks are likely to boost demand and the outlook on external trade<BR>is better, given the improvement in US data points despite the strengthening of currencies<BR>in the past two years (Thailand up 17%, Malaysia 9%, Indonesia 12%).<BR>India and Korea – elevated risk levels<BR>The only two markets exhibiting banking system stress are Korea and India. Korea is by<BR>no means alarming – the higher level of pressure index is due to the acceleration in real<BR>credit growth to 12% (driven earlier by consumer and housing, now by SMEs), which is ok,<BR>but also due to a decline in industrial production to 3.1% (3MMA) as of April (quite volatile,<BR>the latest reading being 6.6% YoY in May).<BR>As for India, this is the only market in Asia flashing red for sometime, our pressure gauge<BR>being at the highest levels in the past 17 years but moderated from the peak of two years<BR>ago – perhaps the strict measures of the Reserve Bank of India (RBI) are working. The<BR>threat emanates from a runaway mortgage-and-consumer driven lending boom (real credit<BR>growth still 21% YoY, down from 33% in September 2005), rising loan-deposit ratio (72%,<BR>up from 51% 5-6 years ago), appreciating currency (up 12.4% vis-a-vis the US dollar in the<BR>past year) and worsening trade account (deficit of US$65 bn on a 12 month rolling basis<BR>compared to US$10 bn five years ago). This puts the RBI tightening in perspective – recall<BR>that RBI has hiked interest rates, cash reserve ratio, risk weights on non-productive<BR>lending, general provisioning, etc., in the past one and a half years – but it also means that<BR>the RBI is unlikely to ease anytime soon until the red signal turns to neutral</P>