It was a scene eerily reminiscent of the dark days of Asia's financial crisis in 1997. Long lines of panicked savers waited outside branches of Hong Kong's Bank of East Asia on Sept. 24 after rumors had started circulating the day before by cell-phone message that the bank was in peril because of its exposure to Wall Street's meltdown. Shares fell 6.9%. The run only lasted 24 hours, ending after the bank issued denials and threatened to take legal action against those spreading the rumors. BEA also won support from Hong Kong tycoons such as Li Ka-shing, who snapped up bank shares, and assurances by the Hong Kong Monetary Authority that the bank's balance sheet was strong.
Ironically, the general public's jitteriness about the health of local banks comes at a time when many of them are actually in pretty good shape. With the notable exception of HSBC (London-based but Hong Kong-listed), which is on the front line of the U.S. financial crisis because of its mortgage portfolio there, Asian banks look strong thanks to minimal exposure to the woes of Fannie Mae (FNM), Freddie Mac (FRE), and Lehman Brothers. Indeed, a number of analysts have buy recommendations for banks in Hong Kong, Singapore, and Korea.
Take the case of Standard Chartered Bank (STAN.L), which Daniel Tabbush, head of Asian Banks Research at CLSA Asia-Pacific Markets is keen on. Unlike bigger rival HSBC (HBC), it has a minimal exposure to loans in Britain or the U.S. While HSBC has about $896 billion in U.S. loans, Stanchart (which is also London-based but derives most of its business from Asia) has just $21 billion. "We are very comfortable with Standard Chartered's [loan] exposure," he says. What's more, it has seen profit growth in excess of 25% for the past 18 months. In contrast, HSBC could be facing billions more in writedowns, bad loans, and other assets which must be marked to market. It has already provisioned for $15 billion.
Thailand and Singapore Look Good
Singapore banks also look well positioned to weather the storm. Stephen Docherty, head of global equities at Aberdeen Asset Management in Edinburgh points out that several Asian banks have been unjustly tarred with the same brush as U.S. and European banks. He notes that United Overseas Bank (UOBH.SI) and Oversea-Chinese Banking Corp. (OCBC.SI), whose share prices are down 15% and 18%, are both "well run, well capitalized, and have a good record of preserving capital." Thanks to sufficient demand for loans, these banks were not compelled to "participate in repackaged, synthetic products" such as collateralized debt obligations to boost profits.
Even Thailand, whose banks were among the worst hit in the region a decade ago, is looking attractive. Sirinattha Techasiriwan, banking analyst at Kasikorn Securities in Bangkok is recommending clients buy shares in Siam Commercial Bank, for which she is forecasting full-year profit growth of 32%, to $590 million.
"This bank has no exposure to troubled U.S. paper and we see personal loans and mortgages picking up quite well," she says. The bank's shares are off 18.5% this year.
Indian banks, too, are well insulated from the troubles roiling other financial institutions, thanks to convertibility restrictions in the country that prevented banks from getting overseas exposure. What's more, Indian banks including State Bank of India (SBI.BO), ICICI Bank (ICN), and HDFC Bank (HDB) are well capitalized from secondary stock offerings in the past 12 months that raised a combined $15 billion. Property exposure at home is relatively small, accounting for less than 10% of overall assets in the banking system, so even if housing prices slump, these banks are still in a strong position. "The health of the banking system in general is good," says N. Krishnan, head of research at CLSA India.
Not Immune
To be sure, Asian banks haven't been able to fence themselves off entirely from the financial meltdown. To the extent the region is still strongly dependent on export growth, Asian economic growth is bound to suffer, and this will have a knock-on effect for the banks. Nowhere is this truer than in China, where a slowdown in U.S. demand has taken its toll on thousands of small manufacturers who have shuttered their factories in southern China. "Credit risk is the No. 1 risk for Chinese banks," says Ryan Tsang, senior director of Financial Institutions Ratings at Standard & Poor's in Hong Kong. "The risk is coming from a global slowdown, how that impacts the economy of China, the corporate sector, and NPLs."
Nonperforming loans in China, which stood at 6.1% in June, could increase by 50% says CLSA's Tabbush, who notes a sagging property sector puts China Merchants Bank (600036.SS) in a particularly vulnerable place. Investors in the Shanghai-listed company share his concerns: The stock is down more than 55% this year.
