Credit market recovery eases capital
concerns but ROE unlikely to return to
the levels seen between 2004 and 2007
We think a re-rating is unsustainable
until the macro economy fully recovers;
RMB business is not a near-term driver
Downgrade BEA to UW(V); ICBC (Asia)
OW(V) remains our top pick
Improved fundamentals? Yes and no – it depends on what
the fundamentals are for individual banks. The credit market
recovery has eased capital pressures but bank operations
remain lacklustre and lack revenue drivers.
No fast rebound in profitability. We believe this credit
cycle will be a protracted one although its impact will be
milder than in 1997-99. For the banks under our coverage,
we expect the average credit cost to double from c40bps in
2008 to c80bps in 2009, suppressing profitability. Overall,
ROE of banks will continue to be under pressure from higher
losses on NPLs and subdued revenues. We believe it is
unrealistic to look for a sustainable re-rating in share prices
until the macro economy fully recovers.
Hype on RMB business inflated. We believe the launch of
RMB trade settlement and expanding the RMB bond market
offers few short-term benefits to the banks.
Stretched valuations. While PB ratios don’t look high
compared to their historical averages, valuations are
stretched when we look at near-term ROE prospects. We
estimate average ROE will be 9% in 2009 and 10% in 2010,
compared to 15% between 2004 and 2007.
M&A is like “Waiting for Godot”. We don’t advise
investors to chase the M&A phantoms. We believe major
M&A is unlikely in the near term due to the more cautious
stance of Chinese banks and the large price expectation gap
between them and potential sellers.
Be selective. Our score-card analysis suggests some Hong
Kong banks still offer value from a regional perspective. But
caution is warranted given the unattractive valuations. We
downgrade BEA to UW(V). ICBC (Asia) rated OW(V)
remains our top pick based on its promising growth outlook.
Caution required at current
valuations 4
Cyclical weakness continued
into 2009 8
Rebuilding capital 15
China-related business –
hype and reality 20
Re-rating: too much, too
quick, and unsustainable 23
M&A…a bit like “Waiting for
Godot” 26
A tale of two cities 28
Company profiles 31
Bank of China (HK) 33
Bank of East Asia 37
ICBC (Asia) 41
Wing Hang Bank 45
Dah Sing Banking Group 49
Dah Sing Financial 53
Appendix 1: Hong Kong’s status
as an OFC 56
Appendix 2: The Prime-HIBOR
conundrum 58
Disclosure appendix 60
Disclaimer 63
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