HSBC Global Emerging Markets EM Banks Jp
Transcript of HSBC Global Emerging Markets EM Banks Jp
EM
Ban
ks
By Olga Fedotova and Keerthi Angammana
Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns
Fundamentals are improving, supported by a traditional banking business model, fast economic
growth and favourable demographics
We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.
Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks
to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are
attractively priced but wait for better entry point
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Glo
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Olga FedotovaAnalystHSBC Bank plc+44 20 7992 [email protected]
Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible forresearch on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst coveringRussian, Kazakh and Ukrainian credits.
March
2011
EM BanksLights back on … but not for all
Global Emerging Markets – Credit Strategy
March 2011Keerthi Angammana, CFA
Analyst
HSBC Bank plc
+44 20 7991 5431
Keerthi Angammana is Head of Fixed Income Quantitative Research, based in London. Keerthi has worked at HSBC for three years, initially as a strategist
in Central and Eastern Europe rates and credit markets. Keerthi is a CFA charterholder.
Yi HuAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2996 [email protected]
Yi joined the Asia credit research team in February 2009, focusing on financial institutions. Yi came to HSBC in September 2007 after completing a Masters degree at the London School of Economics. At HSBC, she has worked in both equity research in Asia and with the credit research team in Europe.
Devendran Mahendran, CFAAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2822 [email protected]
Devendran joined HSBC in 2000 and has worked as a credit analyst since 1994. He started his career in 1991 at the Malaysian central bank where he spentthree years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.
Ksenia MishankinaAnalystHSBC Bank plc+44 20 7992 [email protected]
Ksenia joined HSBC EMEA credit team in June 2009. Prior to that, she has had one year of experience at a leading investment bank having joined on agraduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.
Pavel Simacek, CFAAnalystHSBC Bank plc+44 20 7992 [email protected]
Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerableexperience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analystdesignation and a member of the CFA Institute.
110310_28253 EM Banks (Credit) - Olga Fedotova_f:Layout 1 3/11/2011 3:51 AM Page 1
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The global financial crisis showed that EM banks were not immune to global events. However, in contrast to
their developed market counterparts, most EM banks, particularly those in Asia and Latin America, have
already shaken off the effect of the financial market dislocation. With a few exceptions, indications are that that
the worst is past for asset quality and liquidity problems. Strengthened regulation, reduced leverage and
increased focus on risk management have made EM banks more resilient to future risks in our view.
EM countries have almost three times the expected growth, over five times the population, but only half
the banking sector penetration of developed countries. This lays a firm foundation for healthy and
profitable growth for EM banks.
From a trading point of view, the strong rally since the crisis has taken away the bargains in EM credit.
Valuations are tight, even as risks from the developed world are rising, and bond supply is likely to reach
new highs this year (we estimate USD100bn, up from USD87bn last year). Therefore while we generally
recommend a cautious stance, we identify a number of relative value opportunities where we believe
credit spreads are either too high or too low relative to the underlying risks.
Key cross-regional trade ideas Quasi-sovereign Russian banks offer the best risk reward profile at the moment. The banks benefit from
improving fundamentals and a high oil price environment. Russian banks are likely to issue USD15bn in
debt, which is primarily refinancing. Russian bonds are slightly cheap relative to the ratings but, given an
expected sovereign upgrade by Fitch, they are a good value alternative to Asian and Brazilian banks. We
particularly see value in Bank of Moscow, which was recently acquired by state-owned VTB. The largest
private Russian bank Alfa Bank is a good entry point for investors who want to switch from pure quasi-
sovereign plays to a privately owned Russian financial institution.
Brazilian banks are some of the strongest banks discussed in this report, with well-developed regulation,
excellent growth prospects and healthy profitability. However their bonds are expensive, and with
USD20bn expected supply, their spread performance is likely to be constrained. We would switch out of
Summary
From a fundamental standpoint we favour the growth story of
Russian, Indian, and Brazilian banks
From a trading perspective we prefer Russian and Kazakh banks
while Brazilian bonds, and Asian names are relatively expensive
EM banks will continue to be the largest issuers in 2011 with
expected supply of up to USD100bn in 2011
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Keerthi Angammana Analyst HSBC Bank plc +44 207 991 5431 [email protected]
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Brazilian policy bank BNDES to Russian policy bank VTB or Bank of Moscow. We also would buy Itau over Brazil for a 150bp spread pick up and 1 notch in relative cheapness.
Indian banks represent the best opportunity in our view in Asia with no sign of a slowdown in the Indian economy, a highly underpenetrated market, and low dependence on external funding. However from a cross-regional prospective we prefer the oil-supported Russian economic recovery story and see more value in switching from Axis Bank to Bank of Moscow.
In Hong Kong we are cautious about asset quality because of banks’ aggressive expansion to China and recommend switching from subordinated debt of Hong Kong banks into senior bonds of quasi-sovereign banks either in Russian or Indian. Specifically, we prefer Bank of India over Bank of China Hong Kong.
Kazakh banks, BTA and Alliance have emerged from their restructuring with significantly reduced liabilities and with the government as owner. Both credits remain fundamentally weak on a standalone basis, but government support makes them the cheapest credits in the EM banking sector. We suggest switching into Kazakh banks from the more expensive Ukrainian banks which have yet to see a full turnaround of the financial sector. We prefer Alliance Bank to Alfa Ukraine.
Korean banks are deleveraging, but we estimate should still issue USD9bn in 2011. Korean policy banks such as Export Import Bank of Korea and Korea Development bank have among the tightest spreads in the region and are likely to remain frequent issuers. Similarly rated Middle Eastern banks could be the best alternative.
Directly affected by the ongoing unrest in the region, Middle Eastern banks are relatively the cheapest in the A-rated emerging-market universe, but we prefer to wait for better entry points.
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Summary 1
Trading Ideas 5
EM banks: strength lies in traditional business model 28
Relative value framework 58
Bank profiles 65
Asian banks 67
China banks 68 China Development Bank 70 Export Import Bank of China 71
Hong Kong Banks 72 BOC Hong Kong 74 Bank of East Asia 75 Citic Bank International 76 Dah Sing Banking Group 77 ICBC (Asia) 78 Wing Hang Bank 79
Indian Banks 80 Axis Bank 82 Bank of Baroda 83 Bank of India 84 ICICI Bank 85 State Bank of India 86
Korean Banks 88 Export-Import Bank of Korea 90 Korea Development Bank 91 Industrial Bank of Korea 92 Hana Bank 93 Kookmin Bank 94 Korea Exchange Bank 95 Shinhan Bank 96 Woori Bank 97
Singaporean Banks 98 DBS Bank 99 OCBC 100 United Overseas Bank 101 Bangkok Bank 102
EMEA banks 103
Kazakh banks 104 Alliance Bank 106 ATF Bank 107 BTA Bank 108 Development Bank of Kazakhstan 109 Eurasian Development Bank 110 Halyk Bank 111 Kazkommertsbank 112
Qatar banks 114 Commercial Bank of Qatar 116
Russian banks 118 Alfa Bank 120 Bank of Moscow 121 Gazprombank 122 Russian Agricultural Bank 123 Sberbank 124 Vnesheconombank 125 VTB 126
Saudi banks 128
UAE banks 130 Abu Dhabi Commercial Bank 132 Emirates NBD 133 National Bank of Abu Dhabi 134
Ukrainian banks 136 Alfa Bank Ukraine 138 Privatbank 139 Ukreximbank 140
LatAm banks 141
Brazilian banks 142 Banco do Brasil 146 BNDES 147 Bradesco 148 Itaú Unibanco 149 Votorantim 150
Appendix 151
Disclosure appendix 157
Disclaimer 164
Contents
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Financials still offer value even after the rally Emerging-market spreads have rallied since the
financial crisis, and the financial sector has
outperformed (Figure 1).
Fig 1. EM Sector performance, Feb 09-March 2011
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Source: Reuters, Bloomberg, HSBC calculations
The chart below plots the relative performance of
each emerging-market sector, expressed as their
richness or cheapness. It shows emerging-market
financials remain a leveraged play on sovereigns,
particularly given the links between them, which
were strengthened during the financial crisis. With
financials trading around 2 ½ rating notches, or
around 40% extra spread relative to comparably
rated sovereigns, we think this offers adequate
compensation for the down-side risk of around
two rating notches, on the assumption conditions
could revert to where they were in April 2009.
Fig 2 Sector richness/cheapness (measured in rating notches; negative numbers indicate richness), EMBI + CEMBI
-5.0
-4.0
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Source: Bloomberg, Reuters, HSBC Calculations
Trading Ideas
Emerging-market financial-sector external debt still offers
fundamental value and a way to reduce duration as a hedge
against rising developed-market rates, while still maintaining carry
We have concluded that Russia banks represent superior value
when compared with their peers in Brazil and India
We also prefer Kazakh credits over Ukraine as they are well
positioned to benefit from high oil prices
For investors committed to Asia we see more potential in Indian
senior debt than subdebt of Hong Kong banks
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Keerthi Angammana Analyst HSBC Bank plc +44 207 991 5431 [email protected]
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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The fundamentals of emerging-market banks are
improving across the board: the banks have
benefited from strengthening economies, while
their bonds are supported by a combination of
QE2, limited fixed-income investment
opportunities in developed countries, and a
structural shift in investor preferences towards
emerging markets. The IIF forecasts net private
credit inflows of USD388bn in 2011 and
USD394bn in 2012, up from USD127bn in 2009.
However, unrest in the Middle East and the
continuing Eurozone debt distress complicate the
picture. The chart above shows the evolution of
the relative richness/cheapness of the
regions considered.
Fig 3. Regional richness/cheapness (in rating notches; negative numbers indicate richness)
-1.5-1.0-0.50.00.51.01.52.0
Feb-
09
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-09
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-10
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Rich
/Che
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Asia EE LatAm MidEast
-1.5-1.0-0.50.00.51.01.52.0
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Rich
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Asia EE LatAm MidEast
Source: Reuters, Bloomberg, HSBC Calculations
Another source of risk for the global financial
markets are expected rate hikes in developed
markets.
The USD100bn of new supply expected from
emerging-market financial-sector issuers this year,
with Brazilian, Indian, Russia and Korean banks
leading the pack, is likely to be front-loaded to take
advantage of still-low developed-market rates.
With an ECB rate hike widely expected in April
and US QE2 unlikely to be extended beyond the
2Q 2011, March does not appear to be the best
month to enter emerging market credits (see our
Fixed Income Allocation, March 2011). But given
fundamental credit stories that are unlikely to be
derailed by rate hikes, emerging-market credit
spreads offer an interesting way to reduce
duration while maintaining carry. We recommend
a cautious stance for the coming months and
switching out of long-dated and subordinated
paper into shorter-duration senior instruments.
Fig 4. EM financial spreads and US 10yr, Feb ‘08-Mar ‘11
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1600
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p)
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10y
r Y
ield
EM Financials US 10yr
Source: Reuters, Bloomberg, HSBC Calculations
We also see a number of trades that allow
investors to benefit from relative value
opportunities across regions and position in the
capital structure.
Most emerging-market banks in our universe are
expensive relative to their historical performance
and their ratings, and with rate hikes expected, the
possibility of overshoot on the downside exists.
Supply will also put pressure on spreads, so that
we look for banks with digestible net supply and
strong deposit funding.
Cross-regional trade recommendation Switch into Russian banks from Brazilian
Brazilian banks are some of the strongest
discussed in this report, with well-developed
regulation, excellent growth prospects and healthy
profitability. However, they are also expensive,
following out-performance by the sovereign, and
are likely to be the largest net issuers of external
debt among emerging-market banks. We estimate
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Brazilian banks will be one of the largest net
borrowers this year with potential external bond
supply around USD20bn.
We recommend switching from Brazil into
comparably rated Russian banks. Russia suffered
during the financial crisis, but the sector has
recovered well and the sovereign-linked credit,
such as VTB and Bank of Moscow, offer a
superior return. The rapidly improving
macroeconomic environment is likely to result in
an upgrade by the major rating agencies providing
further support to the mostly quasi-sovereign
banks in our Russian universe of banks. The oil-
exporting country is experiencing strong cash
inflows with banks mediating the process. The
abundance of liquidity in the banking system will
fuel expansion in financial services and thus
provide uplift to the domestic banks. All these
positive developments lead us to favour Russian
banks over their peers in Brazil.
We suggest switching out of Brazilian policy bank
BNDES (Baa2/BBB-/BBB-) 19, indicative OAS
199bp, to Russian state-owned bank VTB
(Baa1/BBB/BBB) 18, 338bp, to pick up 140bp, or
to BKMOSC (Baa2/NR/BBB-) to pick up 150bp.
Both BNDES and VTB are likely to be frequent
issuers with VTB planning USD4.3bn this year, and
BNDES issuance is likely to be driven by ambitious
infrastructure projects in Brazil.
Fig 7. VTB vs BNDES OAS, Oct 2010-Mar 2011
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500
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-10
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-11
OAS
(bp)
050100150200250300
Diff
(bp)
VTB 18 BNDES 19 Diff
Source Reuters, Bloomberg, HSBC Calculations
The relative value chart below shows that even
though VTB has rallied relative to BNDES,
around three notches of cheapness are still left
after adjusting for regional differences.
Switch into Russian banks out of Indian banks
We prefer Russian banks because the financial sector
benefits from ample liquidity provided by high oil
prices and government support. A fundamental
recovery is underway in the banking sector, with
non-performing loans falling. Indian banks are also
benefiting from strong growth, albeit from a low
base, but increasing corporate demand for US dollars
could lead to net supply risk.
Switch out of SBIIN 15 (Baa2/BBB-/NR, 228bp
OAS) into BKMOSC Mar 15 (Baa2/NR/BBB- /*,
349bp) to pick up 120bp (Fig 7-1)
Fig 7-1. SBIIN vs BKMOSC OAS, Oct 210-Mar 2011
-400
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SBIIN 15 BKMOSC 15 Diff
Source: Bloomberg
In non-investment grade, switch into CIS government-linked senior from Asian subordinated
We believe that switching to similarly rated CIS
senior bonds from Asian subordinated paper
would allow investors to improve their position in
the capital structure while picking up spread and
reducing duration. CIS names, particularly Russia
and Kazakhstan, are likely to benefit from
sovereign-rating upgrades and are supported by
better margins, an equally attractive growth story
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and strong internal liquidity on the back of oil
export revenues.
We suggest moving out of CINDBK 20 LT2
(Ba1/NR/BBB-, 320bp OAS), into senior state-
linked VTB 18 ( Baa1/BBB /*-/BBB, 338bp)
In Asia switch from subordinated debt of Hong Kong banks into Indian or Russian senior bonds
Both Indian and Hong Kong banks are seeing
strong growth. The main driver for Hong Kong
banks, however, is expansion into China, often at
the expense of profitability and credit quality.
Indian banks enjoy underpenetrated domestic
market with emerging credit demand, both from
retail and corporates, resulting in stronger
profitability and more healthy growth.
We suggest switching from BCHINA 20
(A1/BBB+/A-, 208bp OAS), into BOIIN 21
(Baa3/BB/NR, 288bp OAS), to pick up spread,
hedge against rapid expansion into China and
participate in Indian growth.
Indian banks benefit from a stable funding base,
the potential for healthy growth as a result of an
under-leveraged population and adequate
capitalization. They will be frequent issuers this
year, but we believe there will be adequate
appetite for this issuance, since the banks are still
new to the market.
We also like Indian ICICI 20 (Baa2/BBB-/NR,
287bp), but the bank has USD3bn to refinance in
2012 and is likely to come to the market in 2011, so
we would recommend waiting for the new issue.
Fig 9. BOOIN vs BCHINA, Oct 2010-Mar 2011
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BOIIN 15 BCHINA 20 Diff
Source Reuters, Bloomberg, HSBC Calculations
We also prefer senior debt of Russian banks over
subordinated debt of Hong Kong banks. We are
concerned about Hong Kong bank's high exposure
to China's market and real estate in the US.
Therefore we recommend switching out of
BNKEA 20 (A3/BBB+/NR, 252bp OAS) to VTB
18 (Baa1/BBB /*-/BBB, 338bp OAS), Russia’s
second largest bank) to upgrade seniority of the
debt, get exposure to improving Russian oil
driven macro environment and pick up 87bp. Sell
ICBCAS 20 subordinated (A3/NR/BBB+, 197bp)
to buy SBERRU 17 (A3/NR/BBB, 253bp), the
largest bank in Russia, to hedge against concerns
about fast growth into China and pick up 60bp.
