Investors are placing bets that banks in India and Indonesia have the best lending 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 eighteen months to combat inflation, but they have done so more gradually and with smaller interest rate hikes. This has improved interest revenue for the region’s banks without having a negative impact on loan growth.

Since the Fed began rising rates in March 2022, banking indices in Thailand, India, and Indonesia have all outperformed the S&P banks index and the larger MSCI Asia ex-Japan index.

However, investors are becoming more picky and concentrating on banks that maintained 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, chief Asia economist at HSBC.

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 worldwide 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 done, according to Xin-Yao Ng, investment manager of Asian equities at UK fund manager abrdn. This makes him choosy.

“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 profits and their superior economic development, Ng prefers banks in Indonesia and India.

According to LSEG data, bank earnings in Indonesia and India are expected to increase by 11% and 13%, respectively, in 2019—nearly twice as much as the average growth of 6% for banks in the Asia-Pacific region.

Vinay Agarwal, director of FSSA Investment Management and Asia portfolio manager, has a sizable portion of his portfolio invested in Indian banking heavyweights HDFC, ICICI, Kotak Mahindra Bank, and Axis Bank.

Agarwal predicted that as India’s disposable income rises, customers will demand more than simply a bank deposit, which is why he chose institutions that lead their respective markets for asset management and insurance.

Bank Central Asia (BCA) in Indonesia “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, highlighting the company’s superior loan pricing and deposit franchise.

The high valuations of these banks provide a risk to investors. Price-to-book (P/B) ratios, which compare stock prices to underlying assets, are traded at three for HDFC, ICICI, and Axis, two for 2.3 and five for BCA.

This contrasts with the MSCI index’s price-to-book ratio of 0.9 for Asian banks across all countries.

Next year, there will be elections in Indonesia and India as well, which could cause further market turbulence.

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 mature markets, expectations for profit growth are also lower. Australia’s banks are predicted to face a 5% decline in earnings in 2024, whereas Singaporean banks’ profits are predicted to remain unchanged. A four percent increase in profits is anticipated for South Korean banks.

Morgan Stanley analysts stated this month that the market is pricing in prolonged net interest margin pressure for Chinese banks as monetary policy is still being loosened, although they are still underweight.

(Adapted from TBSNews.net)