Thursday, May 7, 2009

>Asia Pacific Banks (MORGAN STANLEY)

Stocks to Buy if Economic Recovery Is Sustainable

We have been negative or lukewarm on prospects for Asian banks and remain so – We believe that nonperforming loans (NPL’s) for Asian banks will continue to rise through the year and that revenue progression will remain under pressure. Given the weak profitability at these banks, we do not think they have enough earnings buffer to compensate for higher credit costs. At the same time, on average, capital levels are thinner than in previous cycles.

Moreover, the recent rise in stock prices has made these stocks expensive, relative to fundamentals, in our view. So, on a fundamental basis, we maintain our negative or lukewarm view across the banking sector in Asia.

However, investors are looking for stocks to buy on
the assumption that the economic recovery is sustainable – The view is that with the recovery having started, revenue momentum for banks will begin picking up and NPL’s will rise but not significantly. This is contrary to our view on banks. However, we may be wrong – hence, in this note we present a list of stocks that, in our view, could do well if economic recovery is sustained.

We identify seven stocks: DBS, China Citic, IDFC, Kookmin, Chinatrust, Bank Rakyat, and ICBC Asia. Banks with significant liquidity (large China banks and large Hong Kong banks) are absent from this list, as their net interest margins (NIM’s) have come under pressure, and multiples are already full. For Chinese banks as a whole, the other concern is that profitability is coming under pressure, with revenues declining as a proportion of the balance sheet.

We arrive at these picks by using three screens on a country basis: Core tier 1 ratio, pre-provision profit on loans, and valuations. We look for banks that surpass their country peers on capital and profitability and whose multiples leave some room for upside.

To see full report: ASIA PACIFIC BANKS