We conclude that Russia quasi sovereign banks
represent a good in cross regional comparison.
The Russian story looks favourable to us and we
Fig 8. VTB vs BNDES Relative Value, Oct 2010-Mar 2011
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VTB 18 BNDES 19 Diff
Source Reuters, Bloomberg, HSBC calculations
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would feel comfortable venturing out into private
universe where our top peak is Alfa Bank.
Buy Kazakh banks as cheapest quasi-sovereign credits in EM
ALLIBK and BTAS have emerged from their
restructuring with significantly reduced liabilities
and with the Kazakh government as their owner.
Both credits are fundamentally weak on a stand-
alone basis with high NPLs and low capitalization,
and weak profitability. Hence we initiate longer-
term fundamental Underweight recommendations
on these two banks in this report.
However the banks have received a credit uplift
from government ownership, and now represent
one of the cheapest EM credits providing high
carry and adequate risk/reward short term, in our
view. It is important to highlight that ALLIBK
will start repayment of its sinkable bonds only in
2014, lightening its immediate repayment burden.
As a trading call, therefore, we advocate buy
ALLIBK 17 (Caa2/B-/B-, 991bp OAS) and BTAS
18 (NR/NR/B-, 798bp).
The positive macroeconomic environment in
Kazakhstan provides additional support for this
buy trading call.
In CIS, switch from Ukraine into Kazakhstan
Banks in Ukraine are generally expensive relative
to its rating and its beta, and the country has yet to
see a full turnaround of the financial sector.
Kazakh banks benefit from an improving macro-
economic and operating environment as a result of
strengthening oil prices, which is likely to lead to
a sovereign upgrade. We expect limited supply
from the region, and for investors interested in
participating in single B credits, we suggest
switching from Ukrainian state-owned EXIMUK
15 (B1/NA/B, 565bp OAS) to Kazakh state-
owned BTAS 18 (B-/NA/NA, 798bp OAS), or
ALLIBK 17 (Caa2/B-/B-, 991bp OAS).
We expect a total of USD18bn supply to come
from the CIS region, with USD15bn of external
debt from Russian banks. Neither Ukrainian nor
Kazakh banks are likely to be heavy issuers.
Fig 10. OAS vs historical beta for financial sector, 1 March 2011
UKR
THA
SGP
SAU
RUSQAT
KOR
KAZ
IND
HKG
CHN
BRAARE
y = 47.465x + 194.18R2 = 0.6687
0
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Beta Relative to EMBI
Spre
ad (
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THA
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SAU
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KOR
KAZ
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HKG
CHN
BRAARE
y = 47.465x + 194.18R2 = 0.6687
0
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Beta Relative to EMBI
Spre
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Source: Reuters, Bloomberg, HSBC Calculations
Figure 10A shows the richness (negative
numbers) and cheapness of selected countries
relative to the HSBC Forecast Adjusted Rating
model (see Emerging sovereigns: A new tool for
identifying opportunities in sovereign CDS,
January 2010).
Fig 10A Relative richness/cheapness of selected countries expressed in rating notches (negative numbers indicate richness)
Country Rich/Cheap Country Rich/CheapBrazil -3.0 Russia -1.7China 1.8 Saudi Arabia 2.0Hong Kong -1.7 Singapore N/AIndia 0.2 Thailand -0.9Kazakhstan 0.6 Ukraine -0.4Korea 1.3 UAE 3.5Qatar 4.7 Source: HSBC Calculations
Switch to EURDEV (A3/NR/BBB) from Russia 15 (Baa1/BBB/BBB)
EURDEV is majority-owned by the Russian and
Kazakh governments, which translates into strong
support in case of need. The bank enjoys high
capitalisation (65% of total assets), which means it is
well-positioned for further growth. Even though
EURDEV could raise up to USD1bn this year, that
could be absorbed by investors and should increase
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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liquidity for the bonds. Switching from RUSSIA 15
(Baa1/BBB/BBB, 159bp) to EURDEV 14
(A3/BBB/NR, 297bp) offers a spread pick-up of
138bp, cheapness to ratings, and substantially the
same credit risk. Figure 11 shows the spread
difference between EURDEV 14 and Russia 15.
Fig 11. EURDEV 14 vs Russia 15, Oct 2010-Mar 2011
100
200
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400
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(bp)
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EURDEV 14 RUSSIA 15 Diff
Source: Bloomberg, Reuters, HSBC Calculations
Figure 12 shows the relative value between the two
names expressed in rating notches. Even though the
spread has tightened recently, EURDEV 14s still
offer about two notches of cheapness.
Fig 12 Model richness/cheapness of EURDEV vs Russia 15 (richness is represented by negative numbers)
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EURDEV 14 RUSSIA 15 Diff
Source: Reuters, Bloomberg, HSBC Calculations
GCC banks cheap, but wait for better entry point
Directly affected by the ongoing unrest in the region,
the Middle Eastern banks are relatively the cheapest
in the A-rated emerging-market universe. However,
after adjusting for the regional cheapness of the
Middle East relative to Asia because of its
political instability, we find them not quite as
cheap as spreads alone would indicate. So even if
we like switching out of, for example, Korean
banks from a relative-value standpoint, we would
look for a better entry point.
The issuance risk is lower for Abu Dhabi banks
(USD6bn in 2011) compared with Korean policy
banks, where we expect wholesale-focused Korean
banks in this report to issue USD9bn this year.
Abu Dhabi is a compelling credit story with a
cash-rich government (supported by an oil-driven
economy) which has in the past demonstrated a
strong commitment to the banking sector.
However, banks there suffer from constrained net-
interest margins and limited growth prospects
because of its relatively small population. But
they are well-capitalised and enjoy improving
liquidity from rising oil prices, while government
support makes their credit closely linked to that of
the government.
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Relative value charts, 7 March 2011
OAS vs rating, A-rated or better, 5+yrs, 7 March 2011
Maturity 5+ years
ICBCAS 20 sub
EIBKOR 21 EIBKOR 20
BNKEA 20 LT2
BCHINA 20 LT2
BBB+A-AA+AA-AAAA+AAA
C OMQAT 19 LT2
100
150
200
250
300
350
OAS
(bp)
Asia MiddleEast
Maturity 5+ years
ICBCAS 20 sub
EIBKOR 21 EIBKOR 20
BNKEA 20 LT2
BCHINA 20 LT2
BBB+A-AA+AA-AAAA+AAA
C OMQAT 19 LT2
100
150
200
250
300
350
OAS
(bp)
Asia MiddleEast
Source: Bloomberg, Reuters, HSBC Calculations
OAS vs rating, A-rated or better, 0-5yrs, 7 March 2011
Maturity 0 to 5 years
WOORIB 16
WOORIB 15
WOORIB 15 LT2
WOORIB 15 UOBSP 13 UT2
SHNH AN 15
SDBC 15 SDBC 14
KEB 16
KDB 16 KDB 15 KDB 14
KDB 13
INDKOR 15
INDKOR 14
HANABK 15
EXIMCH 15 EXIMCH 14
EIBKOR 15
EIBKOR 14 EIBKOR 13
D BSSP 15
CITNAT 14
BBB+A-AA+AA-AAAA+AAA
BRADES 13 sub
BAN BRA 14 sub
SABBAB 15 NBADUH 15 NBADUH 14
COMQAT 14
ADCB 14
50
100
150
200
250
300
350
OAS
(bp)
Asia LatAm MiddleEast
Maturity 0 to 5 years
WOORIB 16
WOORIB 15
WOORIB 15 LT2
WOORIB 15 UOBSP 13 UT2
SHNH AN 15
SDBC 15 SDBC 14
KEB 16
KDB 16 KDB 15 KDB 14
KDB 13
INDKOR 15
INDKOR 14
HANABK 15
EXIMCH 15 EXIMCH 14
EIBKOR 15
EIBKOR 14 EIBKOR 13
D BSSP 15
CITNAT 14
BBB+A-AA+AA-AAAA+AAA
BRADES 13 sub
BAN BRA 14 sub
SABBAB 15 NBADUH 15 NBADUH 14
COMQAT 14
ADCB 14
50
100
150
200
250
300
350
OAS
(bp)
Asia LatAm MiddleEast
Source: Bloomberg, Reuters, HSBC Calculations
12
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
OAS vs rating, BBB rated, 0-5 yrs, 7 March 2011 Maturity 0 to 5 years
SBIIN 15 SBIIN 14
ICICI 16 ICICI 15
BOIIN 15
BOBIN 15
BBLTB 15
AXSBIN 15
BB+BBB-BBBBBB+A-
VTB 15 UT2
VTB 15
SBERRU 15
SBERRU 13
SBERRU 13
RSHB 14 RSHB 14
RSHB 13 DBKAZ 15
BKMOSC 15
BKMOSC 13
BRADES 15
BRADES 13
BANVOR 13
BANBRA 15
100
150
200
250
300
350
400
OAS
(bp)
Asia EE LatAm
Maturity 0 to 5 years
SBIIN 15 SBIIN 14
ICICI 16 ICICI 15
BOIIN 15
BOBIN 15
BBLTB 15
AXSBIN 15
BB+BBB-BBBBBB+A-
VTB 15 UT2
VTB 15
SBERRU 15
SBERRU 13
SBERRU 13
RSHB 14 RSHB 14
RSHB 13 DBKAZ 15
BKMOSC 15
BKMOSC 13
BRADES 15
BRADES 13
BANVOR 13
BANBRA 15
100
150
200
250
300
350
400
OAS
(bp)
Asia EE LatAm
Source: Bloomberg, Reuters, HSBC Calculations
OAS vs rating, BBB-rated, 5+ years, 7 March 2011
Maturity 5+ years
ICICI 20 UT2
ICICI 20 DAHSIN 20 LT2
CINDBK 20 LT2BBLTB 29 sub
BBLTB 20
AXSBIN 16
BB+BBB-BBBBBB+A-
VTB 35 VTB 20
VTB 18
VEBBNK 25
VEBBNK 20 VEBBNK 17
SBERRU 17
RSHB 18 RSHB 17
GPBRU 16
ITAU 20 sub
BRADES 21 subBRADES 21 sub
BRADES 19 sub
BNDES 20
BNDES 19
BNDES 18
BANVOR 20 sub
BANBRA 21 LT2
BANBRA 20
100
150
200
250
300
350
400
OAS
(bp)
Asia EE LatAm
Maturity 5+ years
ICICI 20 UT2
ICICI 20 DAHSIN 20 LT2
CINDBK 20 LT2BBLTB 29 sub
BBLTB 20
AXSBIN 16
BB+BBB-BBBBBB+A-
VTB 35 VTB 20
VTB 18
VEBBNK 25
VEBBNK 20 VEBBNK 17
SBERRU 17
RSHB 18 RSHB 17
GPBRU 16
ITAU 20 sub
BRADES 21 subBRADES 21 sub
BRADES 19 sub
BNDES 20
BNDES 19
BNDES 18
BANVOR 20 sub
BANBRA 21 LT2
BANBRA 20
100
150
200
250
300
350
400
OAS
(bp)
Asia EE LatAm
Source: Bloomberg, Reuters, HSBC Calculations
13
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
OAS vs rating, Non-investment grade, 0-5 years, 7 March 2011
Maturity 0 to 5 years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 15
PROMBK 13
PRBANK 15 KKB 13
HSBKKZ 13 HSBKKZ 13
GPBRU 15 GPBRU 14
GPBRU 13
EXIMUK 16 LT2
EXIMUK 15
BKMOSC 15 LT2
BCCRD 14
ATFBP 14
ALFARU 15 ALFARU 13
200
300
400
500
600
700
800
OAS
(bp)
EE
Maturity 0 to 5 years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 15
PROMBK 13
PRBANK 15 KKB 13
HSBKKZ 13 HSBKKZ 13
GPBRU 15 GPBRU 14
GPBRU 13
EXIMUK 16 LT2
EXIMUK 15
BKMOSC 15 LT2
BCCRD 14
ATFBP 14
ALFARU 15 ALFARU 13
200
300
400
500
600
700
800
OAS
(bp)
EE
Source: Bloomberg, Reuters, HSBC Calculations
OAS vs rating, non-investment grade, 5+ years, 7 March 2011
Maturity 5+ years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 16 UT2KKB 16
HSBKKZ 17
BTAS 25 sub
BTAS 18
ATFBP 16
ALLIBK 17
0
100
200
300
400
500
600
700
800
900
1000
OAS
(bp)
EE
Maturity 5+ years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 16 UT2KKB 16
HSBKKZ 17
BTAS 25 sub
BTAS 18
ATFBP 16
ALLIBK 17
0
100
200
300
400
500
600
700
800
900
1000
OAS
(bp)
EE
Source: Bloomberg, Reuters, HSBC Calculations
14
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Rchp vs rating, A-rated, 0-5yrs, 7 March 2011
Maturity 0 to 5 years
WOORIB 16 WOORIB 15
WOORIB 15
SDBC 15
SDBC 14
KDB 16
KDB 15 KDB 14
KDB 13
INDKOR 15 INDKOR 14
EXIMCH 15
EXIMCH 14
EIBKOR 15
EIBKOR 14 EIBKOR 13
C ITNAT 14
BBB+A-AA+AA-AAAA+AAA
BANBRA 14 sub
SABBAB 15
NBADUH 15 NBADUH 14
COMQAT 14 ADCB 14
-2
-1
0
1
2
3
4
5
Rich
/Che
ap
Asia LatAm MiddleEast
Maturity 0 to 5 years
WOORIB 16 WOORIB 15
WOORIB 15
SDBC 15
SDBC 14
KDB 16
KDB 15 KDB 14
KDB 13
INDKOR 15 INDKOR 14
EXIMCH 15
EXIMCH 14
EIBKOR 15
EIBKOR 14 EIBKOR 13
C ITNAT 14
BBB+A-AA+AA-AAAA+AAA
BANBRA 14 sub
SABBAB 15
NBADUH 15 NBADUH 14
COMQAT 14 ADCB 14
-2
-1
0
1
2
3
4
5
Rich
/Che
ap
Asia LatAm MiddleEast
Source: Bloomberg, Reuters, HSBC Calculations
Rchp vs rating, A-rated 5+yrs, 7 March 2011
Maturity 5+ years
ICBCAS 20 sub
EIBKOR 21
EIBKOR 20 EIBKOR 16
BCHINA 20 LT2
BBB+A-AA+AA-AAAA+AAA
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Rich
/Che
ap
Asia
Maturity 5+ years
ICBCAS 20 sub
EIBKOR 21
EIBKOR 20 EIBKOR 16
BCHINA 20 LT2
BBB+A-AA+AA-AAAA+AAA
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Rich
/Che
ap
Asia
Source: Bloomberg, Reuters, HSBC Calculations
15
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Rchp vs rating, BBB-rated, 0-5yrs, 7 March 2011
Maturity 0 to 5 years
SBIIN 14
ICICI 16
ICICI 15
BBLTB 15 AXSBIN 15
BB+BBB-BBBBBB+A-
VTB 15 UT2VTB 15
SBERRU 15
SBERRU 13
SBERRU 13
RSHB 14
RSHB 14
RSHB 13
DBKAZ 15
BKMOSC 15
BKMOSC 13
BRADES 15
BRADES 13
BANBRA 15
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Rich
/Che
ap
Asia EE LatAm
Maturity 0 to 5 years
SBIIN 14
ICICI 16
ICICI 15
BBLTB 15 AXSBIN 15
BB+BBB-BBBBBB+A-
VTB 15 UT2VTB 15
SBERRU 15
SBERRU 13
SBERRU 13
RSHB 14
RSHB 14
RSHB 13
DBKAZ 15
BKMOSC 15
BKMOSC 13
BRADES 15
BRADES 13
BANBRA 15
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Rich
/Che
ap
Asia EE LatAm
Source: Bloomberg, Reuters, HSBC Calculations
Rchp vs rating, BBB-rated, 5+ years, 7 March 2011
Maturity 5+ years
ICICI 20
DAHSIN 20 LT2BBLTB 20
BB+BBB-BBBBBB+A-
VTB 20
VTB 18
SBERRU 17
RSHB 17
GPBRU 16
ITAU 20 sub
BRADES 19 sub
BNDES 20 BNDES 19
BANVOR 20 sub
BANBRA 20
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Rich
/Che
ap
Asia EE LatAm
Maturity 5+ years
ICICI 20
DAHSIN 20 LT2BBLTB 20
BB+BBB-BBBBBB+A-
VTB 20
VTB 18
SBERRU 17
RSHB 17
GPBRU 16
ITAU 20 sub
BRADES 19 sub
BNDES 20 BNDES 19
BANVOR 20 sub
BANBRA 20
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
Rich
/Che
ap
Asia EE LatAm
Source: Bloomberg, Reuters, HSBC Calculations
16
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Rchp vs rating, non-investment grade, 0-5 years, 7 March 2011
Maturity 0 to 5 years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 15 PROMBK 13
KKB 13 H SBKKZ 13
HSBKKZ 13
GPBRU 15
GPBRU 14
GPBRU 13
EXIMUK 16 LT2
EXIMUK 15
BCCRD 14
ATFBP 14
ALFARU 15 ALFARU 13
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
Rich
/Che
ap
EE
Maturity 0 to 5 years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
PROMBK 15 PROMBK 13
KKB 13 H SBKKZ 13
HSBKKZ 13
GPBRU 15
GPBRU 14
GPBRU 13
EXIMUK 16 LT2
EXIMUK 15
BCCRD 14
ATFBP 14
ALFARU 15 ALFARU 13
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
Rich
/Che
ap
EE
Source: Bloomberg, Reuters, HSBC Calculations
Rchp vs rating, non-investment grade, 5+ years, 7 March 2011
Maturity 5+ years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
HSBKKZ 17
BTAS 25 sub
ATFBP 16
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
Rich
/Che
ap
EE
Maturity 5+ years
CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-
HSBKKZ 17
BTAS 25 sub
ATFBP 16
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
Rich
/Che
ap
EE
Source: Bloomberg, Reuters, HSBC Calculations
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cTrade recommendations Asian Banks: total expected supply for the region USD26bn Chinese Banks: total expected supply is very low
Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading Ideas
China Development Bank A+ St /Aa3 Pos /AA- St Extremely high Neutral Very low Moody's positive outlook is likely to be resolved
in 3Q 2011. Given the bank's special ministerial status, 100% state ownership and crucial policy role.
