ASIA EX-JAPAN BANKS
2009 OUTLOOK
The world only ends once
• Bank stocks in the region trade on 1.2x P/B versus a
historical average of 1.8x and, in our view, are better
positioned to weather a period of economic stress than
they were prior to the downturns of 1997 and 2001.
• This optimism is partially offset by the enormous risk to
2009 earnings and also the threat to longer-term returns
as regulations, in particular those pertaining to capital
adequacy, may grow more restrictive.
• Within the banking sector we recommend an Overweight
position in Hong Kong and China and an Underweight
stance for India, Taiwan and Indonesia.
• Our preferred stocks in the region are Bank of China,
Wing Hang and UOB, all of which are rated Outperform.

SUMMARY
‘The world only ends once’ is not the title of the next Bond flick but our 2009 Asia ex-
Japan Banks Outlook. While the macro environment looks bleak, a great deal of this
is reflected in share prices and we believe investors with longer time horizons will be
appropriately rewarded for buying the sector. The table below highlights our key
ratings.
Figure 1: Summary of sector rankings and stock ratings
Weighting Key stock calls
Hong Kong Overweight Wing Hang & BOCHK (Outperform), Hang Seng (In Line)
China Overweight BOC, CITIC, Merchants (Outperform), ICBC (In Line)
Singapore Marketweight UOB (Outperform), DBS & OCBC (In Line)
Malaysia Marketweight Not available
Korea Marketweight Hana (Outperform), Shinhan (Underperform)
Thailand Marketweight Kasikornbank (Outperform), SCB and BBL (In Line)
Taiwan Underweight Fubon & Chinatrust (Outperform), Huanan & Mega (Underperform)
India Underweight HDFC (Outperform), SBI & HDFC Bank (In Line)
Indonesia Underweight Not available
Source: FPK estimates
Investment positives
For the sector as a whole, we see four positives. First, valuations are the most
attractive they have been for several years at least. We estimate the sector trades on
1.2x forward book value, compared with an average of 1.8x during the last seven
years. In addition, we estimate the stock market is currently implying a normalised
ROA of just 52bp for the industry going forward, compared with an historical average
ROA of 92bp. Second, we believe the sector is better-positioned to withstand a period
of economic stress than it was in 1996 (prior to the Asian Financial Crisis) or in 2000
(prior to the period of sub-par growth/mild recession in 2001-02). Third, we believe
capital requirements are fairly modest in the region and that finally, the intra-regional
M&A theme could come back in 2H09 as industry leaders look to take advantage of
weaker players’ financial woes.
Major risks
The major risk to the sector is 2009 earnings. In our view, forecast revisions are
highly likely to be skewed in favour of downgrades rather than upgrades, with higher
credit provisions the major threat, followed by lower NIM as interest rates move lower
across most of the region. Merely to reflect a ‘worst-case scenario’ for credit
provisions, we believe about half of our coverage could see 2009 earnings forecasts
cut by 30% or more. The second broad risk is on the regulatory front. Like elsewhere
around the globe, the potential for higher capital requirements and closer scrutiny of
wealth management operations and liquidity positions could reduce returns.
Investment strategy
From a top-down perspective, we have looked at three criteria: the economic profit
outlook, risk to earnings, and valuation. Hong Kong and China stack up the best in
this regard and are our Overweight calls. We assign Underweight positions to Taiwan,
India and Indonesia.

INVESTMENT POSITIVES
• Valuations are currently the most attractive they have been in several years if not
longer. The sector’s current P/B multiple of 1.2x compares with an average of
1.8x during the previous seven years and we estimate that share prices are
currently implying a normalised ROA of just 52bp, compared with an average
ROA of 92bp over the last seven years.
• Compared with the serious economic shock of 1996 and a period of sub-trend
growth in 2000, the sector looks much more resilient in light of its credit risk
profile, funding structure and operational reforms.
• Capital requirements are fairly modest assuming major losses can be avoided,
which is our base case. To pre-emptively push core Tier 1 capital ratios to at
least 8%, we estimate USD8bn would be needed. Going to 10% would require
USD33bn. This represents just 1% and 5% of the sector’s market capitalisation,
respectively.
• The M&A theme could come back as stronger institutions take advantage of
rivals’ low market capitalisations and financial stress. Granted, this is probably a
2H09 story.
Valuations
While we contend that there is enormous value in the sector currently, we do so with
two caveats in mind. The first is the issue of survivability. For a small group of banks,
the risk that shareholders could be wiped out can not be ruled out. Second, many
other asset classes, both equities and non-equities, have been aggressively sold
down, which raises the question of relative value.
In considering the valuation case for the sector we focussed on the following two
metrics to illustrate the degree to which shares are attractively priced.
• Current versus historical multiples
• Implied ROAs, which are derived from our normalised return analysis and
provide an interesting check on what the market is currently assuming about
future profitability
Using our estimates of forward book values, our calculations show the sector trading
on a 35% discount to the historical average (based on seven years of back data,
where available). Of the 45 stocks included in this analysis, only nine trade on less
than a 20% discount to historical P/B ratios. Using this metric, India looks most
expensive on a relative basis, as do some stocks considered defensive, including
UOB and Hang Seng Bank. Korea looks attractive using this method, as do some of
the weaker players in various markets, for example Krung Thai, Dah Sing and
Taishin.

TABLE OF CONTENTS
Summary.............................................................................................................................. 4
Investment positives............................................................................................................ 5
Major risks .......................................................................................................................... 14
Investment strategy ........................................................................................................... 26
China banks Overweight................................................................................................ 28
Hong Kong banks Overweight ...................................................................................... 30
Taiwan banks Underweight ........................................................................................... 32
Korea banks Marketweight ............................................................................................ 34
India banks Underweight ............................................................................................. 36
Singapore banks Marketweight..................................................................................... 38
Thailand banks Marketweight........................................................................................ 40
Bank of China Outperform............................................................................................. 42
Wing Hang Bank Outperform ........................................................................................ 44
UOB Outperform ............................................................................................................ 46
Disclosure information...................................................................................................... 49