Asian banks preferred on lower-risk, limited contagion from recent banking fallout: analysts

AMID the banking fallout in the US and the European Union(EU), Asian banks are seen as relatively low-risk given their lower exposure to US and EU corporate bonds.

While most US and European banking stocks have corrected sharply following the collapse of several banks over the week, the impact on Asian financials has been more contained, noted industry watchers.

The MSCI Asian Financial Index for example, fell by 4.2 per cent since Mar 8, a much smaller decline as compared with the MSCI World Financials Index, which slipped 10.6 per cent in the same period.

Sundeep Bihani, Eastspring’s Asian equities portfolio manager said that most Asian central banks tend to be conservative in their oversight of banks and apply strict standards when it comes to bank funding parameters, bearing in mind lessons from the 1997 Asian Financial Crisis.

CGS-CIMB analysts also noted that Asian banks operate rather differently from their Western counterparts, which puts them at much lower-risk than small and mid-sized banks in the US.

For these reasons, the brokerage retained its “overweight” view on the Asian banking sector, preferring banks whose re-rating may be driven by economic reopening and recovering domestic consumption.

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The highlighted companies include Bangkok Bank, with a target price of 193 baht, Bank Rakyat Indonesia with a target price of 5,400 rupiah and China Merchant Bank with a target price of HK$69. All three have an “add” rating from CGS-CIMB.

Among the three countries, Indonesia’s banking sector showed the most promising return on equity, driven by a good recovery in credit card or non-mortgage consumer loans, noted analysts.

The country took the lead among some 18 regions in the world as its credit card or non-mortgage consumer loan growth rate stood at 29.5 per cent as at January this year, according to data from CGS-CIMB research, Bloomberg and research platform Wind.

Thailand and China are also set to catch up with Indonesia, as these economies continue to benefit from their re-opening, analysts said.

Meanwhile, Eastspring’s Sundeep was more optimistic on larger better-capitalised, low-cost funded banks in Asia.

These banks’ hold-to-maturity investments should only make up a small percentage of total assets and their short-term liquidity coverage ratios, are high relative to history, Sundeep added, without naming any specific institutions.

That said, Asia’s banking performance is still impacted by future developments in the global markets.

Downside risks, CGS-CIMB believes, could come from interest rate cuts, which could hurt net interest margins.

A marked slowdown in global economic growth could also result in worsening asset quality for the banks under the brokerage’s coverage, it added.

Eastspring’s Sundeep said he was also monitoring the potential second-round effects that can come from tighter US dollar liquidity, higher counterparty risks and wider global credit spreads.