Credit profile is linked closely to the sovereign given the ownership and role it plays in China’s economy. Potential adverse exposure to LGFVs could weigh on asset quality and the bank’s capital structure going forward.
Mostly funded by internal bonds, which are 0%-risk weighted.
SDBC 14 (Aa3/AA-/A+, 145bp) and SDBC 15 (Aa3/AA-/A+, 135bp) trade slightly rich to their rating and to the Asian Financial sector. Asset quality concerns should constrain bonds’ outperformance in the future.
Export-Import Bank (China) A+ St /Aa3 Pos /AA- St Extremely high Neutral Very Low Moody's positive outlook is likely to be resolved
in 3Q 2011. 100% state owned. CEXIM plays an important policy role of
promoting trade and its credit profile is inextricably linked to the China sovereign.
Unlikely to use external debt. EXIMCH 14 (Aa3/Aa-/A+, 122bp) and EXIMCH 15 (Aa3/Aa-/A+, 127bp) are likely to continue their stable performance trading rich to the Asian banking sector.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cHong Kong Banks: total expected supply USD4bn
Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading Ideas
BOC Hong Kong A St /Aa3 St /A- Pos Very high Neutral Low S&P's positive outlook is likely to
be resolved in 2Q 2011. Strong domestic franchise and its credit
profile, underpinned by the strength of its parent, Bank of China, majority owned by the government of China.
Limited issue due to pressure to constraint loan growth.
Sell: BCHINA 20 LT2 (A1/BBB+/A-, 208bp) Buy: SBERRU 17 (A3/NR/BBB, 253bp) to pick up 45bp, move up in the capital structure and capitalise on the improving macro environment in potential Upgrade of Russia' sovereign by Fitch. Buy Indian BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp) would pick up 80bp and hedge against rapid expansion into China.
Bank of East Asia NR /A2 St /A- St Moderate Underweight Low Weak profitability and strong credit growth
will put pressure on the bank's capital. Exposure to real estate in China could weigh on asset quality.
Strong deposit base, no bonds maturing in the next 2 years.
Sell: BNKEA 20 (A3/BBB+/NR,252bp) We are concerned about the bank's high exposure to China's market and real estate property in the US. Buy: VTB 18 (Baa1/BBB *-/BBB, 338bp) to pick up 85bp, to improve seniority of the debt and get exposure to improving Russian oil-driven macro environment.
Citic Bank International BBB+ St/Baa2 St/NR Moderate Neutral Low Strong capital structure and favourable
business cycle in Hong Kong. Concentration risk to China corporates is a potential concern. Majority shareholding by China Citic Bank is a positive for CBI.
Strong deposit base, no maturities in 2011-12.
Sell: CINDBK ’20 LT2 (Baa3/NR/BBB,320bp) Buy Russian state owned VTB 18 (Baa1/BBB *-/BBB, 338bp) to improve rating and seniority of the bond, even though the spread between two bonds are historically tight at 20bp.
Dah Sing Bank A- St /A3 St /BBB+ St Moderate Neutral Low Owing to the small size (1% of banking
sector assets). Growth in lending into China is a potential source of asset quality risk but the cyclical strength of the economies of Hong Kong and China will allow the bank to preserve its rating profile in 2011.
Strong deposit base and limited maturities in 2011-12.
All DAHSIN bonds are small in size and relatively illiquid.
ICBC (Asia) A- Rating watch on/A2 ST/NR High Neutral Medium The largest bank in China. Strong potential support from the parent,
however the bank's standalone profile will likely slip in 2011 on account of strong loan growth placing pressure on the capital structure and funding.
Limited retail deposits combined with loan demand may put pressure on funding.
Sell ICBCAS 20 (A3/NR/BBB+, 197bp) subordinated Buy SBERRU 17 (A3/NR/BBB, 253bp), the largest bank in Russia, to hedge against concerns about fast growth into China and pick up 60bp. Sell: ICBAS 20 (A3/NR/BBB+, 197bp) Buy BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp)
Wing Hang Bank A- St /A2 St /NR Moderate Neutral Medium Limited size of the bank, although some
support could come from other shareholders – Fung family and BONY.
Strong capitalisation but balance sheet has become less liquid as it pushes for earnings growth. Strong sector concentration of loans but the strength of underlying economies should ensure stability of credit profile.
Deposit growth does not keep pace with loan expansion and high balance sheet employment could put pressure on funding.
Perpetual WINHAN ‘49-17c and WINHAN ’49-13c are relatively illiquid.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations Asian Banks (cont’d) Indian Banks: total expected supply USD7bn
Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading ideas
Axis Bank BBB- St /Baa2 St /BBB- St Moderate Neutral Medium Owing to the bank's 3% share in Indian
banking industry deposits. Concern over the bank’s rapid balance sheet expansion is offset by demonstrated profitability and India’s favourable macro outlook.
Rapid growth in international operations suggests higher USD debt supply risk. EUR2bn medium-term note (MTN) programme.
Sell: AXSBIN 16 (Baa2/BBB-/BR, 288bp) Buy:BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 61bp and benefit from the recent acquisition Bank of Moscow by the state champion VTB Prefer Russian banks to Indian banks even though spreads seem fair after adjusting for regional differences. Even though India's GDP is likely to grow at a higher rate than Russia's, the near to medium-term prospects of the banks in India will be constrained by a much lower per capita GDP and level of industrialisation. O&G economies likely to support banking sector growth. We recommend switching.
Bank of Baroda BBB- St /Baa2 St /BBB- St High Neutral Low-Medium Given majority state ownership. Rapid credit growth could potentially
translate into asset quality concerns down the road. Nevertheless its credit profile is underpinned by the government's majority stake in the bank.
Strong funding position with healthy loan/deposit ratio.
Sell BOBIN 15 (Baa2/NR/BBB-, 269bp) Buy: similarly rated Russian state owned BKMOSC Mar 15 (Baa2/NR/BBB-, 349bp) to pick up 80bp.
Bank of India NR /Baa2 St /BBB- St High Neutral Medium On the back of majority state ownership. Credit metrics are showing strains from
rapid growth, however credit profile will remain stable against the backdrop of a favourable macro environment.
Strong deposit funding, however some USD800m of maturing bonds in 2011-12.
Sell BOIIN Oct 15 (Baa2/BBB-/NR, 252bp) Buy: a similarly rated Russian state owned of BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 97bp. Within the region Sell: ICBCAS 20 (A3/NR/BBB+, 197bp) Buy: BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp) to pick up 91bp, or BCHINA 20 (A1/BBB+/A-, 208bp) to pick up 80bp and hedge against rapid expansion into China.
ICICI Bank Ltd BBB- St /Baa2 St /BBB- St High Neutral High Given the bank is the 2nd largest by
deposits and assets. The bank remains profitable compared to peers and the macro environment remains favourable.
Risk of fresh USD supply due to expected growth and USD3bn in redemptions by 2012.
Potential supply of new bonds to refinance USD3bn in 2012 should constrain further bond performance. Bonds fairly priced.
State Bank of India BBB- St /Baa2 St /BBB- St High Neutral Low-medium Crucial to Indian economy since it is the
largest bank. Also it is majority state owned (59.4%).
Strong recent credit growth raises concerns on asset quality, however the macro backdrop remains favourable and majority state ownership supports credit.
USD800m of maturities before 2012, however strong deposit funding (almost a quarter of the country's total) provides a solid base.
Sell: state owned Indian SBIIN 14 (Baa2/BBB-/BBB-,222bp) Buy: Kazakh bank HSBKKZ 17 (Ba3/B+/B+,427bp) to pick up 205bp.
Sell SBIIN 15 (Baa2/BBB-/NR,228bp), to BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 121bp.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations Asian Banks (cont’d) Korean Banks: total expected supply USD9bn
Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading ideas
Export-Import Bank of Korea A+ St /A1 St /A St Strong Neutral High Quasi-sovereign status. The level of government support is
viewed favourably and should ensure that the ratings move in tandem with the sovereign.
Total foreign currency funding needs in 2011 are expected to be in the region of USD7-8bn.
Sell: EIBKOR 8.125% 14 (A1/A/A+,177bp) is relatively expensive and is likely to be a frequent issuer in the medium term.
Hana Bank A- St /A1 Possible upgrade /A- Watch Neg
High Neutral Medium-High
S&P's watch negative outlook is likely to be resolved in 1Q 2011.
Owing to a track record of government support and systemic importance
Acquisition of 51% stake in KEB from Lone Star Funds for (USD4.1bn) creates uncertainty.
Almost USD2bn of redemptions by through 2012 combined with need to fund acquisition
Buy: senior debt of BKMOSC Mar 15 (Baa2/NR/BBB-,320bp Z-sprd) to pick up 59bp Sell: subordinated HANABK 16 (A2/BBB+/BBB+, 261bp Z-sprd) Potential USD bond supply should undermine future performance of HANA bonds.
Industrial Bank of Korea A+ St /A1 St /A St High Neutral Low Owing to substantial market share in the
SME lending market. Recent results show stability in IBK's credit profile and expect its ratings to remain stable over the next year.
Only USD500m of maturities in 2011. More cautious approach to FX lending would further limit borrowing needs.
Fairly priced
Kookmin Bank A- St /A1 St /A St High Neutral Medium Owing to a track record of government
support and systemic importance. Greater focus on internal controls and trimming costs ahead of acquisitive growth. We expect improvement in asset quality going forward.
Limited redemptions of USD1.2bn in 2011-12 although BCC subsidiary in Kazakhstan may require more funding.
Fairly priced. Supply might constrain bond performance
Korea Development Bank A+ St /A1 St /A Neg High Neutral Medium Given the solvency guarantee, state
ownership and systemic importance. Credit profile is closely linked to that of the sovereign.
Bank likely to be a multiple issuer as USD1.7bn of bonds are maturing in 2011-12.
Fairly priced. Supply might constrain bond performance
Korea Exchange Bank A- St /A2 possible upgrade /BBB+ St Extremely high Neutral Low Given its unique role as one of the key
banks in trade facilitation and foreign currency operations.
Acquisition by Hana Financial Group will benefit credit profile, while the bank’s stand alone credit metrics compare well against peers.
Limited USD300m in redemptions in 2012, combined with solid deposit base.
Fairly priced
Shinhan Bank A Neg /A1 St /A- St High Neutral Low-Medium Fitch's negative outlook is likely to be
resolved in 2Q 2011. Owing to a track record of government support and systemic importance.
The restructuring of the shipping sector in 2011 could weigh on earnings. Although profitability is better than peers, the operating environment will present some challenges.
Relatively liquid balance sheet compared to peers (Loans to deposits c 100%) should make redemptions of USD800m due to 2012 manageable.
Fairly priced
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations Asian Banks (cont’d) Korean Banks: total expected supply USD9bn
Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading ideas
Woori Bank A- St /A1 St /A- St Very High Neutral Medium-High Given the bank's size as the 2nd largest
in the system. With 19% of the system's deposits, we believe the level of government support for the bank will remain very high. Senior ratings should remain stable on strong government support.
Potentially heavy redemptions in 2011 with USD1.5bn coming due.
Sell: WOORIB 37 T1 (Ba2/BBB/BB+, Zsprd 391bp)
Buy: the largest private Russian bank ALFARU 15s (Ba1/B+/BB, Zsprd 405bp) at roughly flat spread, but move up in the capital structure, and obtain exposure to the rapidly growing Russian banking sector.
Singaporean Banks: total expected supply: USD4bn
Bank Fitch/Moodys/S&P Government Support Fundamental Credit View External Debt Supply Trading Ideas
DBS Bank AA- St /Aa1 St /AA- St Very High Neutral Low-Medium The largest bank in Singapore. The bank is facing lower profitability
compared to its peers however its credit profile is among the highest in Asia.
Likely to refinance some USD1.6bn of maturities coming due in 2011.
Fairly priced.
OCBC AA- St /Aa1 St /A+ St Very High Neutral Low We think the bank is underrated by S&P
and has room for a 1-notch upgrade in the year ahead.
High systemic importance to Singapore's economy.
The move to acquire ING's private banking assets in Asia will differentiate and strengthen its franchise, in our view.
News issues likely to be driven by USD1.25bn of redemptions due in 2011.
Fairly priced.
United Overseas Bank AA- St /Aa1 St /A+ St Very High Neutral Low The bank's credit profile is on an
improving trend and it comfortably sits in the AA category, in our view. We expect that S&P will raise UOB's senior debt rating to AA- in the year ahead.
Given it is one of Singapore's major three banks.
Good customer base in the SME and consumer sectors and better than peers' profitability. Its standalone profile is among the strongest in the region.
Strong deposit base and liquid balance sheet.
Fairly priced.
Thailand Banks: total expected supply: USD2bn
Bank Fitch/Moodys/S&P Government Support Fundamental Credit View External Debt Supply Trading Ideas
Bangkok Bank BBB+ St /A3 St /BBB+ St High Neutral Low We think the ratings of Bangkok Bank will
get a lift from a sovereign rating upgrade in 2011.
Owing to systemic importance to Thai banking sector.
The bank's credit metrics are strong and its ratings by S&P and Fitch are currently being constrained by the sovereign, in our view.
No redemptions in 2011-12 while deposits comfortably cover potential loan growth.
Fairly priced.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations CIS banks: Total expected supply for the region: USD18n
Kazakh Banks: total expected supply USD2bn
Bank Fitch/Moodys/S&P Government Support Fundamental credit view External Debt Supply Trading Ideas
Alliance Bank B- St /B3 St /B- St Limited Underweight No issuance expected. The bank doesn't represent strategic
investment for Samruk-Kazyna National Welfare fund.
Weak fundamentals and the uncertainty surrounding the future ownership structure.
No issuance expected. Buy ALLIBK 17 (Caa2/B-/B-, 991bp ALLIBK is a very weak credit on a stand-alone basis. However, it has come out of government bailout program with restructured liabilities and state ownership. It is the cheapest quasi-sovereign credit in the EM universe. The first repayment of the sinkable bond is scheduled to start in 2014.) Sell: EXIMUK 15 (B1/NR/B, 565bp) to ALLIBK 17 (Caa2/B-/B-, 991bp) to pick up 426bp
ATF Bank BBB Pos /Ba2 St /NR Limited Neutral No issuance expected. Fitch's positive outlook could be
resolved in Q3 2011 Privately owed. However, high probability of support from Unicredit, its 100% owner
The strengthening ties with a reputable international parent (Unicredit) are the main factor underpinning the credit profile of ATF Bank. However, weak credit indicators constrain the credit profile.
