By Ankur Banerjee
SINGAPORE, November 29 (Reuters) – As Asia’s banking sector weathers a spike in global interest rates and risks of slower growth, investors are betting that banks in India and Indonesia have the strongest lending and profitability profiles to deliver returns next year.
Over the past 18 months, Asian central banks have tracked the US Federal Reserve tightening monetary policy to fight inflation, but their interest rates have been smaller and slower, resulting in better interest income for the region’s banks without loan growth suffering.
Bank indices in India .dMIIN0CB00PUSIndonesia .dMIID0CB00PUS and Thailand .dMITH0CB00PUS all outperformed the broader MSCI Asia ex-Japan index .MIAPJ0000PUS as well as the S&P banks index .SPXBK since March 2022, when the Fed began raising rates.
But now, as a steep global rate cycle peaks and the specter of recession looms, investors are turning selective and focusing on banks that have kept financing costs down while expanding loans.
“The hope is that we will see a mild tapering cycle next year, nothing too aggressive … that should generally be positive for the financial sector in Asia because it should stimulate loan growth,” Frederic Neumann said. , chief Asia economist at HSBC.
Neumann points to India, where banks have delivered double-digit growth in lending in recent months due to growing demand for credit in the world’s most populous but underbanked nation.
Loan growth at Asian banks is estimated to rise from 4.5% this year to 10% next year, LSEG data shows, with banks in India and Indonesia leading the way with 15% and 11% growth, respectively.
Analysts at JP Morgan say Asian banks, apart from China, have led global demand for total loans, and their interest margins of 2.4% in 2022 were already at pre-pandemic levels.
Xin-Yao Ng, investment manager of Asian shares at UK fund abrdn, says the easy wins for banks due to rising borrowing costs are over, which makes him picky.
“We think that rates have peaked or are near a peak, but the downswing will be less steep than the upswing. Thus, this headwind will be more gradual, not an income shock,” says Ng.
Ng likes banks in India and Indonesia, due to the better economic growth in those economies and banks’ ability to sustain margins.
LSEG data shows that profits at banks in India and Indonesia will grow 13% and 11% respectively next year, almost double the 6% average increase across Asia-Pacific banks.
Indian banking heads HDFC HDBK.NSICICI ICBK.NSKotak Mahindra Bank KTKM.NS and Axis Bank AXBK.NS comprises a significant part of the portfolio of Vinay Agarwal, Asia portfolio manager and director at FSSA Investment Management.
Agarwal said the increase in disposable income in India will mean consumers will do more than just bank deposit, leading him to choose banks that are market leaders even in asset management and insurance businesses.
Indonesian Bank of Central Asia (BCA) BBCA.JK “It’s just a class apart,” Agarwal said.
Morgan Stanley added BCA to its focus list for Asia Pacific excluding Japan this month, citing its strength in deposit franchise and loan pricing.
The risk for investors lies in the rich valuations of these banks. HDFC and ICICI trade at a price-to-book (P/B) ratio, a metric that compares share price to underlying assets, of 3, while Axis trades at 2.3 and BCA at 5.
That compares to a price-to-book ratio for MSCI’s index of nationwide Asian banks .dMIAS0CB00PUS of 0.9.
India and Indonesia also face elections next year, which could mean more volatility in those markets.
Laggards are in markets such as Singapore, Hong Kong and South Korea, whose more mature financial sectors and low interest rates reduce the scope for banks to maneuver.
Profit growth expectations are also lower in these developed markets. Banks in Australia are estimated to see a 5% drop in profits in 2024 while profits at Singapore banks will be flat. South Korean banks are expected to see profit growth of 4%.
For banks in China, where monetary policy is still loose, the market is in the process of pricing in continued net interest margin pressure, analysts at Morgan Stanley wrote this month, maintaining their underweight stance.
Valuation for banks from Indonesia and India looks rich
Asian bank stocks have outperformed the broader market since March 2022
Profit growth estimate for 2024
(Reporting by Ankur Banerjee in Singapore, additional reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Vidya Ranganathan & Simon Cameron-Moore)
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