Investors are wagering that banks in India and Indonesia have the strongest loan and profitability profiles to generate returns in 2019, as the region’s banking sector navigates a peak in global interest rates and challenges of slower growth.
Asian central banks have followed the U.S. Federal Reserve’s tightening monetary policy in the last 18 months to combat inflation, but they have done so more gradually and with smaller interest rate hikes. This has improved interest income for the region’s banks without having a negative impact on loan growth.
Since the Fed began raising rates in March 2022, the banking indexes in Thailand (.dMITH0CB00PUS), India (.dMIIN0CB00PUS), and Indonesia (.dMIID0CB00PUS) have all performed better than the S&P banks index (.SPXBK) and the broader MSCI Asia ex-Japan index (.MIAPJ0000PUS). However, investors are becoming more selective and concentrating on banks that maintain low funding costs while increasing loan volume as a sharp global rates cycle peaks and the threat of a recession approaches.
“The hope is that we’re going to see a mild rate-cutting cycle coming into next year, nothing too aggressive … that should generally be positive for the financial sector in Asia because it should spur loan growth,” said Frederic Neumann, HSBC’s chief Asia economist. Neumann cites India, the most populous but underbanked country in the world, as an example of a country where banks have recently produced double-digit loan growth.
According to LSEG data, loan growth at Asian banks is predicted to increase from 4.5% this year to 10% the following year, with banks in Indonesia and India leading the way with growth rates of 11% and 15%, respectively.
Asian banks, with the exception of Chinese banks, have led the way in the global demand for aggregate loans, according to J.P. Morgan analysts, and their 2.4% interest margin in 2022 was already at pre-pandemic levels. The easy gains for banks from rising borrowing costs are over, according to Xin-Yao Ng, investment manager of Asian equities at UK fund manager abrdn, which makes him selective.
“We think rates have peaked or are near peak, but the way down will be less steep than the way up. Thus, this headwind will be more gradual, not an earnings shock,” Ng says. Because of their ability to maintain margins and their superior economic growth, Ng prefers banks in Indonesia and India.
According to LSEG data, bank profits in Indonesia and India are expected to increase by 11% and 13%, respectively next year — nearly twice as much as the average growth of 6% for banks in the Asia-Pacific region.
A significant portion of Vinay Agarwal’s portfolio, who is an Asia portfolio manager and director at FSSA Investment Management, is made up of the leading Indian banks HDFC (HDBK.NS), ICICI (ICBK.NS), Kotak Mahindra Bank (KTKM.NS), and Axis Bank (AXBK.NS).
According to Agarwal, consumers in India will have more options than just bank deposits as disposable income rises. For this reason, he has selected banks that lead their respective markets in asset management and insurance. The Bank Central Asia (BCA) of Indonesia (BBCA.JK) “is just a class apart,” according to Agarwal.
This month, Morgan Stanley added BCA to its list of companies to watch in Asia-Pacific, excluding Japan, citing the company’s superior loan pricing and deposit franchise.
The high valuations of these banks present a risk to investors. Price-to-book (P/B) ratios, which compare stock prices to underlying assets, are traded at 3 for HDFC, ICICI, and Axis at 2.3 and 5 for BCA. This contrasts with the MSCI index for all-country Asian banks (.dMIAS0CB00PUS) which has a price-to-book ratio of 0.9.
Next year, there will be elections in Indonesia and India as well, which could cause further market volatility. Markets like Singapore, Hong Kong, and South Korea are lagging behind because of their less flexible banking policies and more developed financial sectors.
In these developed markets, expectations for profit growth are also lower. Australia’s banks are predicted to see a 5% decline in profits in 2024, while Singaporean banks’ profits are predicted to remain unchanged. A 4% increase in profits is anticipated for South Korean banks.
Morgan Stanley analysts wrote this month that the market is pricing in continued net interest margin pressure for Chinese banks where monetary policy is still being loosened, but they are still underweight.
- Published By Team Genuine Reporter