No issuance expected. Buy: ATFBP 14 (Ba2/NR/BBB, 545bp) benefits from its foreign ownership which is the main credit driver. Indeed Italian Unicredito provides explicit and implicit support, which makes the bank one of the cheapest Ba2/BBB credits.
BTA B- St /Caa3 Possible upgrade /B- St Moderate Underweight No issuance expected. Is not a strategic investment for Samruk
Kazyna, National Welfare fund. The relationship with SK is the bank’s main credit driver. However, the bank struggles to recover from its recent failure, the credit fundamentals remain weak further undermined by very high NPLs
No issuance expected. Buy BTAS 18 (NR/NR/B-, 798bp) BTAS 18 trades rich to ALLIBK 17 (Caa2/B-/B-, 991bp), but also benefits from government support and potential for recovery supported by advancing economy. Sell: EXIMUK 15 (B1/NR/B,565bp) to pick up 233bp
Development Bank of Kazakhstan
BBB- St /Baa3 St /BBB St High Overweight Low
100% state owned. Due to its government ownership and development mission, DBK’s credit risk is closely aligned with that of Kazakhstan. The current favourable macroeconomic story supports the positive momentum of its credit profile.
USD500m is possible. Bonds are very illiquid.
EURDEV BBB+ Pos /A3 St /BBB St Strong Overweight Medium Fitch's positive outlook is likely to be
resolved in 3Q 2011. Strong support from Russian and Kazakh government owing to the bank's role as a multilateral development finance institution
EDB’s has strong political profile, regional development mission and direct involvement of cash rich governments
USD500m is possible. Sell: Russia 2015 (Baa1/BBB/BBB,159bp) Buy: EURDEV 14 (A3/BBB/NR,297bp) and pick up 138bp and a relative cheapness of around 2 rating notches.
Halyk Bank B+ St /Ba3 St /B+ St Medium to strong Neutral No issuance expected. The largest retail bank in Kazakhstan.
Track record of government equity and funding injections
Creditworthiness remains under pressure due to the still challenging operating environment and fragile economic recovery. This coupled with a low albeit stabilising quality of the loan book.
Has completed USD500m in 2011. No more expected in the current year.
Halyk bonds appear fair valued across all maturities.
KKB B- St /Ba3 St /B St Medium Neutral The largest bank is Kazakhstan by assets.
Track record of government equity and funding injections.
One of the largest private banks in the CIS and the market leader by total assets in Kazakhstan. However, credit volumes stayed flat in H1 2010, reflecting a still difficult economic situation and a scarcity of funding.
In case of favourable market conditions around USD300m, however, the base case scenario assumes no issuance.
Buy KKB 14 (B2/B/B-,803bp) outright. Switch from PRBANK 15 (B1/NR/B, 726bp) to ALLIBK 17 (Caa2/B-/B-, 987bp) to pick up 261bps. Ukrainian banks to underperform their peers in the Central Asian region as the economic recovery in Ukraine has not picked up momentum yet and is lacking the support of natural resources.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations CIS banks: (cont’d) Russian Banks: total expected supply USD15bn
Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading ideas
Alfa Bank BB St /Ba1 St/B+ Pos Limited Overweight Medium S&P's positive outlook could be
resolved in Q1 2011 However, there is a track record of shareholder support.
Seems well positioned to reap the benefits of the Russian’s continuing economic recovery. Strong credit profile and improving financial performance is likely to continue.
USD1.5-2.0bn Buy ALFARU 15 (Ba1/B+/BB, 437bp) ALFARU is a good choice for investors who want to switch from pure quasi sovereign plays to a Russian privately-owned financial institution. Sell: SBERRU 17 (A3/NR/BBB, 253bp) to pick up 184bp while still enjoying one of the strongest credit profiles among private banks in Russia.
Bank of Moscow BBB- On watch /Baa2 St /NR Overweight No issuance expected. An ongoing acquisition by government-
owned VTB would strengthen BOM’s credit profile, lifting the bank from sub-Sovereign control to direct Sovereign ownership. Additionally the bank's performance has been improving over the past year.
No issuance expected. Buy: Following its acquisition by the state-owned VTB, BKMOSC15 (Baa2/NR/BBB-, 349bp) is our top pick among Russian quasi-sovereign names. Also the rating of BKMOSC should receive an uplift in case of a sovereign upgrade. Sell: Asian SBIIN 15 (Baa2/BBB-/NR,228bp), and BOBIN 15 (Baa2/NR/BBB-, 269bp) to pick up spread and benefit from strong (oil/commodity) cash inflows running through state owned banks. Also switch from subordinated Korean HANABK 16 (A2/BBB+/BBB+, 261bp Z-sprd) to pick up 41bp. We also prefer BKMOSC 15 over Brazilian BNDES 19 (Baa2/BBB-/BBB).
Gazprombank NR /Baa3 St /BB Pos High Overweight Medium. S&P's positive outlook could be
resolved in Q2 2011 Was demonstrated by injections from government during the crisis.
The bank’s relationship with Gazprom and the Russian government underpins its credit profile. The banks profitability is growing rapidly on the back of strengthening economy driven by high commodity prices.
USD1bn is possible. GPBRU 15 (Baa3/BB/NR, 344bp) is fairly priced, in our view.
Russian Agricultural Bank BBB St /Baa1 St /NR High Neutral Medium 100% state owned. Has a clearly defined role in the
implementation of the government’s economic policy. Credit profile is closely linked to that of the Russian government, its 100% owner. However, the bank is involved in the highly volatile agricultural business.
USD1,500bn. RSHB could be excluded from the bond index given the state might divest a minority stake. According to the Ministry of Finance the transaction should take place by 2013. Also the risk of new supply is relatively high. Therefore the upside performance is limited.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations CIS banks: (cont’d) Russian Banks: total expected supply USD15bn
Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading ideas
Sberbank BBB St /A3 St /NR Very high Overweight Medium Plays the key role in the Russian
economy as the largest bank. Majority state owned.
A close proxy for Russian sovereign risk. The state is a controlling shareholder with a 57.6% stake, while the bank’s systemic importance is enhanced by its unmatched retail franchise with 48% of retail deposits on its books.
Expected to be quite active on debt capital markets in 2011. May raise up to USD2bn.
Buy: SBERRU 17 (A3/NR/BBB, 253bp) Sberbank is one of the strongest financial credits with undisputed leadership position in retail business. Sell: BCHINA ’20 LT2 (A1/BBB+/A-, 208bp) to pick up 45bp. Sell: ICBCAS 20 (A3/NR/BBB+, 197bp) subordinated. In Russia: Sell: SBERRU 17, Buy ALFARU 15 (Ba1/B+/BB, 437bp) to pick up 184bp while still enjoying one of the strongest credit profiles among private banks in Russia.
VEB BBB St /Baa1 St /BBB St High Overweight High 100% state owned VEB is wholly owned by the government,
so its creditworthiness is likely to mirror the developments the sovereign. The banks enjoys extraordinary government support and plays crucial role to the Russian economy.
Two benchmark issues totalling maximum USD3bn in 2011.
VEB is essential part of Russian government finance. The bank is likely to be a frequent issuer in the medium term as it plans to replace government funding with wholesale funding. It is fairly priced, in our view.
VTB BBB St /Baa1 St /BBB St Full support Neutral High Government is the controlling
shareholder. VTB’s credit profile is closely linked to that of the Russian government, owner of 75.5% of its equity. State support has been forthcoming in the past, and remains strong in our opinion. However, the bank’s aggressive acquisitions policy creates integration risks.
USD4.3bn Buy VTB 6.465% 15 (Baa1/BBB/BBB, 309bp) is fairly valued given the supply risk and integration risk stemming from the recently acquired banks. Sell: HK's BNKEA 20 (A3/BBB+/NR,252bp) Buy Russia's second-largest bank VTB 18 (Baa1/BBB/*-/BBB, 338bp) to upgrade seniority of the debt, get exposure to improving Russian oil driven macro environment and pick up 86bp. Sell: BRADES 15 (Baa2/BBB/WD,213bp) Buy VTB 18s (Baa1/BBB/BBB, 338bp) to pick up 125bp.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
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cTrade recommendations CIS Banks: (cont’d) Ukrainian Banks: total expected supply USD2bn
Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading ideas
Alfa Ukraine NR /Withdrawn /CCC+ Pos No support Neutral Low S&P's positive outlook is likely to be
resolved in 1Q 2011. Private ownership. However, Alfa Bank Consortium, the bank's ultimate shareholder, provided multiple capital injections during the crisis with the latest one in March 2010 of USD93m.
The bank's operating environment remains weak and asset quality stays under pressure. On the other hand, ABU’s shareholder, AGC, provided continuous support to the bank during the crisis including the latest capital injection of USD116.4m in February ‘11.
No issuance expected Buy: ALLIBK 17 (Caa2/B-/B-,991bp) Sell: ALFAUA 12 (NR/CCC+/NR, 700bp) to play Kazakh oil-driven recovery story, benefit from Kazakh state support and pick up 290bp.
Privatbank B St /B1 St /NR Possible Neutral Low Given the large size and importance to
the Ukrainian banking sector. Benefits from a strong domestic franchise and solid financial performance. A strong market share of the retail sector boosts its systemic importance. However, weak operating environment constrains further upside performance.
Up to USD500m. Sell: EXIMUK 15 (B1/NR/B,565bp) Buy: PRBANK 15 (B1/NR/B,726bp) to reduce maturity, reduce new supply and pick up 161bp.
Ukreximbank B St /B3 St /NR High Neutral Medium Significant support was provided to the
bank by Ukrainian government. Enjoys support from its owner, the Ukrainian government, which injected USD800m in fresh equity in H1 2010, although government finances remain fragile. Also, the bank’s liquidity appears adequate and sufficient to cover liabilities maturing in 2011.
Up to USD1bn. Sell EXIMUK 15 (B1/NR/B,565bp)
Buy PRBANK 15 (B1/NR/B,726bp) to reduce maturity, reduce new supply and pick up 161bp. For those who are not comfortable with Ukrainian risks, we recommend to switching to high-yield Kazakh banks.
Buy: BTAS 18 (NR/NR/B-, 798bp) to pick up 233bp, or ALLIBK 17 (Caa2/B-/B-,991bp) to pick up 426bp
Source: Bloomberg, Fitch, Moody’s, S&P
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cTrade recommendations Latin American Banks: total expected supply for the region USD20bn Brazilian banks: total expected supply USD20bn
Bank Fitch/Moodys/S&P Government Support Fundamental credit view External debt supply Trading Ideas
Banco Bradesco SA BBB Pos/Baa2 St/BBB St High Medium Fitch's positive outlook is likely to be
resolved in 2Q 2011. The bank's importance to the Brazilian banking sector is very high.
Being one of the largest private banks in Brazil and LatAm Bradesco’s credit profile benefits from high probability of state support and a good access to the local deposits though vast branch network and strong brand recognition.
The bank enjoys strong liquidity from its local market and very light repayment schedule of external debt in 2011-2012. However, HSBC equity research expects that the bank will grow 18% in 2011, which will require additional funding. If the bank decides to issue it would be only long-term bonds, mainly subordinated issue, as equity will be needed to support further growth. HSBC credit research estimates that the bank might issue up to USD3bn in 2011.
Sell BRADES 15 (Baa2/BBB/WD,213bp) Buy VTB 18s (Baa1/BBB/BBB, 338bp) to pick up 125bp.
Banco do Brasil SA BBB- Pos/Baa2 St/BBB- St Very High Medium-High The bank might be upgraded in 2011,
particularly if sovereign is upgraded *Largest bank in Brazil* Majority owned by the federal government of Brazil
Banco do Brasil is one of the highest-rated banks in the LATAM universe. The bank benefits from hefty liquidity on the back of vast deposit base, healthy margins and healthy capital base.
Banco do Brasil has low refinancing needs in the short-term, but the bank will need to fund expected 20% loan growth in 2011. We estimate that BdB might issue USD3-5bn in the next 12 months. Supply of external bonds is likely to have either long-term maturity or subordinated nature, as BoB capital remains tight.
Sell: BANBRA 21 (Baa2/NR/NR, 223bp) Buy: BANVOR 20 (Baa2/NR/NR, 342bp) to pick up 120bp.
Banco Votorantim BBB- Pos/Baa3 St /BB+ St High from Banco do Brasil Medium Fitch's positive outlook is likely to be
resolved in 1Q 2011. Banco do Brasil owns 49.9% of Banco Votorantin
The bank benefits from access to cheaper and longer funding from Banco do Brasil and a sizable market share in retail lending.
The bank is likely to be a regular issuer, however it benefits from an access to Banco do Brasil deposit base and potential of selling its retail loan portfolio to Banco do Brasil in case of need.
Fairly priced.
BNDES BBB- Pos/Baa2 St /BBB- St High Medium Fitch's positive outlook is likely to be
resolved in 3Q 2011. BNDES is 100% state owned A quasi-sovereign risk, the bank is fully
owned by the government and is the major tool in implementing the state policy.
The bank is likely to be a regular borrower given its funding structure and fast growth.
Sell: of BNDES 18 (Baa2/BBB-/NR, 199bp) Buy BKMOSC 6.699% 15 (Baa2/NR/BBB- /*-, 349bp) to pick up 150bp. Sell: BNDES 19 (Baa2/BBB-/BBB-, 199bp) Buy VTB 18 (Baa1/BBB *-/BBB, 338bp) to pick up 139bp.
Itau Unibanco BBB Pos /Baa2 St /BBB St Moderate Medium Fitch's positive outlook is likely to be
resolved in 1Q 2011. Significant importance to Brazilian financial system
Constrained by sovereign ceiling, the bank is one of the best credits in the country and will be benefiting from improvement of overall operating environment through its exposure to commercial lending and consumer credit.
With already high employment of balance sheet the bank will likely to be multiple issuer.
Sell: Brazil 2019 (Baa3/BBB-/BBB-, 122bp)
Buy: ITAU 20 (Baa2/NR/BBB-, 277bp) to pick up 150bp in spread and 1 notch in relative cheapness.
Source: HSBC, Bloomberg, Fitch Rating, Moody’s
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cTrade recommendations Middle East banks: total expected supply for the region USD12bn Middle East banks
Fitch/Moody’s/S&P Government support Credit profile External debt supply Trading ideas
Abu Dhabi Commercial Bank PJSC NR / A1 St / A- St Extremely high Low-Medium Given its majority ownership by the Abu
Dhabi Investment Council (ADIC). The bank is likely to continue consolidating its balance sheet and focus on improving its credit strength this year. The group's operating performance will likely remain subdued meanwhile.
Some USD1bn of maturities due in 2011
MENA banks are cheap but wait for entry point
COMMERCIAL BANK OF QATAR A St / A1 St / A- St Extremely high Low-Medium Given CBQ's systematic importance to
Qatar banking system and track record of support.
Earnings pressure as its share of business with public sector entities increases. Continued capital injection from the state is credit supportive.
USD500m of redemptions in 2011 and further pressure on loan/deposit ratio due to infrastructure lending may lead to new supply
MENA banks are cheap but wait for entry point.
Emirates NBD PJSC A+ St / A3 St / NR Extremely high Low Given its majority ownership by the
government of Dubai (56%) and track record of support in the UAE.
Continued margin pressures due to relatively higher cost of funding. Exposure to Dubai remains a point of concern and the bank will likely book further impairments in 2011.
Balance sheet rationalisation is to continue.
MENA banks are cheap but wait for entry point.
National Bank of Abu Dhabi PJSC AA- St / Aa3 St / A+ St Extremely high Medium High importance to UAE banking
system, indirect majority ownership and close links to Abu Dhabi government.
Strong support from Abu Dhabi. The group will likely focus on lending growth this year after a modest growth in 2010.
Modest redemptions in 2012 (cUSD700m) however growth focus and already high loan/deposit ratio may lead to more supply.
MENA banks are cheap but wait for entry point.
Source: HSBC, Bloomberg, Fitch Rating, Moody’s
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Resumption in growth has fundamental support Emerging market (EM) banks offer an attractive
risk-adjusted premium over their Sovereigns in
our view. As 2011 EM corporate issuance is
expected to be dominated by banks, they will be a
key focus for debt investors.
