By Morgan Stanley
Our overall outlook for ASEAN banks for 2015 remains subdued. In
our view, the strong earnings growth we experienced from 2010-2013
is unlikely to be repeated as loan growth is expected to be more
measured. This is partly because banks continue to face liquidity
constraints, and we are unlikely to see this improve in a strong
dollar environment. In addition, borrowers are more indebted than
they were five years ago, and are not expected to add significantly
more debt as rates are expected to edge up. These constraints on
lending are expected to add to a subdued economic environment,
although we do expect growth to be stronger in 2015 than it was in
2014, and we believe some of the uncertainties that existed 12
months ago, especially as regards credit quality, have begun to
work themselves through.
Capital is also expected to remain a vexing issue in 2015. On
the one hand banks have more of it, and most appear well positioned
for Basel III implementation. On the other hand, they could still
need more, and as capital builds up further, it will begin to
impact returns, and possibly risk as bank managements seek to lift
RoE (return on equity). Capital therefore remains a risk for
2015.
In a table which can be seen at barrons.com, we rank the
different ASEAN banking markets from one to five based on a variety
of metrics, with one representing the best score. We have then
showed an average score across these metrics. We see the
Philippines as being the best banking market for 2015, closely
followed by Indonesia and Singapore.
Given this more subdued environment, we seek stocks with high
and stable returns, or stocks with improving returns. In Indonesia,
we recommend a switch out of Bank Rakyat Indonesia (BRI), where
returns are more at risk, and into Bank Central Asia (BCA) or Bank
Mandiri. In addition, we prefer the high return KBank over the low
RoE Bangkok Bank. Recent underperformance of KBank provides an
opportunity to revisit this call. Finally we are positioned in
banks where returns may not be as high, but where we see a pick up
in returns or EPS growth. For Singapore banks, we expect higher
rates from 2016 onwards will help lift returns - OCBC and DBS are
preferred, we see more upside at OCBC. We also see returns
improving for the Philippine banks; Metrobank is the only one which
offers upside to our target price, however, and is our Overweight
call in the sector. We highlight the investment case surrounding
our key picks below, and then discuss our country sector preference
in more detail.
1. Buy Metrobank in the Philippines
We see the Philippines as the most attractively positioned of
the ASEAN banking market, primarily due to its strong liquidity
position and leading GDP growth forecasts. However, valuation
multiples are full, with the exception of Metropolitan Bank &
Trust (MBT.PH). In our view, Metrobank will see continued strong
loan growth over the next two years and this will drive the
strongest underlying earnings per share (EPS) growth in the
Philippines sector. This should also lead to a narrowing of the
valuation gap between Metrobank and its local peers.
2. Buy Mandiri or BCA in Indonesia; sell BRI
We continue to prefer Bank Central Asia (BBCA.ID) as one of our
top picks, especially in the context of a prolonged downcycle. We
expect loan growth to accelerate after consolidation in 2014. We
also see greater risk aversion from the market.
Bank Mandiri (BMRI.ID) is our second pick, based on its
structural growth prospects. Mandiri has been leading peers in
terms of business evolution, which should make it best prepared to
transform and diversify its income sources from lending to
non-lending drivers. We expect an acceleration in its earnings in
2015, but the stock could remain volatile in the short term
considering its high beta.
Our least preferred Indonesian bank is Bank Rakyat Indonesia
(BBRI.ID): its lending and NIM (Net interest margin) have been
slowing down, while its asset quality has been deteriorating. We
remain cautious on the sustainability of RoE, especially on loan
yield, and believe any RoE downside will prompt a de-rating.
3. KBank Preferred over Bangkok Bank
Although the outlook for loan and income growth at the Thai
banks is better in 2015 than it was in 2014, we still expect slow
growth. In addition, the tight cost control of 2014 is likely to be
relaxed and credit costs will remain elevated. In this environment
investors are expected to stick with higher return names such as
Kasicornbank (KBANK.TH). We expect that it will continue to deliver
strong RoE of 19.7% in 2015e, driving book value growth of 17.3%.
In our view, investors will continue to pay a premium for this
growth, and we see 15% upside over the next 12 months. By contrast,
we see the slowest book value growth in the Thai banks sector
coming from Bangkok Bank, where RoE is set to remain low at 12.5%
as the bank continues to see inefficient use of RWAs. We see book
value growth of just 8.1% at Bangkok Bank (BBL.TH), producing a 27%
lower TSR than KBank over the next three years. We expect investors
will continue to value it at a discount as a result. While KBank
has underperformed BBL since early Dec-14, we believe its delivery
of higher returns and superior TSR will mean this could easily
reverse.
4. Stick with Defensive Singapore Plays - DBS and OCBC
Although Singapore banks are expected to produce some of the
lowest top-line and bottom-line growth in the sector in 2015e, we
remain positive for two reasons. Firstly, we see Singapore banks as
having some of the lowest risks in both economic and political
terms. In addition, although we see less uncertainty over credit
costs across ASEAN this year, we are still in the upward part of
the NPL cycle, and note that Singapore banks have generally managed
credit risk better than other ASEAN peers in the past. Secondly, we
do expect short term rates in the US and then Singapore will begin
to rise in 1Q 2016, and that this will then drive NIM expansion and
EPS growth. Share prices of the Singapore banks could react to this
perspective growth in 2015.
