Differentiating regional returns: using our proprietary
bank version of a modified DuPont we de-compose the
return structures of our regional bank coverage (57
stocks – 11years of analysis). We also asses our view of
the normalized return power of each franchise. That is,
the underlying through the cycle view of returns from
each earnings driver. With this data, we identify the top
and bottom ten performers at each level over 11 years to
iron out any outliers – looking for persistency and
trajectory. We compare normalized returns to 1) current
performance to highlight delta, and 2) our assumed cost
of equity to highlight value creators and destructors.
Where are the structurally wide returns? Indonesian
banks (BRI, BCA, Danamon & Mandiri) dominate the top
10, as measured by unlevered returns (return on assets
“RoA”) with powerful revenue generating capacity.
Thailand (Kbank & SCB) show well. The high quality
leading franchise managers in the region (Hang Seng,
HDFC Bank & Public Bank) shine through with a
balanced mix of margin management, fee generation/
collection, cost control and sound underwriting.
Who are the value creators? Hang Seng, BRI, CCB,
ICBC and Public Bank clearly stand out on both actual
and potential returns versus the cost of equity. The
Australian’s did well historically with leverage and a long
buoyant economic cycle … but the future looks different.
Where is the most potential? Danamon offers the
widest delta as it deploys the recently raised capital into
high return Indonesian growth. Our turnaround themes
(TMB & MBT) show well assuming execution is crisp.
Korea is always seductive but seldom delivers.
No real surprises: except that the Chinese banks don’t
offer the level of return typically associated with an
emerging financial system. While near term growth
easily trumps and supports our preferred stocks (CCB &
ICBC) an eventual credit cycle may be painful. Our
attractive stance on Indonesia (Danamon, Mandiri &
BRI) is well justified. Our positive stance in Thailand is
also reinforced. Taiwan and Singapore remain
hampered by narrow returns and weak growth.