HSBC FI has performed extensive fundamental,
relative-value analysis, including visiting many of
the banks covered in the report, as well as
investors, rating agencies and regulators. On this
basis, we believe growth in the sector is founded
on solid fundamental ground, with no indications
yet that a bubble is forming.
The different regions display converging growth
prospects and credit stories, which offer numerous
cross-regional arbitrage opportunities. In absolute
terms we favour Brazilian, Russian and
Indian banks.
Chart 1: EM debt outstanding by industry as of February 2011 – financials have been the major source of supply
Finance45%
Chemicals2%
Other8%Transportation
3%
Oil & Gas18%
Telecoms6%
Utility & Energy6%
Metal & Mining
6%
RE6%
Finance45%
Chemicals2%
Other8%Transportation
3%
Oil & Gas18%
Telecoms6%
Utility & Energy6%
Metal & Mining
6%
RE6%
Source: Dealogic
In our opinion a favourable macroeconomic story
underpinned by strong commodity prices will
translate into positive momentum for banks in a
number of EM countries. The current price of
crude around USD100 per barrel will support
EM banks: strength lies in traditional business model
Our positive outlook on Brazilian, Russian and Indian banks is
supported by their traditional interest-income business model,
robust growth prospects and healthy profitability
Asset quality in the UAE, Kazakhstan and Ukraine remains under
pressure, but should start recovering slowly later this year;
Kazakhstan will benefit from an improved macro environment
We expect EM banks to borrow cUSD100bn in 2011 to improve
their maturity profiles, fund growth and address USD30bn in
refinancing needs
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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business activity in oil-exporting countries
including Russia, Kazakhstan, the UAE and Saudi
Arabia. HSBC forecasts oil prices to stay above
USD84 per barrel in the next two years, thus
securing the continuation of growth in oil
producing economies. Improved business activity
in oil exporting countries will lead to an increased
demand for banking services and thus have a
positive bearing on local financial institutions.
Consequently we expect the banking sectors of
commodity/oil exporting countries to deliver a
better performance than those of countries lacking
these natural resources.
Chart 2: Oil net exporters/(importers)
-220
-120
-20
80
180
280
380
Rus
sia
Saud
i
UAE
Kaza
khst
an
Qat
ar
Braz
il
Thai
land
Sing
apor
e
Indi
a
Chi
na
m to
nnes
Source: BP, 2009FY. Net exports = production - consumption
Talk of bubbles is premature… Emerging markets account for 85% of the world’s
population according to Moody’s. They are
expected to grow at almost three times the rate of
developed countries over next two years and have
half the banking sector penetration. EM banks
therefore have a firm foundation on which to
build healthy and profitable growth. A traditional
business model focused on deposit collection and
loan origination also supports the long-term
growth prospects of EM banks.
However, the expansion story is not free of risk,
and the global financial crisis amply demonstrated
that EM banks are not immune to global events
despite their more conventional business model.
That said, in contrast to their developed market
counterparts, most EM banks – particularly those
in Asia and Latin America – have already shaken
off the effects of financial market dislocation and,
with a few exceptions, the indications are that
asset quality problems have already peaked.
The response to the crisis has strengthened
regulation, reduced leverage and increased the focus
on risk management, making EM banks more
responsive to the underlying risks. Liquidity
measures and capital injections introduced during
the crisis have increased the links between banks
and governments, making the sector’s debt a
leveraged proxy for that of its Sovereigns,
something that is already reflected in credit spreads.
Nevertheless, even in the new post-crisis world,
most EM banks still carry old baggage of high
related-party transactions, concentration risk,
inconsistent corporate governance and maturity
mismatches. The speed of the EM expansion, and
inflows created by the excessive liquidity
provided by developed market policymakers has
also raised the question of whether a bubble may
be growing in EM banks.
…but it is a risk in the future To be successful you have to be lucky, or a little
mad, or very talented, or find yourself in a rapid
growth field.
Edward de Bono
Following a dip in 2009, strong inflows returned
to EMs, fuelled by loose monetary policy and
limited investment opportunities in developed
markets. The Institute of International Finance
(IIF) forecasts that net private capital inflows into
EMs will reach USD1trn in 2011, up from
USD669bn in 2009 (see Chart 3).
These strong inflows coupled with limited
investment opportunities, and abundant liquidity
have already inflated asset prices in EM,
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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increasing concerns about bubble creation due to
such imbalances as rising property prices and
rapidly increasing leverage. Indeed, this risk of
overheating, (while overheating does not
necessarily result in a bubble) has already been
recognised by some governments and, with
inflation also becoming a concern in such
countries as China, Brazil and Korea, they are
stepping in with counter-cyclical measures to cool
off excessive growth.
Highest growth will be in the BRICs, Qatar and Hong Kong
HSBC forecasts high banking sector loan growth
in India (20%), Brazil (15%) and Russia (20%),
which should be well supported by positive
macroeconomic growth, low banking penetration,
a large population as well as an under-penetrated
SME and retail client base, coupled with robust
liquidity, capitalisation and profitability.
In China, HSBC economists are concerned about
loan growth rates that are above the long-term
trend (15-16%) even before accounting for off-
balance-sheet transactions such as informal
securitisation and discounted bills, even though
recent quantitative tightening measures appear to
be having an effect (China – Jan new lending
below expectation as tightening takes effect, 15
February 2011, Qu Hongbin).
Qatar’s 18% growth is supported by anticipated
government capital expenditure on infrastructure
projects, even though it doesn’t have the benefit of a
large population or low banking sector penetration.
In Hong Kong (15%) growth is driven mainly by
demand from offshore Chinese companies.
We are generally cautious about countries with
fast-growing banking systems, but in many EMs
this is caused by a still developing banking system
and improving living standards, so that we believe
it will be two to three years before we see any
red flags.
Chart 3: Capital inflows to emerging market economies
0
200
400
600
800
1000
1200
2009 2010e 2011f 2012f
USD
bn
Equity inv estments, net Priv ate creditors, net
Source: IFF research
Medium to lower growth in Singapore, Korea, Thailand, Kazakhstan, Ukraine, Saudi Arabia and the UAE
In Singapore (10%), Korea (7.4%) and Thailand
(7.5%), growth is constrained by a highly
competitive environment and high banking
sector penetration.
Relatively lower growth is expected in
Kazakhstan, Ukraine, UAE, and Saudi Arabia. In
Kazakhstan (6.5%) and Ukraine (4%) it is due to
poor asset quality, low capital, and negative
demographics (relatively small bankable
population, defined as those earning enough
money to be eligible to be served by banks) in
Kazakhstan and falling population in Ukraine).
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The UAE (5.1%) is significantly more leveraged
than its other Middle Eastern peers, having been
exposed to the Dubai construction sector and has
suffered significantly during the crisis. Credit
growth is likely to be constrained by a limited
deposit base, although the banks would be looking
for favourable windows of opportunity to attract
external funding.
Although Saudi Arabia (9.6%) has low banking
sector penetration, forecasted economic growth
(2011 4.8%) is low relative to population growth
(14% over the next five years).
Credit creation in energy producers is also
sensitive to oil price risk and could be higher than
the above numbers if oil prices stay above
USD100 a barrel (HSBC forecast USD84).
Chart 5: Growth in the emerging markets will boost global growth
0.0
1.0
2.0
3.0
4.0
1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s
0.0
1.0
2.0
3.0
4.0
Dev eloped Markets Emerging markets Global
% % Contributions to global growth
Source:
Chart 4: Summary of banks’ fundamentals outlook
Macro DemographicsPotential
loan growth
Potential Retail growth
Growth Outlook
Asset quality Liquidity
Net Interest margin Capital
Fundamental Outlook
State Support likelihood
Overall Outlook
China 3 3 1 1 2.00 1 2 0 1 1 2 1.67
India 2 2 3 3 2.50 1 3 1 3 2 2 2.17
Hong Kong 2 2 1 0 3.00 1 2 0 2 1.25 0 1.00
Singapore 2 1 1 0 1.00 2 1 0 2 1.25 0 1.00
Korea 1 1 1 1 1.00 2 1 0 2 1.25 3 1.00
Thailand 1 1 1 1 1.00 2 3 0 3 2 0 1.00
Russia 1.5 0.9 3 3 2.10 1 3 2 2 2 2 3.00
Kazakhstan 3 1 3 1 1.50 1 0 1 0 0.5 1 1.00
Ukraine 1 0 1 1 0.75 0 0 0 0 0 0 0.25
UAE 1 1.5 0 1.5 1.00 0 1 0 2 0.75 2 1.25
Saudi Arabia 1 1 2 2 1.50 2 3 1 1 1.75 3 2.08
Qatar 1 0 2 2 1.25 3 1 1 3 2 3 2.08
Brazil 2 2 2 2 2.00 1 2 3 2 2 3 2.33
Outlook Positive Neutral Negative
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Favourable economic backdrop
The investor of today does not profit from
yesterday’s growth
Warren Buffett
HSBC economists expect EM growth (6.4%) to
outpace the developed world (2.3%) over next
three years. Emerging economies in Asia are
expected to be the fastest growing (7.5% overall
and 8.6% in China), followed by Latin America
with 4.8% and EMEA with 4.1% (see The world
in 2050 – quantifying the shift in the global
economy, January 2011, and Global Economics
Quarterly – a misfiring growth engine, Q1 2011).
In a longer term HSBC forecasts that world output
will treble, as growth accelerates on the back of the
emerging economies. On average annual world
growth is projected to be towards 3% compared
with growth of just 2% in 2000 (Chart 5).
Emerging market growth will contribute twice as
much as that of the developed world to global
growth between now and 2050. By 2050, the
emerging world will have increased five-fold and
will be larger than the developed world to global
growth over this period.
Chinese growth in particular, is to outpace
developed countries for at least five years as inter-
regional competition and local economic
autonomy fuels the economy. HSBC economist
Karen Ward estimates that China and India will
be the largest and third-largest economies in the
world, respectively (Global Economics Quarterly
– a misfiring growth engine, Q1 2011).
Mainly supportive demographics trends
There is no finer investment for any community
than putting milk into babies.
Winston Churchill Growth in retail loans is the key driver of banking
sector expansion across EMs, and is reinforced by
the strong demographic structure of the
population (already accounting for some 85% of
the world’s total, with 4.8bn people), which is in
sharp contrast to the aging population of the
developed world. However, the number of people
being put to work will vary substantially across
economies in the coming years.
For example, Saudi Arabia with the highest fertility
rate gets a significant boost to growth with the
working population expected to grow by more than
70%. India will also enjoy strong growth.
Chart 6: Bankable population trends in: Income per capita should grow in all EM countries, but demographic patterns vary significantly.
UAE5m Saudi Arabia
26mIndia
1,173m
Brazil201m
Kazakhstan15m
Thailand66m
China1,330mUSA
310m Singapore5m
Korea49mUK
62mHK7m
France65m Germany
82m
Ukraine45mRussia
139m-5%
0%
5%
10%
15%
Ban
kabl
e po
pula
tion
grow
th (%
)
Older YoungerTrend in aging of bankable population
UAE5m Saudi Arabia
26mIndia
1,173m
Brazil201m
Kazakhstan15m
Thailand66m
China1,330mUSA
310m Singapore5m
Korea49mUK
62mHK7m
France65m Germany
82m
Ukraine45mRussia
139m-5%
0%
5%
10%
15%
Ban
kabl
e po
pula
tion
grow
th (%
)
Older YoungerTrend in aging of bankable population
Source: Central Banks, US government statistics
33
Global Emerging Markets – Credit Strategy EM Banks March 2011
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On the other side of the spectrum South Korea’s
and Russia’s demographic outlook is quite poor
with the workforce shrinking by c30% by 2050.
China, Singapore and HK will also see more than
double-digit declines in total working population.
We will see a significant divergence of the growth
trends even in the medium term (Chart 6).
The structure of the population is very important
as it indicates a trend in bankable population. For
example considering the under-15 population in
India (34%), the UAE (30%) and Brazil (29%),
they are much larger than in the UK, France and
USA (20%). This population structure results in
high growth differential in bankable population
relative to developed markets for most Asian
countries in this report as well as for Brazil. The
absolute growth potential is also strong in Brazil
the Middle East, and India, which also create
encouraging conditions for the development of the
banking sector in the medium term.
Relatively low penetration, but not everywhere
Don’t judge each day by the harvest you reap but
by the seeds that you plant
Robert Louis Stevenson
Retail loans can grow even in the face of stable or
falling population trends as long as banking sector
penetration rates are increasing.
Banking loan penetration and growth patterns
vary greatly among emerging markets. Brazil,
Russia, India and Qatar have experienced
extremely strong loan growth in recent years, and
although the former three stumbled for a moment
in 2009, the resumed growth still has some steam
due to low level of credit penetration.
India shows the lowest penetration and is best
positioned to continue its high rate of credit
expansion (see Chart 7). The combination of high penetration and high
growth rates is generally a red flag, for example
China, Korea, Singapore, HK and the UAE (before
the crisis in 2008). HK’s outlier position could be
Chart 7: Total leverage levels of EM economies: most EM countries remain underleveraged
India
China
HK
Thailand
Kazakhstan
Ukraine
UAE
Qatar
Saudi Arabia Brazil
Korea
Germany
UK
France
Singapore
Russia
40%
70%
100%
130%
160%
190%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
CAGR loan growth (2007-2010)
Loan
s / G
DP
245%
India
China
HK
Thailand
Kazakhstan
Ukraine
UAE
Qatar
Saudi Arabia Brazil
Korea
Germany
UK
France
Singapore
Russia
40%
70%
100%
130%
160%
190%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
CAGR loan growth (2007-2010)
Loan
s / G
DP
245%
Source: CB county websites, HSBC, 2010
34
Global Emerging Markets – Credit Strategy EM Banks March 2011
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justified by its role as a regional financial centre and
a gateway to China, which will continue to drive its
loan growth despite already high leverage relative to
country’s GDP. Similarly, Singapore’s seemingly
high leverage results from growth related to regional
trade flow, a trend that is highly correlated with the
world (and Chinese) economic activity.
In the CIS, Kazakhstan has been going through a
healthy contraction, which was needed to clean up
the system. We expect Kazakhstan to start
benefiting from improved economic conditions
and higher commodity prices. Similarly, Russia’s
low level of banking penetration is likely to
improve with stronger oil prices, even though
Russia’s recent growth trend has been distorted by
the state-sponsored substitution of foreign loans to
corporates by the local (mostly state-owned)
banks’ funding. Penetration in the Ukraine is the
highest among CIS countries and should act as a
drag on the nation’s banking system growth.
Continuing attraction of retail segment, but not for all Asian countries
You hope your buddies will win so you don’t have
to loan them any money.
Chris LeDoux
Consumer lending and small and medium-sized
enterprises (SMEs) are likely to be key growth
areas across EM with all countries under review
significantly lagging behind the developed world.
Household leverage is likely to accelerate faster
than income growth, and this typically high-
margin segment will be targeted by both local and
foreign players.
India, Russia and Saudi Arabia have significant
room for retail loan growth as access to credit and
a consumer culture has yet to be fully developed
there. In India’s case limited savings and low
GDP/capita are a constraint, although its medium
to long-term prospects are better then that of the
other two countries considering the population
trends discussed above. Qatar has the best short-
to-medium term prospects, as private sector
demand is expected to pick up. Brazil is seeing
increased appetite for retail credit, with household
indebtedness increasing from 24% of income at
the end of 2006 to 39% at the end of 2010. In
India, for example, the credit appetite of the
population is still low, therefore the main driver of
loan growth was infrastructure in 2010.
35
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
However, in Korea retail growth will be
constrained by already relatively high leverage
among population.
Traditional banking model at the heart of system health Life is not complex. Life is simple, and the simple
thing is the right thing.
Oscar Wilde
The traditional banking model calls for funding
loans from deposits, with lower exposure to
structured products and market risk. The EM
banks have been able to maintain this model (net
interest income represents 70-80% of total income
vs close to 50% in developed world) because
faster growth and wider margins have allowed
them to maintain profitability without having to
move down the risk curve. Long-term growth
opportunities and a high margin environment
discouraged most banks from undertaking exotic
investments – with a couple of exceptions.
This business model has helped EM banks,
particularly those in Asia and Latin America, to
shake off the effects of the recent financial market
dislocation. Indications are that apart from a few
exceptions (UAE, Kazakhstan, Ukraine), the peak
of the asset quality problems are also in the past.
