Saturday, 25 October 2008
Most Bank Shares Are Getting Unjustly Lashed
DBS is selling at just under nine times next year’s earnings, with an estimated dividend yield of 5% and a price-to-book ratio of 0.9 times, versus the 2.6 times it fetched at the height of the recent boom. Credit Suisse’s target is S$15.70 (about US$10.42), or 57% upside. If China, India and the rest of the region weather the global storm better than most pundits expect, bank shares should rebound smartly.
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Most Bank Shares Are Getting Unjustly Lashed
By Assif Shameen – Barron’s
25 October 2008
As regulators in the U.S. and Europe have churned out rescue packages to recapitalize banks and stabilize financial markets, Asian regulators have rushed to guarantee all deposits in Singapore, Hong Kong, Australia and Malaysia. Elsewhere in Asia, similar deposit-insurance measures were taken to cover most deposits, at least at the retail level.
Ironically, corporate and personal balance sheets in most of Asia are in far better shape than Europe’s and North America’s, and stronger than they were during Asia’s own major crisis in 1997-’98. While it may be too soon to buy shares of even the healthy banks – since their fates remain linked to any further global economic deceleration – most don’t need this additional deposit insurance.
Says Prasenjit Basu of Daiwa Securities in Singapore: “Asian banks are fairly robust and, in general, much better-regulated [and] better-capitalized than they were at the onset of the Asian financial crisis a decade ago.” Moreover, he asserts, “Improved asset quality, funding sources and risk management are all in place.”
Says Daniel Tabbush, regional-bank analyst at CLSA Asia-Pacific Markets in Bangkok: “With the exception of Korea and Thailand, the loan-to-deposit ratio for banks across Asia is still very low . . . under 80% on average, and in some cases closer to 60%,” compared to the nearly 100% that’s more typical in the west. Indeed, unlike the U.S. and Europe – where credit is contracting as part of a deleveraging process – in much of Asia, credit is still growing, albeit at a much slower pace than it was a few months ago.
While the credit crunch hasn’t yet significantly hurt Asian banks, the region’s economies and its key export markets – the U.S., Europe and Japan – are slowing. Singapore and Hong Kong may even slip into a technical recession if the global economy weakens even more.
Analysts expect higher costs, lower revenue growth, slimmer interest margins and deterioration in asset quality to start showing at Asian banks in coming quarters. Little wonder, then, that bank stocks across Asia have plunged by 40% to 50% in recent months. Over the past year, many of the region’s better banks are down by 60% to 65%.
Have Asian bank stocks fallen enough to be attractive?
CLSA’s Tabbush doesn’t think so, asserting that “not all the bad news is in the price. They could go down a lot more before they go up again.” Indeed, he fears that valuations might return to the trough levels seen in the late 1990s’ financial crisis. And many bank analysts agree with him: In recent weeks, they’ve aggressively downgraded Asian banks with lower price targets, even as the shares have slid 20% or more.
Among the biggest victims of the downgrades have been Singapore’s DBS Group and Bank of East Asia, or BEA, Hong Kong’s No. 4 bank. The banks in Hong Kong and Singapore, Asia’s main financial centers, are leveraged to trading, property and financial services – all likely to be hit hard next year. DBS owns Singapore’s largest retail-banking franchise and has a growing footprint in Hong Kong and Taiwan.
BEA has transformed itself into a significant China play, with loans to Chinese businesses as well as foreign companies operating there recently making up 40% of its loans and 30% of its profits.
Slower growth in China would be a negative for both. And there are more problems. In this year’s first nine months, Hong Kong deposits fell 2.6% - their first decline in more than a decade. Meanwhile, Singapore’s DBS and its peers sold several billion dollars of credit-linked notes to unsuspecting retail investors and now must refund some of them.
Credit Suisse has a 12-month target price of HK$29 (about US$3.74) for BEA, or nearly 70% upside. BEA stock is down nearly 60% in the past year. At the height of the Asian crisis, in September 1998, it traded as low as 7.7 times its rolling price/earnings ratio (the P/E for the past two quarters, plus the projected P/E for the next two quarters) and 0.8 times rolling price-to-book. It now sells at 6.5 times next year’s earnings, with a 4.4% dividend yield and a price-to-book ratio of 0.9 times, versus 2 to 2.5 times in better days.
“We do see value in the Hong Kong banks,” says Credit Suisse’s Christopher Esson, asserting that “Hong Kong banks are now at their trough values.”
Esson believes that any economic contraction will produce an earnings, rather than a solvency, problem for Hong Kong banks. One reason: Corporate and household balance sheets are much improved since Asia’s last financial crisis – during which DBS stock traded at a low of 0.7 times price-to-book and 5 times earnings. The stock is off 46% over the past year.
DBS is selling at just under nine times next year’s earnings, with an estimated dividend yield of 5% and a price-to-book ratio of 0.9 times, versus the 2.6 times it fetched at the height of the recent boom. Credit Suisse’s target is S$15.70 (about US$10.42), or 57% upside. If China, India and the rest of the region weather the global storm better than most pundits expect, bank shares should rebound smartly.
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