We see more upside in OCBC (O39.SG) than DBS (D05.SG), and note
that as OCBC continues to pay a scrip dividend in 2015e, its fully
loaded core equity tier 1 ratio gap with peers will begin to close.
This could lead to a relative re-rating.
5. Maybank is the oil price trade
Maybank (MAYBANK.MY) has been one of the sector's worst
performers in 2014. In common with other Malaysian banks, it has
experienced EPS downgrades driven by a weaker-than-expected
domestic NIM, slow capital market activities, and a deterioration
in both NIM and credit quality at its Indonesian subsidiary, BII.
In addition, it has gone from being one of the highest rated ASEAN
banks relative to its history, to being one of the lowest rated.
The slide in the oil price since Sep-14 has particularly hurt its
rating. Our ASEAN economist, Deyi Tan, sees Malaysia as being most
negatively impacted by the falling oil price.
Whilst the outlook for 2015 remains difficult, we see a lot as
being discounted in the price, and Maybank could rebound sharply on
the first signs of oil price stabilization. MS strategists see a
year end 2015 Brent price of US$82/bbl, although they expect to see
it trough at US$57/bbl by end of 2Q15.
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Ranking Country Sectors
The Macro Outlook for banks
Putting our ASEAN Economic forecasts in the context of banking
growth
1. Philippine Banks: We see the Philippine banking system as the
most preferred. Although a low level of financial inclusion plus a
conservative central bank and bank managements mean the credit
multiplier is unlikely to increase materially, the higher than peer
GDP forecasts on a flat multiplier still ranks Philippine first in
ASEAN5 in terms of our system loan growth forecast of c.15% over
FY14-16. We also think strong balance sheet growth will benefit
Philippine bank margins and thereby returns.
2. Singapore Banks: While credit growth is forecast to be c.7%
in Singapore, we believe rising rates will more than offset slower
balance sheet growth resulting in higher margins and returns for
the Singapore banks, although these rate benefits are unlikely to
fully materialize until late FY16.
3. Indonesia Banks: The only other banking system where we
expect mid-teen loan growth of c.15% to continue over FY14-16 is
Indonesia. However, the possibility of a hawkish interest rate
trend (thereby tighter liquidity) amidst rupiah weakness could mean
more downside risks for the Indonesian banks, particularly for
those with weaker funding franchises.
4. Thai Banks: Political uncertainty has clearly taken its toll
on GDP growth in FY14. Moreover, Bank of Thailand cut GDP growth
estimates for FY14/15 from 1.5%/4.8% to 0.8%/4.0% on Dec. 26, 2014.
This compares to MS' FY14/2015 GDP growth forecasts of 0.6%/3.6%.
Based on a credit multiplier of 2.5x (the average multiplier in
Thailand since 2009), we expect c.9.0% loan growth for Thailand in
FY15. Despite some forecast improvement in margins in 2016 (in-line
with our ASEAN economist, Deyi Tan's expectation of policy rate
normalization beginning 4Q15), we do not expect NIM and hence
profitability to return to levels seen in FY11-13.
Compounded with the lack of a structural story, unlike in the
Philippines and Indonesia, we expect Thai Bank EPS growth from
FY14-16 to be structurally lower than in FY11-13.
5. Malaysian Banks: With forecast fiscal consolidation (that
could come under further pressure as falling oil prices could
potentially worsen the 'Dutch Disease' problem) and a slowdown in
GDP growth, we expect system credit growth of c.8% in FY15/16. In
addition, with policy rates expected to remain flat, we see slower
earnings growth over the same period. We also note that large
Malaysian banks with mid-tier Indonesian funding franchises that
are exposed to deteriorating asset quality in the coal and coal
related lending segments add to downside risks.
Liquidity
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Many ASEAN banks and banking systems have hit LDR constraints.
As LDR continues to rise, we are seeing this push up interest
rates, and loan growth is consequently slowing in Indonesia,
Malaysia and Singapore. In Thailand, rates have moved down
recently, but balance sheet growth is nonetheless slowing (going
forward, we expect balance sheet growth to improve and ultimately,
margins to recover, but to a structurally lower level than pre
FY13). Again, the Philippines stands out here as it is the only
country in ASEAN5 where the LDR has remained unchanged since 2008
and at 62%, has the largest scope to increase it and consequently
benefit bank margins and profitability. The same cannot be said of
Thailand and Indonesia on the other end of the spectrum with an LDR
of 110%. At 80-90%, the scope for LDR improvement is relatively
limited for Singapore, Malaysian and Indonesian banks too.
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This is an extract from a longer Asia Insight Research report by
Morgan Stanley analysts Nick Lord, Mulya Chandra, Edward Goh and
Daniel R Ng.
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The companies mentioned in Hot Research are subjects of research
reports issued recently by investment firms. Their opinions in no
way represent those of Barrons.com or Dow Jones & Company, Inc.
Share prices at the time the report was issued and the date of the
report are in parentheses.
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Email: asiaresearch@barrons.com
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