Brazilian credit quality could worsen slightly in
2011, as higher rates bite into
consumer delinquencies.
Structural risks still persist though, including
maturity mismatches, reliance of some sectors on
wholesale funding, varying transparency and a high
level of related party transactions in a number of
countries. In addition, corporate governance risk is
still substantial both in countries with a relatively
weaker banking supervision such as the CIS and
also in countries with a more developed and
advanced regulatory mechanisms.
EM banks will continue to enjoy strong government support
The links between banks and the governments are
particularly strong in EM world. We believe that
the emerging market governments will continue to
provide strong support to the banking sector given
its systemic nature and its extensive use in many
countries as a tool in implementing the
government’s economic policies and in indirectly
supporting the other sectors of the economy, as
Chart 8: Penetration of EM retail banking services by country: retail business will be the main driver of EM banks growth in the medium term
India
UAE
Brazil
Korea
HK
Singapore
Thailand
UK
Germany
China
RussiaKazakhstan
Ukraine
QatarSaudi Arabia
France
0%
10%
20%
30%
40%
50%
60%
70%
80%
0 10 20 30 40 50
GDP per capita (USD '000)
Ret
ail l
oans
/ G
DP
76
Source: CB county websites, HSBC, Fitch, 2010
36
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
well as due to high government participation in
the banking sector in many countries (Chart 9).
EM policy response during the crisis was fast and
efficient in most markets, and increased the links
between banks and the government, making the
banking sector a close proxy for the sovereign.
Indeed banks were used during the crisis as a
convenient tool for conducting government
economic policy. Examples are numerous:
controlled stimulus lending in China with counter-
cyclical supervision to increase SME lending;
“leading by example” restructuring in India (5%
of the book vs 2% in private banks); VEB lending
in Russia to refinance external debt of highly
leveraged corporates; tailored liquidity support in
the UAE (facilitating DW restructuring); and
capital injection by Banco Nacional de
Desenvolvimento Economico e Social (BNDES)
for providing credit to corporates and for
infrastructure investment.
A notable exception to this trend was Kazakhstan
and, to some extent, Ukraine, which has created a
precedent that while state support is likely, it is not
always guaranteed, especially if the scale of the
problem is large in relation to the size of the
economy. For example in the BTA’s case, a
USD10bn fraud was combined with USD12bn of
external liabilities, was clearly too big to absorb for
a country with USD45bn of FX reserves at the time.
Chart 10: Government support capacity varies greatly across EM economies, 2010F
050
100150200
250300350
400450500
Qat
ar
Kaza
khst
an
UAE
Ukr
aine
Kore
a
Braz
il
Rus
sia
Indi
a
Thai
land
Saud
i Ara
bia
Exte
rnal
Deb
t/FX
Res
erve
s (%
)
Source: Moody’s
In our view the EM governments are very likely
to continue providing a safety net to the banking
sector in case of need, prioritising it over other
industries. However, if faced with a prolonged
economic downturn, the governments’ capacity
could be undermined by eroded FX reserves and
constrained liquidity and such support would be
more selective and limited to systemically
important banks. There could be a further
prioritisation of the state-linked institutions over
the privately owned and senior debt over
subordinated obligations.
Chart 9: Governments are highly involved in the banking sector across the board
75% 74%
60 %55%
44% 44%
33%28%
25%19% 17%
0% 0%0%
10%
20%
30%
40%
50%
60%
70%
80%
UAE
India
Chi
na
Rus
sia
Qat
ar
Kore
a
Braz
il
Saud
i Ara
bia
Kaza
khst
an
Thai
land
Uk
raine
Sing
apor
e
HK
Ban
king
sta
te o
wn
ersh
ip (%
)
Source: Bank data
37
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
We are confident that the willingness of EM
governments to support their banking sectors will
be high across EMs, although capacity of the
governments could be a constraint in
some countries.
Quality of assets: the worst is over
You never know what can happen. I feel like I
have a pretty good chance, but you never know.
Carly Patterson
A side-by-side comparison of EM banks is
complicated by erratic growth, a lack of
transparency, and divergent reporting standards,
for example with restructured and re-priced loans
not always being recognised as NPLs. However, it
is clear that the effect of the crisis on EM banks
varied widely, from a momentary hiccup for most
Asian banks, to continued intensive care for
Ukranian, Kazakh and Dubai-based banks.
Broadly speaking, we believe that the NPL peak is
behind us in most markets, with 2010 being a
peak in Russia, Saudi Arabia, Qatar, HK, India
and Korea. The exception is UAE, where we
expect NPLs to peak in 2011 (Chart 11).
While overall NPL performance in many emerging
countries appears to be superior to that of Western
Europe, reported NPLs often do not take into
account restructured, re-priced or refinanced
problem loans, which is a widely used practice in
many EM countries. According to our estimation
such loans varied from 30% for Dubai-based banks
to 35% in Russia, 40% in Ukraine and 50% for some
Kazakh banks.
Contraction of loan books during the crisis
combined with a sharp deterioration of overall
economic conditions, generally caused reported
NPLs to increase dramatically. However, this
number can be distorted due to state intervention.
For example in Russia during the crisis where
government action to provide foreign funding to
large corporations through state-owned banks
(VEB, VTB and Sberbank) caused NPLs to
be understated.
Chart 11: The peak in bad loans appears to be past for all EM banks, apart from the Middle East:
0%
5%
10%
15%
20%
25%
Kazakhstan Ukraine Russia Singapore India China Korea HK Brazil Qatar Saudi
Arabia
UAE UK Germany France
NPL
(%)
2007 2008 2009 2010F 2011F 2012F
48%Russia & CIS
Asia LATAM & ME Europe
Source: CB county websites, HSBC, Moody’s
38
Global Emerging Markets – Credit Strategy EM Banks March 2011
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In the UAE, which was exposed to the
construction sector, NPLs have yet to peak
(HSBC Equity Research expect this to peak in
2011), mainly driven by a possible restructuring
in Dubai Holding and Dubai group. We also
expect provisions to increase, driven partly by
new regulations and partly by under-provisioning
in previous years.
In Brazil, asset quality improved significantly in
2010 after the NPL peak in 2009, with NPLs
dropping to 5%, which is lower than pre-crisis
levels, and in line with the expected level in Western
Europe. Most Brazilian banks we met indicated that
they see the NPL level as stabilising around this
level, with limited room for further improvement
and even the probability of a slight deterioration.
Although these numbers are higher than those
reported by some Asian banks, we note that given
the high quality of disclosure and risk
management of Brazilian banks – among the best
in the emerging world – these are much more
reliable than those reported by CIS, ME and some
Asian countries.
For example reported NPLs in China are among the
lowest in our universe at 2.8%, but probably don’t
reflect the potential problem loans of local
government financing vehicles (some 26% of which
are flagged as potentially problematic). If these were
included NPLs would rise to 7%, which would be
the highest among non-CIS issuers.
Otherwise, reported NPLs in Asia were low, with
hardly a noticeable increase as effects of the crisis
were shallow and short-lived in NPL terms, with
the most recent results giving the impression of
higher asset quality because of the resumption of
loan growth.
The exception is Korea, where banks are still de-
leveraging even as high household debt and
exposure to the construction industry could result
in pressure on profitability through increased
provisioning.
Ample liquidity but maturity mismatches remain
"Reality is merely an illusion, although a very
persistent one"
Albert Einstein
EM banks benefit from generally good liquidity on
the back of a growing (albeit volatile) deposit base,
government support (both direct liquidity injections
by Central Banks and deposits from state-linked
corporates) and positive external liquidity trends
(positive current account positions). While
commodity-driven economies (Brazil, Russia) have
cash-rich corporates, in other EM countries banking
sector liquidity is also supported by positive current
account position, which is the case for all banks
included in this report except for those in Brazil,
India and Ukraine.
This strong liquidity of corporates and sovereigns
combined with still cautious lending and a limited
number of quality borrowers (in Russia and
Middle East, for example), or with counter-
cyclical regulations in other countries (China,
Brazil, India and Singapore), have resulted in a
low utilisation of balance sheets.
Chart 12: Most banks enjoy strong liquidity
0%10%20%30%40%50%60%70%80%90%
100%
Indi
a
Kore
a
Ukr
aine HK
Kaza
khst
an
Thai
land
Rus
sia
UAE
Qat
ar
Saud
i Ara
bia
Chin
a
Sing
apor
e
Braz
il
Loan
s / T
otal
ass
ets
0%10%20%30%40%50%60%70%80%90%
100%
Indi
a
Kore
a
Ukr
aine HK
Kaza
khst
an
Thai
land
Rus
sia
UAE
Qat
ar
Saud
i Ara
bia
Chin
a
Sing
apor
e
Braz
il
Loan
s / T
otal
ass
ets
Source: Central Banks, 2010
The loans/assets ratio for all countries (save for
Korea) is close to or below 60%, with Brazil around
50%, indicating a very liquid balance sheet,
39
Global Emerging Markets – Credit Strategy EM Banks March 2011
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supported by strong deposit inflows and access to
government paper offered at lucrative yields.
This is partly a reflection of prudent regulation and
proactive positioning by the Brazilian Central bank,
which has learnt its lessons from previous banking
crises, and has now raised the mandatory reserve
ratio to equate to more than 30% of total deposits,
one of the highest in the world, a move which has
now been mirrored by the Chinese regulator.
Profitability improvement on upswing in credit cycle
The banks covered in this report are heavily
reliant on a traditional banking model with a high
proportion of interest income. Although this
increases stability of income, it also makes them
very dependent on both the net interest margin
(NIM) trends and growth of the loan book.
EM banks generally enjoy healthy profitability
with higher NIMs than their Western counterparts.
However these margins are under pressure from
increased competition for quality borrowers and
tightening credit conditions, and there are also
idiosyncrasies in each country (Chart 13).
Korean banks appear to be in the most
disadvantageous position, with the highest
proportion of interest income and among the
lowest NIMs, although this situation improved in
Q4 2010. NIM rebounded on the back of: 1)
benefits of the negative duration gap; 2) funding
cost savings by the replacement of high-cost funds
with lower ones; and 3) the resumption of interest
payments on once-defaulted work-out loans.
Russia and Brazil enjoy the highest level of NIM,
although in the case of Russia this is partially a
reflection of the re-pricing of bad loans and an
adjustment to more normalised margin is likely to
continue as credit conditions stabilise. At the same
time, the quality of interest income remains a
question due to a relatively high level of (non-cash)
accrued interest associated with restructured loans, a
trend which is also seen in other CIS countries.
In the case of Brazil, NIMs are moving in the
opposite direction, reflecting strong demand for
credit, better employment of balance sheet
(Loan/Deposit ratio increased from 78% in 2008 to
over 100% in 2010) and still relatively cheap
funding, despite increasing competition and
tightening spreads. Increased penetration of high
margin retail products (credit cards, car loans and
mortgages) and continuing strong demand for
Chart 13: Profitability of EM banking sectors 2009 vs. 2010: margins are healthy but under pressure due to increasing competition
HK 09
Russia 09
Kazakhstan 09
Saudi Arabia 09
Korea 09
China 10
HK 10
Singapore 10
Russia 10
Kazakhstan 10
Qatar 10
Saudi Arabia 10
Korea 10
India 09
China 09
Singapore 09
UAE 09
Qatar 09
Brazil 09
India 10
UAE 10Brazil 10
60%
70%
80%
90%
2% 3% 4% 5% 6% 7% 8%
Net interest margin
Net
inte
rest
inco
me
/ Tot
al in
com
e
HK 09
Russia 09
Kazakhstan 09
Saudi Arabia 09
Korea 09
China 10
HK 10
Singapore 10
Russia 10
Kazakhstan 10
Qatar 10
Saudi Arabia 10
Korea 10
India 09
China 09
Singapore 09
UAE 09
Qatar 09
Brazil 09
India 10
UAE 10Brazil 10
60%
70%
80%
90%
2% 3% 4% 5% 6% 7% 8%
Net interest margin
Net
inte
rest
inco
me
/ Tot
al in
com
e
Source: CB county websites, HSBC, Fitch
40
Global Emerging Markets – Credit Strategy EM Banks March 2011
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credit is likely to keep margins healthy, but due to
competition there will be NIM pressure.
There is a significant divergence among countries
within in the Middle East. HSBC (Equity
Research) expects overall flat NIMs, however
Saudi Arabia is experiencing shrinking margins
(driven by contracting asset yield), while Qatar is
seeing improvements as the country benefits from
public-sector spending and has recently received a
further long-term boost with the award of the
2022 World Cup. In the UAE, high competition
drove margins to the lowest in the Middle East
because of the lack of good corporate clients and a
retail client base which is thin because of
deterrent legislation that makes loan default a
criminal offence. As a result, future growth and
profitability improvement in UAE will be
challenging, in our view.
Capital is healthy and unlikely to be target of the new regulation
The loftier the building, the deeper must the
foundation be laid.
Thomas Kempis
While most EM banks have adequate capital, the
trend in post-crisis banking regulation is towards
increasing capital requirements, which can reduce
return on equity. However, we expect a limited
effect on EM banks.
The recommendations proposed by the Basel
Committee on Banking Supervision in December
2011 (Basel III) are aimed at strengthening the
banking sector by optimising capital allocate for
securities markets operations (counterparty and
market risks and exclusion of non-Tier 1
instruments (CET1), improving leverage and
liquidity by introducing a stringent liquidity
coverage ratio (LCR), and net stable funding
requirements (NSFR).
In our view the impact of Basel III regulations on
EM banks will be muted. Not only is it unclear
which countries will implement the guidance and
when, but EM banks also present some particular
challenges: (a) the guidance will be difficult to
implement, particularly considering limited adoption
of Basel II by EM countries and more urgent policy
priorities concerning stabilising the economy; (b)
EM banks generally have a simple business model
with limited exposure to capital markets so that they
fall outside the main thrust of Basel III; and (c) EM
banks generally enjoy a strong capital position and
limited use of non-Tier 1 instruments.
In our view local regulators, which often have
limited independence and power, will likely opt
for late adoption of the guidance in order to not
put local players at a disadvantage, with the
exception of Brazil.
The first challenge to Basel III adoption is that in
addition to typical credit, market, or counterparty
risks, EM banks have substantial structural
deficiencies such as a high level of related-party
or single-borrower exposure and extremely high
loan and deposit concentration, which makes
probability-driven loss calculations superficial and
irrelevant, even if regulators do have appropriate risk
management tools, which is not always the case.
In driving industry reforms, local regulators are
hampered by limited system readiness, and often
prioritise more urgent local matters. For example
these include: containment of credit growth in
China, managing the risk of a real estate bubble
through tighter personal loan guidelines in
Singapore, encouraging restructuring and
diversification of sector exposure in India,
reducing related party exposure in Russia,
expanding the government toolbox to control the
banking sector in Kazakhstan, and imposing
tighter controls on currency speculation in
Ukraine and Brazil.
41
Global Emerging Markets – Credit Strategy EM Banks March 2011
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Finally, looking at capital adequacy (Chart 14),
which is a special focus of Basel III, EM banks in
this report generally have a solid capital base that is
in many cases sufficient to both support growth that
is above that of developed markets, and also to
cushion credit losses that are also likely to be above
that of developed markets. Non-Tier 1 capital
instruments are also not as widely used in EM, and
would have limited impact even in the case of likely
early adopters such as Brazil, the UAE and HK. In
HK for example, regulatory capital calculations
already exclude non-Tier 1 instruments.
When and if Basel III is adopted, we expect NSFR
to have a more significant impact on EM banks, as
they will be more actively looking for long-term
sources of capital, including capital markets. We
believe that for most EM countries the direct
operational and financial impact of Basel III will be
limited in the short to medium term.
