Friday, September 11, 2009

>Rising Interest Rates: Not That Scary (CITI)


Earlier rate hikes — Our economists expect monetary tightening to begin earlier for Asia. Korea (1Q10), India and China (2Q10) likely the first markets to tighten.

Limited impact on loan growth, credit quality — Rates will rise due to normalization rather than cooling off of over-heated economies, and should coincide with improving economic growth. Loan growth is largely still weak across Asia. We have already had an NPL cycle in 4Q08, and NPLs are improving in Asia.

Mostly positive for NIMs — Most major Asian banks have big deposit franchises (high % of low-cost deposits), which mean widening deposit spreads as rates rise, while assets tend to reprice faster than liabilities. Our key conclusions:
1. Insurers are bigger beneficiaries than banks – Insurers carry much less credit risks and are earlier/more direct beneficiaries of inflation/higher asset prices.

2. Korea and China are significant NIM beneficiaries – Chinese banks will benefit from the high % of demand deposits; Korean banks’ deposit and wholesale funding costs should improve while earnings sensitivity is very high.

3. Indian banks appear most negatively affected given limited scope for NIMs to rebound plus large and long duration bond portfolios (revaluation losses).

4. HK and SG beneficiaries are the big deposit franchises (BOCHK, HSB, DBS).

5. Non-issue for Taiwan and Malaysia (rate cycle laggards) and Thailand.

History is inconclusive — Results of reviewing historical price performances going into the first tightening round is highly inconclusive; interest rates may be only one of many factors affecting share prices.

Valuation — Asian banks are trading a little below mid-cycle P/Bs. Outliers: SCB, Fubon (over 20% above mid-cycle); First, CMB, ICBK (20% below mid-cycle).

Beneficiaries / most hurt — Key gainers: Chinese life insurers and banks, Korean banks, large HK banks, DBS. Most hurt: India PSU banks, mid-cap HK banks.

To see full report: ASIAN FINANCIALS