In a down-cycle, returns certainty is paramount
Banks are cyclical. The rising threat of recession could potentially tip ASEAN banks in to a growth down-cycle. While not the base-case, we downgrade the regional sector outlook to Neutral as uncertainty increases. In such a macro backdrop, we think banks that have solid track records of delivering the least volatile returns and the most consistent dividends plus the strongest balance sheets would outperform. Our screening shows MY, SG and ID banking sectors largely satisfy these factors. Top picks: HLBK, RHB, OCBC, DBS, BMRI.
M’sia, S’pore show the least volatile ops
To screen for stability thorough a cycle, we look at the standard deviation on return on assets of NII, Non-II and NPAT through the past 16-years across our coverage universe. Of the top-10 least volatile NII/assets generators, the MY banks feature prominently – esp. PBK, CIMB, RHB, Alliance. On the other end of the scale, the VN and TH banks tends to display significant volatility. In Non-II, the MY and SG banks (esp. DBS, UOB) display the least volatility despite undergoing the GFC and taper tantrum. This is likely supported by their focus on wealth management and limited proprietary trading exposure. Delivering returns through a cycle means dynamically managing provisions, so that negative asset quality surprises are minimized, while maximizing shareholder returns. We believe banks with the least divergent ROEs manage this best. SG ranks the best, while MY generates a 3.5ppt higher ROE for marginally higher volatility.
Region positioned for uncertainty
Balance sheet stability is equally important as earnings stability, in our view – especially as macro growth risks increase. We note that 2022E provisioning cover for NPLs are largely well above past historical highs regionally. ID and VN standout here with provisions 41-98ppts higher than in the past. Similarly, CAR levels are comparable to past cycle highs giving regional banks significant buffer to weather uncertainty.
Pick banks with the best visibility
While MIBG’s macro team expects regional 2022E policy rates to rise 50- 256bps YoY, NIMs are forecasted to rise 1bps-13bps YoY. This indicates significant upside surprise to margin revisions going forward, in our view. At the same time, we screen for banks that have delivered consistent DPS growth over the past decade. SG, ID and MY banks feature the most in the top-10 of strongest DPS growth CAGRs. We think increasing recession risks could heighten ROE volatility, especially for banks in higher growth markets. We appreciate that stronger balance sheets should offer some offset from downside risks. As a result, we lower our ASEAN banks outlook to NEUTRAL. In terms of preferred picks, we like to focus on banks that offer the least ROA volatility with the most dividend visibility. These include HKBK, RHB from rebounding PPOP and potential provisions write backs, OCBC and DBS from NIM upside due to low funding costs and improving North Asia outlook and BMRI from strong provisioning levels and recovering loan growth.