42
Global Emerging Markets – Credit Strategy EM Banks March 2011
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Tier 1 capital ratio of EM banks: Chart 14-1: The majority of Asian banks benefit from healthy capitalisation
0%2%4%6%8%
10%12%14%16%18%20%
OCB
C
Unite
d O
vers
eas
Bank
DBS
Bank
Kore
a D
evel
opm
ent B
ank
ICIC
I Ban
k Lt
d
Shin
han
Bank
Kore
a Ex
chan
ge B
ank
Bang
kok
Bank
Han
aBa
nk
BOC
Hon
g Ko
ng
Woo
riBa
nk
Kook
min
Bank
Dah
Sing
Ban
king
Gro
up
Citic
Bank
Inte
rnat
iona
l
Bank
of E
ast A
sia
Stat
e Ba
nk o
f Ind
ia
Indu
stria
l Ban
k of
Kor
ea
Axis
Ban
k
Chi
na D
evel
opm
ent B
ank
ICBC
(Asi
a)
Bank
of I
ndia
Bank
of B
arod
a
Tier
1 c
apita
l (%
) Basel III requirement : 8.5%
0%2%4%6%8%
10%12%14%16%18%20%
OCB
C
Unite
d O
vers
eas
Bank
DBS
Bank
Kore
a D
evel
opm
ent B
ank
ICIC
I Ban
k Lt
d
Shin
han
Bank
Kore
a Ex
chan
ge B
ank
Bang
kok
Bank
Han
aBa
nk
BOC
Hon
g Ko
ng
Woo
riBa
nk
Kook
min
Bank
Dah
Sing
Ban
king
Gro
up
Citic
Bank
Inte
rnat
iona
l
Bank
of E
ast A
sia
Stat
e Ba
nk o
f Ind
ia
Indu
stria
l Ban
k of
Kor
ea
Axis
Ban
k
Chi
na D
evel
opm
ent B
ank
ICBC
(Asi
a)
Bank
of I
ndia
Bank
of B
arod
a
Tier
1 c
apita
l (%
) Basel III requirement : 8.5%
Source: Company data, Latest, see profiles
Chart 14-2: Middle Eastern and LatAm Banks: Capital should be sufficient to support growth and asset quality
0%2%4%6%8%
10%12%14%16%18%20%
Nat
iona
l Ban
kof
Abu
Dha
bi
Com
mer
cial
Bank
of Q
atar
Banc
oBr
ades
co
Emira
tes
NBD
Abu
Dha
biC
omm
erci
alBa
nk
Itau
Uni
banc
o
Saud
i Brit
ish
Bank
BND
ES
Banc
odo
Bras
il
Banc
oVo
tora
ntim
Tier
1 c
apita
l (%
)
Basel III requirement : 8.5%
0%2%4%6%8%
10%12%14%16%18%20%
Nat
iona
l Ban
kof
Abu
Dha
bi
Com
mer
cial
Bank
of Q
atar
Banc
oBr
ades
co
Emira
tes
NBD
Abu
Dha
biC
omm
erci
alBa
nk
Itau
Uni
banc
o
Saud
i Brit
ish
Bank
BND
ES
Banc
odo
Bras
il
Banc
oVo
tora
ntim
Tier
1 c
apita
l (%
)
Basel III requirement : 8.5%
Source: Company data, Latest, see profiles
Chart 14-3: CIS Banks: Capital is generally strong, while capital position of ATF is likely to be supported by foreign parent
0%
5%
10%
15%
20%
25%
30%
Ukr
exim
bank
VEB
Hal
ykBa
nk
KKB
Bank
of
Mos
cow
RSH
B
Alfa
Ban
k
Priva
tban
k
VTB
Sber
bank
Gaz
prom
bank
ATF
Tier
1 c
apita
l (%
)
Basel III requirement : 8.5%
0%
5%
10%
15%
20%
25%
30%
Ukr
exim
bank
VEB
Hal
ykBa
nk
KKB
Bank
of
Mos
cow
RSH
B
Alfa
Ban
k
Priva
tban
k
VTB
Sber
bank
Gaz
prom
bank
ATF
Tier
1 c
apita
l (%
)
Basel III requirement : 8.5%
Source: Company data, Latest, see profiles
43
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Funding and supply: who is paying?
EM banks, whether strong or weak, suffer from
one big funding problem: their assets are longer
then their liabilities (Chart 15). In our view, this
dislocation was one of the main reasons for bank
defaults in Ukraine and Kazakhstan. This
mismatch will continue to make EM banks more
vulnerable to external and internal shocks as
deposit growth is often insufficient to fund the
loan growth alone (Chart 16). Even if a bank
enjoys plenty of liquidity from a stable deposit
base, it could be eroded due to potentially volatile
nature of EM deposits, sensitive to negative
market sentiments.
Chart 16: Deposit growth is constraining loan growth and banking penetration, funding of EM banks
Turkey$576bn
France$10,480
UK$12,287
Germany$11,115
Korea$1,422
Brazil$2,206
Saudi Arabia$369bn
Qatar$139bn
UAE$420bn
Ukraine$112bn
Kazakhstan$81bn
Russia$903bn
Thailand$286bn
Singapore$1,549bn
HK$1,546bn
China$13,200
India $1,335
0%
50%
100%
150%
200%
250%
300%
350%
400%
35.0% 55.0% 75.0% 95.0% 115.0% 135.0% 155.0%
Loan-to-deposit ratio
Ban
king
ass
ets
/ GD
P
1247%
198%
Bubble size stands for asset size of banking system in particular country Source: CB county websites, HSBC, Fitch, 2010
Chart 15: Most banks suffer from maturity mismatch, funding long-term loans with short-term liabilities
-105%-85%-65%-45%-25%
-5%15%35%55%75%95%
Chi
na D
evel
opm
ent B
ank
Sber
bank
Hal
yk
Banc
oBr
ades
co
EXIM
Ukr
exim
bank
Saud
i Brit
ish
Bank
Stat
e ba
nk o
f Ind
ia
Nat
iona
l Ban
k of
Abu
Dha
bi
OC
BC
Com
mer
cial
ban
k of
Qat
ar
BOC
Hon
g Ko
ng
Bang
kok
bank
Liqu
idity
sur
plus
(gap
) as
% o
f tot
al a
sset
s
< 1 year > 1 year
-105%-85%-65%-45%-25%
-5%15%35%55%75%95%
Chi
na D
evel
opm
ent B
ank
Sber
bank
Hal
yk
Banc
oBr
ades
co
EXIM
Ukr
exim
bank
Saud
i Brit
ish
Bank
Stat
e ba
nk o
f Ind
ia
Nat
iona
l Ban
k of
Abu
Dha
bi
OC
BC
Com
mer
cial
ban
k of
Qat
ar
BOC
Hon
g Ko
ng
Bang
kok
bank
Liqu
idity
sur
plus
(gap
) as
% o
f tot
al a
sset
s
< 1 year > 1 year
Source: Bank financials
44
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Chart 17: Supply weighted towards Russia, Brazil and Korea EM financials debt outstanding by country as of Feb 2011
Russia13%
Brazil13%
S. Korea12%
China4%
Other28%
UAE7%
Mexico8%Philippines
6%
Kazakhstan3%
India3%
Venezuela3%
Russia13%
Brazil13%
S. Korea12%
China4%
Other28%
UAE7%
Mexico8%Philippines
6%
Kazakhstan3%
India3%
Venezuela3%
Russia13%
Brazil13%
S. Korea12%
China4%
Other28%
UAE7%
Mexico8%Philippines
6%
Kazakhstan3%
India3%
Venezuela3%
Source: Dealogic
EM banks are expected to be active borrowers
in external debt markets
Financials are by far the largest industry sector in
EM external debt, representing around 44% of
total (Chart 1). We expect around USD70bn of
supply in 2011 (with South Korean, Brazilian, and
Russian issuers leading the pack) as EM banks
seek to fund their growth (Chart 17).
While the banking system growth in several EM
countries outpaces by far both deposit growth and
the country’s GDP, the crisis had the painful but
healing effect of reducing leverage and improving
the funding structure as deposit accumulation and
more cautious lending policies has led to
improved loan-to-deposit ratios (Chart 18).
Chart 18: Crisis triggered de-leverage in EM economies
0%
50%
100%
150%
200%
250%
Ukr
aine
Kaza
khst
an
Kore
a
HK
Braz
il
Rus
sia
Qat
ar
UAE
Thai
land
Saud
i
Indi
a
Chi
na
Sing
apor
e
Loan
to d
epos
it ra
tio
2008 2010
Source: Central Banks websites, Fitch
However even companies with healthy loan-to-
deposit ratios (a ratio of around 100% is
considered optimal), can suffer from some form
of maturity mismatch.
These mismatches will be addressed by EM banks
continuing to access external public markets
frequently, although there will be a diversity of
needs, timing, and scale.
Issuance by EM banks in 2010 exceeded all
earlier expectations. This was driven not just by
the need to refinance public and private debt, but
also by a very low interest rate environment in the
developed world, and need to raise sources with
long-term maturities and to address demand for
hard currency by the bank’s clients (Chart 19).
In 2010 Asian financials issued some USD24bn,
well above our expectations, while just USD8.2bn
of bonds matured. Similarly, in CIS and GCC
countries the volume of issues reached USD17bn
and USD16bn, respectively.
Brazilian banks issued some USD17bn, despite
having strong liquidity and a light repayment
schedule, in attempting to fix low coupons and
extend maturity profiles.
Asian and Brazilian banks were active suppliers
of hybrid capital instruments in 2010. We do not
expect this trend to continue in the medium term
and do not favour hybrid structures, which could
be increasingly pushed to share more risks in case
of banks insolvency. Basel III treatment will also
entice banks to focus on Tier 1 capital.
Banks will continue to borrow in 2011
As the capital markets start opening up again we
expect a growing number of banks from EM to
raise international debt. We have already seen
some established names placing Eurobonds in the
post-crisis period. Also banks from less-
traditional issuer countries such as Turkey, the
UAE, Saudi Arabia and Qatar have established
45
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
successfully their presence in the Eurobond
markets and are likely to stay there. The interest
of banks in external borrowings will be further
boosted by the demand of their corporate clients
for credit. It is much easier for banks to raise
international debt than it is for corporates, which
typically have to turn to domestic financial
institutions for funding.
Russia, Brazil, Korea and then UAE and India are
likely to be the most frequent issuers in 2011 Indeed,
2011 has already started with a strong pipeline of
issues, with USD11bn from the banks covered in
this report with those from Brazil leading the pack.
Should the low interest rate environment and
investor demand continue, we expect this trend to
lead to cUSD100bn of new issues, compared to
2011 refinancing need of USD30bn.
Asia: we expect total borrowing of USD26bn
From Asia, we expect a total USD26bn, including
USD9bn of refinancing from Korea, USD7bn to
fund growth from India, USD4bn from each
Singapore and HK and USD2bn from Thailand
and other Asian countries.
For Korea, we think issuance could reach
USD9bn, similar to levels in 2010. We think the
sector as a whole will remain in de-leveraging
mode, particularly the commercial banks. They
will likely substitute public debt with bilateral
borrowings and privately placed deals. The policy
banks will likely step up issuance as it is their
primary source of funding. Net issuance of
USD4bn is not large for the Korean banking
sector, in our view.
For example India might need about USD18bn of
funding to cover the shortfall, but given its low loan
to deposit ratio we expect that less then a half of this
amount will be funded by public borrowing.
Indian banks will likely be relatively big issuers in
2011, estimated at USD7bn given the strong
growth prospects and USD demand by Indian
corporates. Redemptions in 2011 are only
USD1bn (Chart 4), so the net issuance of USD6bn
is a relatively significant supply for issuers rated
in the BBB-category.
Singaporean banks will see redemptions of
USD2.8bn in 2011, which we expect will be
refinanced. Total issuance could reach USD4bn
taking into account growth prospects.
The level of sub-debt issuance out of Hong Kong
this year will likely not be repeated in 2011.
However, given the strength of lending abroad by
Hong Kong banks and the tighter loan-deposit
ratio of some banks, we expect issuance of about
USD4bn, particularly among subsidiaries of
mainland banks.
Indonesian and Thai banks are showing strong
growth prospects and could also potentially access
the US dollar-denominated debt market in 2011.
In the CIS, new issues should also be in the
range of USD18bn. Among the CIS countries,
which face USD9.2bn of Eurobond maturities, we
expect at least USD15bn of external issues from
Russian banks to fund projected growth of 15-
20% in 2011. Kazakh banks, particularly KKB,
might come back this year but with quite
moderate appetite.
We expect manageable supply from GCC
countries (USD12bn)
We expect lower supply from GCC countries, where
maturing debt does not to exceed USD7bn this year,
and a combination of inflows to deposit and earnings
should be sufficient cover growth in 2011. However,
given the banks’ need to refinance short- dated
deposits and bilateral funding with longer date
borrowings to match longer dated infrastructure
loans, we envisage USD12bn of supply, mainly
from UAE and Qatari banks.
46
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Brazilian banks are likely to issue USD20bn
Finally, Brazilian banks are likely to be the most
active borrowers with expected issuance to reach
around USD20bn. USD4bn having already been
placed by the middle of February 2011. Brazilian
banks have just USD2bn of public funding to be
repaid this year, but they are planning to grow
another 15%-20% this year, while deposit growth
is likely to lag.
The EM banks will be competing for investor
money with peripheral Eurozone financial
institutions as in the post-crisis world the
difference between these two issuer groups has
become rather blurred. Now the main
differentiating factor between them will be the
currency denomination of debt rather than
creditworthiness. Some emerging market bank
may be even viewed as safe haven when
compared to their Euro-zone peers decimated
during the crisis. This could fuel demand for their
paper. Traditionally the emerging market issuers
have given preference to USD denominated
facilities while Euro-zone institutions opted for
EUR. However, based on price considerations this
difference may disappear.
Overall, we believe the banking sector’s credit
metrics has improved for most EM countries, and
although the crisis is not fully over in some markets,
we believe that the industry has turned the corner.
We believe the peak in NPL has passed (barring the
UAE and probably Brazil), liquidity and capital
positions are good, and profitability, although
shrinking due to competition, remains superior to
that Western markets. Moreover, reliance on a
traditional banking model and limited exposure to
structured products and capital markets mutes the
impact of Basel III.
