Inflation Nations
Two-stage NIM expansion across the region
With yield curve flattening in the US and Asia, six out of 10 Asian countries are
expected to see policy rate hikes in 2010. We believe this will result in a two-stage
NIM expansion for banks across the region, once the effect of a ~200bp loan rate cut –
since 3Q08 – is fully absorbed by the end of 3Q09. The first stage is to have funding
cost roll-over to lower rates, and the second stage is to have the loan rate priced at
higher levels. Korea and India are the two markets set to see larger NIM expansion at
both stages. Both markets have more than 25% saving deposits that are yet to be repriced
at lower rate from 4Q09, and are expected to experience a 75bp policy rate
increase, better than the 50bp forecasted for the rest of the region.
Asset quality to remain sound
We do not believe the upcoming rate-firming cycle will trigger systematic asset quality
risk before 2H10. Even if loan growth has slightly contracted across the region (except
in China), NPL’s only inched up from 2.83% at the end of 2008 to 3.12% in 1Q09, and
dipped to 3.06% by the end of 1H09. Both exporters and industrials weathered the
financial crisis much better than expected, and although the exuberance in the
property market has already urged regulators in Hong Kong and China to introduce
tightening moves, these measures are modest thus far, in the current recovery phase
of the economic cycle.
Long India, Korea and Malaysia; short China
Our regional long-and-short picks consider the interest rate and currency outlook as
well as the income and balance-sheet structure of banks. Although Korea and India
should have the most NIM upside in 2010, both markets recorded strong
performances in 2009, so investors should balance their portfolio with defensive
names in Hong Kong and Malaysia. Our picks are Punjab National Bank, Hana
Financial, CIMB and BOC HK on the long side; the Bank of Communication and Bank
of China on the short side. At a lofty average 2.3x 2010 P/BV, China banks’ heavy
loan exposure to questionable regional-government investments is likely to retard their
performance.