Upgrade Korea to OVERWEIGHT, downgrade Singapore to MARKET
WEIGHT – During our trip to Korea this week, we found banks (as well as
the Bank of Korea) to be cautiously optimistic, with margins expected to be
the main earnings driver in action in 2H09. The biggest beneficiary of the
easing of the credit crisis in Asia, Korea also gains from a stronger-thanexpected
OECD recovery. We raise Korean banks to OVERWEIGHT from
Underweight and draw the money from Singapore which we downgrade to
MARKET WEIGHT from Overweight.
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Valuations and earnings momentum are supportive – Korean banks’ P/B
is still 0.9x 2009E and the farthest from their own five-year average.
Consensus earnings are showing the strongest momentum in Asia.
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Asset quality has stabilised – Government support has been critical in
Korea. NPL and precautionary loan ratios have stabilised since May/June
and most importantly, new NPL formation moderated in 2Q09. Credit costs
should come down in 2010 and further in 2011.
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The first market in Asia to raise rates? – Despite a historical low policy
rate of 2.0% and real policy rate being -1.0%, the Bank of Korea made it
clear to us that the accommodative stance will continue for the time being.
However, it said inflation will start to rise in late 2010 simply due to base
effect. Our economist Joseph Lau expects the BoK to hike policy rate
gradually starting in 1Q10, raise it by 100-125 bp next year and continue the
normalisation towards 4.0% in 2011-12. Bank margins could be boosted by
10-20 bp for every 100 bp rate hike.
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KBFG and Shinhan top picks – Our top picks in Korea are KB Financial,
Shinhan and regional banks Daegu and Busan. Our top sell is Woori due to
its larger corporate exposure and inferior Tier 1 capitalisation.