Asian Financials 2009 Outlook
This too shall pass...
Banks
Sunil GargAC
(852) 2800-8518
sunil.garg@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
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MSCI Asia ex vs. MSCI Asia ex
Financials
35
45
55
65
75
85
95
105
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
MSCI Asia ex Jpn
MSCI Asia ex Jpn Fin
Source: Datastream.
OVERWEIGHT
• HK/Singapore
• UPGRADE Korea
• Thailand
• Standard Chartered
UNDERWEIGHT
• India/Australia
• Taiwan
• Indonesia
• HSBC
NEUTRAL
• China, Malaysia, Philippines
TOP PICKS TOP AVOIDS
Hang Seng BEA
Standard HSBC
KB Financial Woori
DBS Axis
Siam Commercial CBA
ICBC WBC
Roadmap for 2009
• We present a 2009 roadmap and signposts (to affirm/negate the view)
rather than reacting to events/news flow. (1) Flow of credit – to resume in
2QE/3QE. (2) Asset quality – to deteriorate through 2009E, particularly
SMEs. (3) Capital raising. (4) Ugly for 2009E earnings as depressed
consumer/business confidence leads to deferred consumption/ investment,
revenues swoon; credit losses rise and banks raise dilutive capital. We
believe earnings downsides remain in store as corporate denial continues
and the scale of both external/internal linkages is underestimated. Deflation
is a real threat for now - hence a defensive stance.
• A very different crisis: The only certainty about downturns is that they
will recur and be different. Defining features in Asia: (1) SME asset
quality deterioration and (2) revenue crunch – as operating leverage kicks
in, revenue pressures will likely drive earnings weakness in 2009.
Beyond the short term
• The next new thing – low/zero interest rates on one hand signify
deflation fears and on the other, promise to sow the seeds of the next
credit bubble. After an initial period of risk aversion, we expect banks to
resume lending from 2Q/3Q – China will likely create the next creditfueled
bubble – enjoy the ride.
• Leverage (or lack of): Regulatory/investor pressures are forcing banks to
raise capital that they do not need – this will lower ROEs now and be
used for pricier deals later – neither is optimal.
• Long-term structural trends intact: While it may stretch the
imagination, we see long-term structural trends of (1) disintermediation;
(2) role of demographics driving WM demand in affluent Asia and credit
demand in younger developing Asia; and (3) consolidation, remaining
intact given an economic rationale. Leverage, however, will likely be
structurally lower, monoline models perish and capital flows will have a
home/regional bias. Despite this, banking should remain a leveraged
cyclical business and stability of a utility-type business is unlikely.
Timing
• Buy quality, buy capacity, buy medium-term winners: Quality and
capacity relate both to balance sheets and management – and both are
quantifiable, in our view. Investors too will need capacity – to take a
medium-term view given that elevated correlations make alpha generation
near impossible in the short term. This too shall pass…
• Stay defensive for 1Q: 4Q earnings and economic data are likely to
cause weakness in share prices. Wait for China pullback – A weak set
of 4Q results will likely reverse recent outperformance providing fresh

Table of Contents
Navigating the downturn – Investment Summary .................4
Growth (& Quality) At a Reasonable Price (pages 55-60) ..........................................4
Recommended Stance..................................................................................................6
Roadmap for 2009 (pages 21-46).................................................................................9
Cyclical Positioning and Earnings Outlook (pages 70-85) ........................................12
Roadmap Beyond 2009 – Structural Trends (page 47) ..............................................13
Roadmap Beyond 2009 – Sustainability (pages 48-49) .............................................15
Issues to Debate – Valuations in a Low/Zero Rate Environment (page 54) ..............15
Issues to Debate – Counter Cyclical Capital Allocation (pages 67-69) .....................16
Issues to Debate – Goodwill and NTA (page 44) ......................................................16
Model Portfolio Performance and Recommended Stance .........................................17
Valuation Tables ........................................................................................................19
The Roadmap for 2009...........................................................21
ROADMAP for Liquidity and Flow of Credit...........................................................21
ROADMAP for Balance Sheet Health – Asset Quality.............................................26
ROADMAP for Balance Sheet Health – Capitalization ............................................33
ROADMAP for Revenue Crunch ..............................................................................38
Other Key Issues: Balance Sheet Health – Goodwill.................................................44
Balance Sheet Health – Assessing True Book Value.................................................45
ROADMAP Beyond 2009 – Structural Trends ......................47
Structural Trends........................................................................................................47
Sustainable Profitability.............................................................................................48
A World of Low/Zero Interest Rates......................................50
What do Low/Zero Interest Rates Mean for Valuations?...........................................54
Growth (& Quality) At a Reasonable Price ...........................55
Defining Quality ........................................................................................................55
It’s a Cost Game .....................................................................61
Management Quality Can Be Quantified ..............................63
Issues to Debate – Counter-Cyclical Capital Allocation .....67
What Went Wrong? ...................................................................................................67
What Can Be Done?...................................................................................................67
Risk Management ......................................................................................................67
Regulatory Oversight – Smarter, Not More Regulation.............................................68
Counter-Cyclical Capital Allocation – A Market-Driven Approach to Regulation ...68
Can Banks Run a Counter Cyclical Capital Allocation Model Themselves? ............69
Credit Cycle ............................................................................70
Valuations ...............................................................................74
Earnings & profitability database ..............................................................................78
Model Portfolios .....................................................................86
Country Sections....................................................................89

Growth (& Quality) At a Reasonable Price (pages 55-60)
While the near-term outlook is not pretty as revenues slow, asset quality deteriorates
and banks carry excessive capital, it appears that share prices to some extent already
reflect this outcome. We believe investors need to focus on long-term winners
that can deliver growth and are available at a “reasonable” price – a GARP or
GASP approach to investing should provide solid returns.
Defining quality
• Capacity wins: We believe banks with balance sheet capacity – liquidity and
capitalization – will emerge as winners.
• Deposit franchises: The value of deposit franchises cannot be over-emphasized
at most times, but in the current environment, this will provide both balance sheet
capacity as well as customers to sell products to.
• Asset quality: Although asset quality tends to be a cyclical phenomenon, well
reserved banks that have been able to minimize asset quality deterioration should
be able to move ahead with fewer distractions.
• Management quality: We believe management quality for banks is quantifiable
and see management a critical driver for delivering superior sustainable ROEs.

2008E, representing a one-third decline from current estimates) and capital raising
impacting both ROEs and book values, looking at adjusted multiples may provide
better guidance.
Looking at valuations in the context of relative resiliency as well as adjusted
valuations:
• Korean and Thai banks are the cheapest along with Indian SOE banks. Downside
risks for Korean banks’ estimates also appear limited in a regional context.
• Chinese banks appear reasonably balanced – our medium-term constructive
stance is premised on expectations of a state-led credit expansion fueling earnings
upsides in 2009E.
• Indian and Indonesian banks appear expensive across multiple metrics.
• Taiwan bank valuations remain unattractive.
A “Normalized” Valuation Comparison
Our core valuation framework is dependent on “normalized” through the cycle ROEs
as presented below. The process of ascertaining Sustainable ROEs factors in
structural changes to the business (that cause curve shifts) as well as cyclical credit
costs. While history serves as a guide, large scale structural changes have led us to
make this a forward looking exercise.