Note: For China it is off-BS agency services as % of total on-BS assets, and for India it is banks’ exposure to NBFCs as % of total loans. Source: CEIC, Credit Suisse estimatesSource: Company data, Credit Suisse estimates
12 December 2018
Asia Pacific Financials StrategyThe rise and retreat of shadow banks
Rise of shadow banks
In the past decade, shadow banking in Asia has grown at ~20% CAGR to US$9 tn to 44%
of GDP on back of low rates, easy liquidity, and lax regulations. This along with the
growing corporate bond market have aided aggregate credit in Asia more than quadrupling
post-GFC to US$39 tnto 194% of GDP (up 74 pp). The shadow banks and bonds have
contributed 40% of incremental credit in the last three years. The size of shadow banking
is unsurprisingly large in China (57% of GDP) and India (27%). Its market share though is
highest in India where it contributes 31% of credit vs 25% in China.
Now in retreat in China and India
As both regulations and liquidity tighten, the key drivers underpinning shadow banking and
corporate bond growth are reversing. Chinese regulatory tightening has triggered a
deceleration in the off-B/S credit growth since 2017 and outstanding balance of off-B/S
credit started shrinking from March-2018 (down 9% since then). In India as well, over the
past three months, funding constrains have led to a dramatic slowdown in the shadow
banks (mainly the NBFCs and HFCs). The ALM corrections needed and likely asset
quality stresses are likely to slow them down going forward.
Credit momentum will slow
The retreat of shadow banks is likely to impact aggregate credit momentum most in India
and China, where it accounts for 30-40% of incremental credit. Moreover, on account of
larger share of shadow bank, certain segments will be more impacted. 45% of debt for real
estate developers in China and 50% in India comes from these non-bank sources.
Constraint on credit availability coupled with the downswing in their business cycle may
raise asset quality risk in this segment. SME in China and Autos in India may also face
growth challenges. The retreat of shadow banks provides an opportunity for banks to raise
their share. However, with deposit growth trailing loan growth across most of Asia, loan-to-
deposit ratio has moved up and ability to raise deposits would be key to loan growth pick
up. Therefore, as shadow banking slows we see increased deposit competition, rise in
funding cost, and likely slowdown in overall credit growth. Deposit growth could pick-up if
monetary conditions ease.
Prefer deposit rich banks less exposed to real estate
We expect deposit rich banks will have an opportunity to expand their market share and
witness a pick-up in loan growth. As highlighted earlier, as shadow banks were
contributing to 45-50% of funding for the real estate developers in India and China, their
constraints may result in asset quality stress in this segment. We, therefore, continue to be
cautious on lenders with large exposures to this segment including Indiabulls, L&T
Finance, Yes Bank in India; and MSB, PAB, CEB in China.
We are also cautious on the banks with high shadow banking exposure. However, with the
regulator easing its stance in China to support the economy, the incremental impact on
joint stock banks (JSBs) could be more moderate relative to the recent past. On the other
hand in India, we expect the shadow banks to witness growth and margin pressure going
into 2019.
We expect only deposit rich banks (as LDRs are close to peaks) will have an opportunity
to expand their market share and witness a pick-up in loan growth. Our preference is for
the banks with relatively lower LDR and higher CASA ratio. On this theme, we like Big 4
banks in China; ICICI, HDFC Bank and Axis in India (should benefit from the SLR cuts);
BBNI and BBCA in Indonesia; SCB in Thailand; and PNB and BPI in the Philippines.
Shadow banks and
bonds have contributed
40% of incremental
total credit
Regulatory crackdown
and tightening liquidity
to slowdown shadow
banks
Credit momentum likely
to slow most in China
and India
45% and 50% of real
estate developer debt
in China and India,
respectively, is from
non-bank sources
Cautious on lenders
with large real estate
exposure
Also cautious on banks
with high shadow
banking exposure
Prefer deposit rich
banks
12 December 2018
Asia Pacific Financials StrategyValuation snapshot and top picks
Figure 10: MSCI AxJ bank index EPS growth (%)Figure 11: Market cap vs ROA (%)
1615
-1-234
253-3
412-551525
30
35
40
'05'06'07'08'09'10'11'12'13'14'15'16'17'18E'19E
MSCI Asia-ex-Japan bank index EPS growth (%)
CN
IN-G
IN-P
IN
TW
ID
TH
MY
SG
AU
PH
PK
JP
IN-PC
IN-PR
IN-NBFCs
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
0.00.51.01.52.02.53.0
Mkt cap / Assets '19E
ROA '18E-19E
Source: Datastream, Credit Suisse researchSource: Company data, Credit Suisse estimates
Figure 12: Regional banks’ valuation table
FY18EFY19EFY18EFY19EFY18EFY19EFY18EFY19EYTD20172016
China7.67.36.25.813.412.90.79 0.71 -52811
India-govt-118.2488.246.98.02.010.90.91 0.83
India-pvt26.650.327.318.212.115.83.08 2.68
Indian.a105.529.814.57.413.62.10 1.85 -842-3
Taiwan14.10.511.511.410.810.31.20 1.15 72916
Indonesia11.714.816.114.015.616.02.39 2.12 -25119
Thailand8.411.011.09.910.210.61.09 1.01 -103422
Malaysia10.511.913.211.811.311.81.44 1.35 7331
Philippines16.725.915.212.110.111.11.40 1.28 -2244-3
Singapore23.59.010.29.412.312.61.23 1.14 -4535
Pakistan-23.631.310.27.811.914.91.22 1.10 -32-2641
Australia-1.97.111.310.512.513.01.39 1.35 -16107
Japan-1.7-3.49.09.36.46.00.57 0.55 -1816-3
EPS growth (%)P/E (x)ROE (%)P/B (x)Price performance **
Note: FY18E denotes year ending Mar-19E for India. ** Price perf for MSCI Bank Indices (US$ terms). Source: Credit Suisse estimates
Figure 13: Most preferred and least preferred stocks to watch for among Asian banks
BloombergBankRatingMkt capEPS growth (%)P/E (x)RoE (%)P/B (x)DY (%)
ticker(US$ bn)FY18EFY19EFY18EFY19EFY18EFY19EFY18EFY19EFY18E
Most preferred
3988 HKBOC (H)Outperform145.88.08.24.84.410.810.80.560.516.5
HDFCB INHDFC BankOutperform80.816.421.826.922.116.816.53.893.430.8
ICICIBC INICICIOutperform32.0-7.3150.336.014.46.114.32.161.951.7
BBCA IJBCAOutperform44.211.015.524.721.418.418.44.263.670.9
BBNI IJBNIOutperform10.911.914.710.49.114.915.61.511.332.4
BPI PMBPIOutperform8.13.423.016.013.011.612.31.681.531.9
Least preferred
1988 HKMSB (H)Underperform37.26.63.64.13.912.711.70.510.461.2
YES INYes BankNeutral5.420.217.67.56.418.318.91.281.032.3
IHFL INIndiabulls Neutral4.35.812.27.56.721.619.81.401.265.4
Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse estimates。