The financials sector in Asia remains out of favour due to low levels of borrowing and the rising in...
The financials sector in Asia remains out of favour due to low levels of borrowing and the rising interest rate environment.
Britannic Asset Management is negative on the financials sector, as previously oversold stocks bounced back by around 15% in local currency terms in under 10 days. Financials account for 13% of the Britannic Pacific Growth portfolio, versus a 20% benchmark.
Diamond Lee, Far East fund manager at Britannic, says the main reason for this is that demand for credit in Asia has not yet significantly recovered following the crisis of 1997.
He says: "There is still over-capacity in many industrial sectors which means there is weak demand for credit, leading to a lack of loan growth."
The rising interest rate cycle in the US remains a concern and has also contributed to a lacklustre loan growth in the market. There are also more attractive growth opportunities elsewhere, for example in certain technology sectors where Britannic is focusing on electronic companies as beneficiaries of the global outsourcing trend.
Within the financial sector Lee concentrates on holding those banks with strong balance sheets. Among the banks Britannic holds are HSBC and the DBS Group in Singapore.
He says: "We like HSBC because it is a big cap stock which investors will buy when markets bounce. It is of international quality, with good management and plans to expand.
"We like the DBS group because it is restructuring and hired a new chief executive officer a year ago whose mandate is to squeeze more profits out of the company. It currently has far too much cash on its balance sheet and is aiming to deploy capital more efficiently."
He says valuations vary enormously within the region. Some Korean banks are trading at around half times book value, while HSBC is trading at three times book value. Some Malaysian banks are also more than three times book value which given their inferior quality relative to HSBC, suggests they are overvalued.
Heather Manners, Far East fund manager at Henderson Investors, is also negative on the financial sector, due to the low loan/deposit ratios.
She says: "These ratios have fallen to below 80% which is the lowest they've been in 10 years. Before the crisis they were well above 100%."
When borrowing does resume banks will have the liquidity and capacity to cater for increased demand. She agrees that there are varying degrees of value in banks throughout Asia. "In Hong Kong the banks aren't cheap by Asian standards but they are if compared to the west, trading on 2.5 times price to book ratios. In Korea, they are quite cheap, trading on 0.8% price to book."
Jonathan Harrison, fund manager at Cazenove, is also negative, based on the lack of lending and questions over quality. "There is little demand on the mortgage side and it is difficult to see this improving."
Harrison says while banks in Korea are cheap, the asset quality is questionable. Meanwhile, there are questions over Thai banks which claim to have restructured their bad loans, but Harrison says it seems they have merely put off claiming bad debts.
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