Chart 19: Strong supply of Eurobonds from EM banks expected in 2011
02
46
8
10
121416
18
20
Braz
il
Rus
sia
S. K
orea
Indi
a
UAE H
K
Qat
ar
Sing
apor
e
Kaza
khst
an
Thai
land
Ukr
aine
Saud
i Ara
bia
Chi
na
USD
bn
2009 2010 2011A 2011E
Source: Source: Dealogic, Bloomberg, HSBC
47
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
Russia and Korea to remain active borrowers in 2011 and 2012 Chart 21a: 2011 maturity, Eurobonds
02468
101214
S. K
orea
Russ
ia
Philip
pine
s
UAE
Hun
gary
Braz
il
Chi
na
Indo
nesi
a
Mex
ico
Ukr
aine
Vene
zuel
a
Chi
le
Saud
i
Arab
ia
Kaza
khst
an
Qata
r
USD
bn
Financials Other corporates
Source: Dealogic
Chart 21b: 2012 maturity, Eurobonds
0
5
10
15
20
S. K
orea
Russ
ia
Phi
lippi
nes
UAE
Hun
gary
Braz
il
Chi
na
Indo
nesia
Mex
ico
Ukr
aine
Vene
zuel
a
Chi
le
Saud
i
Arab
ia
Kaza
khst
an
Qat
ar
USD
bn
Financials Other corporates
Source: Dealogic
Chart 20: EM Eurobond deals, 2011
Issuer Deal pricing date Amount (m) Currency Coupon Maturity type Maturity
ADCB 08/03/2011 150 CHF 3 AT MATURITY 08/12/2015 Bank of Baroda 24/02/2011 500 USD 5 AT MATURITY 24/08/2016 VTB 22/02/2011 750 USD 6.315 AT MATURITY 22/02/2018 State bank of India 22/02/2011 325 CHF 3.375 AT MATURITY 22/02/2016 VEB 17/02/2011 500 CHF 3.75 AT MATURITY 17/02/2016 Bank of India 16/02/2011 500 USD 6.25 AT MATURITY 16/02/2021 Banco Votorantim 11/02/2011 750 USD 5.25 AT MATURITY 11/02/2016 Bank of Moscow 01/02/2011 150 SGD 4.25 AT MATURITY 01/02/2013 Halyk 28/01/2011 500 USD 7.25 AT MATURITY 28/01/2021 Banco do Brasil 20/01/2011 750 EUR 4.5 CALLABLE 20/01/2016
Source: Bloomberg
48
Global Emerging Markets – Credit Strategy EM Banks March 2011
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Chart 22a: Eurobond maturity by bank 2011
0
500
1000
1500
2000
2500
3000
3500
4000
4500
VTB
OC
BC
Kore
a D
evel
opm
ent
Bank
Expo
rt-Im
port
Ban
k of
Kor
ea
ICBC
(Asi
a)
Abu
Dha
bi C
omm
erci
al B
ank
PJSC
VEB
Emira
tes
NBD
PJS
C
Chi
na D
evel
opm
ent B
ank
DBS
Ban
k
Bank
of B
arod
a
Sber
bank
Itau
Uni
banc
o
Bank
of I
ndia
Indu
stria
l Ban
k of
Kor
ea
KKB
Kook
min
Ban
k
Woo
ri Ba
nk
Stat
e Ba
nk o
f Ind
ia
ICIC
I Ban
k Lt
d
Ukr
exim
bank
CO
MM
ERC
IAL
BAN
K O
F Q
ATAR
Saud
i Brit
ish
Bank
Gaz
prom
bank
BND
ES
Banc
o Vo
tora
ntim
Bank
of M
osco
w
Bank
of E
ast A
sia
Banc
o Br
ades
co S
A
Alfa
Ban
k
Kore
a Ex
chan
ge B
ank
Axis
Ban
k
Shin
han
Bank
Citi
c Ba
nk In
tern
atio
nal
BOC
Hon
g Ko
ng
USD
m
Source: Bloomberg
Chart 22b: Eurobond maturity by bank 2012
0
500
1000
1500
2000
2500
3000
3500
4000
Expo
rt-Im
port
Bank
of K
orea
ICIC
I Ban
k Lt
d
Kore
a D
evel
opm
ent B
ank
VTB
Alfa
Ban
k
Emira
tes
NBD
PJS
C
Han
a Ba
nk
Axis
Ban
k
Chi
na D
evel
opm
ent B
ank
Nat
iona
l Ban
k of
Abu
Dha
bi P
JSC
Kook
min
Ban
k
Shin
han
Bank
Expo
rt-Im
port
Bank
(Chi
na)
Alfa
Ukr
aine
Priv
at b
ank
Kore
a Ex
chan
ge B
ank
KKB
Indu
stria
l Ban
k of
Kor
ea
Stat
e Ba
nk o
f Ind
ia
Itau
Uni
banc
o
Ukr
exim
bank
Banc
o Br
ades
co S
A
ICBC
(Asi
a)
ATF
Rus
sian
Agr
icul
tura
l Ban
k
Bank
of E
ast A
sia
Bank
of I
ndia
Bank
of B
arod
a
Banc
o Vo
tora
ntim
DBS
Ban
k
Woo
ri Ba
nk
Citi
c Ba
nk In
tern
atio
nal
BOC
Hon
g Ko
ng
USD
m
Source: Bloomberg
49
Global Emerging Markets – Credit Strategy EM Banks March 2011
abc
EM issuance by bank Chart 23a: Asia
0.00.51.01.52.02.53.03.54.0
Expo
rt-Im
port
Bank
of K
orea
Stat
e Ba
nk o
f Ind
ia
ICIC
I Ban
k
BOC
Hon
g Ko
ng
Woo
ri Ba
nk
Kore
a D
evel
opm
ent B
ank
Han
a Ba
nk
Kook
min
Ban
k
Indu
stria
l Ban
k of
Kor
ea
Shin
han
Bank
Bank
of I
ndia
Bang
kok
Bank
Bank
of E
ast A
sia
DBS
Ban
k
OC
BC
Bank
of B
arod
a
Axis
Ban
k
ICBC
(Asi
a)
Citi
c Ba
nk In
tern
atio
nal
Kore
a Ex
chan
ge B
ank
Dah
Sin
g Ba
nk
Uni
ted
Ove
rsea
s Ba
nk
Chi
na D
evel
opm
ent B
ank
Expo
rt-Im
port
Bank
of C
hina
USD
bn
2009 2010 2011
Source: Dealogic
Chart 23b: EMEA
0
1
2
3
4
5
BTA
VTB
VEB
Sber
bank
Alfa
Ban
k
Gazp
rom
bank
DBK
RSH
B
Bank
of
Mos
cow
Allia
nce
Bank
Halyk
EDB
ATF
KKB
USD
bn
200 9 2010 2 011
7
Source: Dealogic
Chart 23b: LatAm and Middle East
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Banc
o do
Bras
il
Banc
o
Brad
esco
Itau
Uni
banc
o
BND
ES
Banc
o
Voto
rant
im
Com
mer
cial
bank
of Q
atar
Nat
iona
l Ban
k
of A
bu D
habi
PJSC
Abu
Dha
bi
Com
mer
cial
Bank
Saud
i Brit
ish
Bank
Emira
tes
NBD
USD
bn
2009 2010 2011
Source: Dealogic
Glo
bal E
merg
ing
Markets – C
redit S
trategy
EM
Ban
ks M
arch 2011
50
ab
cMarket overview Asia
China India Hong Kong Korea Singapore Thailand
GDP growth 2011 (HSBC forecast)
8.90% 8% 5.20% 4.90% 5.20% 5.30%
Country’s total FX reserves (USDbn)
2,847 299 258 291 223 161
System structure A total of 3,857 financial institutions, including 5 large commercial banks and 12 joint-stock commercial banks
Top 5 account for 51% of banking assets
81 commercial banks (27 public, 22 private and 32 foreign)
Relatively high concentration, with top 10 banks accounting for 57% of banking assets
State banks are prominent, with 74% of assets
23 banks incorporated in HK, with the top 5 accounting for 68% total assets
18 banks, with the top 4 banks representing 48% sector assets
205 banks, including 3 local banks (with 60% of country’s loans) and 24 foreign banks with full banking licence
34 banks, including 14 domestic banks; the top 4 banks account for 60% of banking assets, the top 10 for 88%
Market trends Still high credit growth expected (20%+); although the government is taking steps to cool it down
No explicit credit quota for 2011, as use of discounted bills and informal securitisation circumvented loan quotas in 2010
Concerns on non-performing loans to local government financing vehicles to weigh on asset quality and capital level
Competition for deposits and higher reserve requirement (currently 17.5-19.5%) are placing pressure on funding
High inflation is likely to erode savings and deposit growth
After slowdown in 2008-09, the economy has returned to pre-crisis growth level; high credit growth, which could become a concern for asset quality
Margins have been expanding on strong credit demand and cheaper CASA deposits, but are expected to reverse on funding squeeze
Strong USD demand from Indian corporates pushed up Indian banks’ offshore financing
Loan growth rebounded strongly in 2010 on robust growth in trade finance, the domestic property market and lending outside HK
Lending to corporates with end use in China rose significantly
Asset quality continues to improve but NIM is becoming squeezed in low rate environment
Deleveraging of the banking sector, with total credit/GDP declining to 177% in Q1 2010 from 184% at YE 2008, however – still high vs. peers
Banks’ funding structures improved on the back of lowered loan growth and increased deposit funding
Further restructurings and provisions to come
Expected loan growth between 4-7% in 2011
Profitability likely to remain a challenge
Economy is highly sensitive to external trade and has been very volatile
Strong growth momentum at present, although the state has restricted speculative mortgage lending
Loan demand is expected to improve, but NIM pressure to continue owing to competition
Asset quality to improve, as NPLs peaked at 2.4% in 2009
Strong performance throughout the global crisis and political turbulence
Loan growth has been limited since 2006 owing to political instability, which has resulted in few signs of an asset bubble
Cautious approach to corporate leverage and conservative lending standards
NPLs likely peaked in 2008, at 5.7% (down to 4.6% in Q3 2010)
Source: HSBC
Glo
bal E
merg
ing
Markets – C
redit S
trategy
EM
Ban
ks M
arch 2011
51
ab
cMarket overview (cont’d) Brazil and CIS
Brazil Kazakhstan Russia Ukraine
GDP growth 2011 (HSBC forecast)
5.10% 6% 4.80% 4%
Country’s total FX reserves (USDbn)
302 31 497 32
System structure Concentrated system, with 2 state-owned banks accounting for 60% of deposits
Concentrated and relatively small system with only 37 banks, 11 of which have foreign participation
The top 10 banks account for 92% of the system’s assets
Large number of banks (1,087) but 55% of assets are concentrated within the top, 5 state-owned banks, which receive disproportionate support
The second tier comprises 30 private and foreign-owned banks, the rest are small financial institutions
185 commercial banks (14 in liquidation) The top 10 banks accounting for 50% of system’s
assets High level of foreign ownership: 53 banks (45%
of the system’s capital)
Market trends Improving economy and increased liquidity Strong credit growth but government’s anti-
cyclical measures aim to slow it down Competition is increasing but cheap funding will
support margins Shift of focus to liquidity and asset quality from
profitability Government banks replaced private sector
lending during the crisis, but this is now reversed (state banks lending grew 40% and 32% in 2008 and 2009, respectively, and 20% in 2010 (expected))
Three defaulting banks have been undergoing restructuring (Alliance, completed; BTA and Temir, ongoing); for others, credit growth is depressed as most NPLs are still on the balance sheet
Banks are accumulating liquidity and reluctant to lend
The system avoided a deposit run despite three failures
Shrinking NIM owing to tighter competition for deposits and low interest rates
Gradual exit from support measures Asymmetric support for top, state-owned banks Weak asset quality but reasonable capitalisation
and provisioning Likely consolidation to come
Continued deterioration in asset quality, with half of the loans being restructured or non-performing
Extensive capital shortfall in the system: NBU has requested banks to raise some USD6bn in capital
Severe run on deposits during the crisis
Source: HSBC Middle East
UAE Qatar Saudi Arabia
GDP growth 2011 (HSBC forecast)
3.30% 9.50% 4.40%
Country’s total FX reserves (USDbn)
41 113 410
System structure 52 banks in total, with top nine banks accounting for 81% of banking
assets 14 banks, with top 5 banks accounting for 75% of banking assets 12 banks, with the top 5 accounting for around 60% of banking
assets Market trends Economic environment likely to be subdued:
Progress in restructuring the debt of government-related entities Lending growth is expected to resume Increased competition for deposits to put pressure on margin Legacy exposure to real estate remains a risk factor
Very strong economic growth Healthy asset quality with low NPLs World Cup 2012: local banks will be major beneficiaries of the
expected USD54bn spending
Banks’ profitability is expected to grow in 2011 as provisioning charges have already peaked
Saudi banks should remain well capitalised. Despite a formal minimum capital adequacy requirement of 8%, banks seem to maintain a 12% floor
Efficiency is expected to remain strong
Source: HSBC
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cSummary of support measures during the crisis Asia
China India Hong Kong Korea Singapore Thailand
Support during the crisis:
Temporarily removed credit quota (ie upper lending limit) for the year
Temporarily suspended 75% loan-to-deposit ratio for small- to medium-sized banks
Relaxation by RBI of loan restructuring criteria in 2008, allowing for easier restructuring of NPLs
Capital injections in state banks with low capital and close to 51% state ownership; other banks were free to tap equity market
Temporary blanket deposit guarantee was introduced during the crisis; it expired in 2010
The state set up a bank recapitalisation fund
Purchased bad loans from banks via majority state-owned Korea Asset Management Corp
Provided certain SMEs with guarantees for bank loans
Direct liquidity and funding support
USD100bn were available in the form of guarantees for banks to issue foreign currency debt
USD16bn ‘Resilience package’ to support economic stability
Temporary blanket deposit guarantee from October 2008 to December 2010
SME guarantee to share 90% of risk with banks
Measure to reduce speculative property demand
Bilateral swap lines set up with the US Fed (USD30bn) and Dutch DNB to support banking system; lines were not used
USD48bn stimulus package introduced in 2009 through 2012
Deposit protection extended to all type of deposits – to 100%; this will decrease to USD34,000 by Aug 2012
Liquidity support Central bank has always offered liquidity support to banks in China. No extraordinary support was required during the crisis.
RBI liquidity injections in 2010 through REPO on government paper
RBI made USD liquidity line available for banks in 2008/09
Reduced the statutory liquidity ratio from 25% to 24% from 18 December 2010
Temporary measures to provide liquidity assistance from October 2008 to March 2009, including the expansion of assets acceptable to and the duration of liquidity assistance through the discount window, FX swaps and the lending of term money at the request of the banks
Incorporating FX swaps and term repo into HKMA’s ongoing market operations to offer HKD liquidity assistance to banks, starting from April 2009
The authorities made USD50bn in short-term foreign currency liquidity support available to Korean banks in a combination of a swap facility (USD10bn), a loan facility (USD30bn) and loans secured by export bills (USD10bn).
The government has given an FX guarantee commitment of up to USD100bn for three years, to enable banks to fund in the USD debt market
MAS standing facility already existed pre-crisis but the type of collateral was widened in 2009
None
Capital injections USD29bn injected into ICBC, CCB, BOC and BoComm through participation in rights issue or IPO in 2010: USD1.5bn to PSBC in 2010; USD19bn into ABC in 2008
USD3.6bn was injected into state banks in 2010, to maintain 8% Tier 1 ratio
No capital injection required, although a Contingent Bank Capital Facility was established
KRW20trn (USD15bn) bank recapitalisation fund, that was available to all banks
The government injected KRW3.4trn into major banks
None None
Bailouts/ defaults/restructuring
None No bank failures; some small private banks were acquired by state banks with no losses to debtors
None None None None
Source: HSBC
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cSummary of support measures during the crisis (cont’d) Asia (cont’d)
China India Hong Kong Korea Singapore Thailand
Most recent regulations:
State council approved new bank capital rules, incorporating new ratios proposed under Basel III
CBRC required banks to bring trust loans back on to the balance sheet in 2011
CBRC assigned higher risk weighting to non-performing lending to local government financing vehicles
Introduction in 2008 of guidance for loan restructuring and NPL provision requirements (to 70% of NPLs by September 2010)
Introduction of limitation on sector concentration (including capital markets, 40% of capital, and real estate, 15% of loans)
Minimum capital requirement for new banks is expected to increase from USD43m to USD107m
LTV ratio ceiling set at 80%, and risk weighting and provisioning requirement on residential housing loans raised
Deposit protection increased from HKD100,000 (USD13,000) to HKD500,000 (USD65,000), replacing the temporary blanket guarantee introduced during the crisis
Loan/deposit ratio should be less than 100% by end-2013
Mid- to long-term financing ratio to be raised to 100% from 90%
New limits on banks’ FX derivative positions (to 50% of equity capital for domestic banks and 250% of equity capital for foreign banks)
The government is seeking to introduce a bank levy on non-core foreign currency borrowings in H2 2011
No recent changes, as the normative ratio already exceeded global standards: Tier 1 of 6% and CAR of 10% (versus 4% and 8% globally); more stringent loan classification (requiring the monitoring of borrowers’ credit weakness, rather than only non-payments); stricter guidance on personal loans
Consumer protection measure to limit unfair bank fees (affecting some 6-10% of bank earnings)
Source: HSBC
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cSummary of support measures during the crisis (cont’d) Brazil and CIS
Brazil Kazakhstan Russia Ukraine
Support during the crisis:
Looser reserve requirements, broader deposit guarantees
Banks across the system have been active in tapping international capital markets for both hybrid capital instruments and senior debt
Government cut the key base rate by 500bp to 8.75%
Limited support to banks, allowing three large banks to fail and forcing losses on bondholders
Total support amounted from the government to USD8.2bn (including USD2.9bn in capital and USD3bn in long-term deposits)
USD5bn bonds from SamrukKazyna being used in restructuring to convert into preference shares of Alliance and BTA
Quick crisis response by CBR and MinFin: support started in Q4 2008, and was largest in EM – 10% of GDP (cUSD200bn):
Mostly took the form of liquidity injections, but also capital injections and bailouts
Reduced reserve requirements on liabilities Unsecured 1-year loans from CBR (some
USD400m), now significantly reduced Extended range of securities for REPO (some
100 companies) – likely to stay in medium term Loan secured by unmarketable collateral
(interbank guarantees and loans to corporates) totalled USD750m; likely to be closed in 2011
But CBR allowed some 30 private banks to default
Initial response was relatively good, with sizeable liquidity measures equivalent to 13% of deposits
Liquidity support RUSD100bn liquidity through reduced mandatory provisioning (reinstated from March 2010)
USD3bn in long-term deposits USD100bn in short-term funding (12% of banking liabilities), including USD10bn subordinated loan to Sberbank
Increase in securities eligible for repo transactions
NBU provided USD7.8bn in loans to banks in H1 2009
NBU introduced a temporary memorandum on early deposit withdrawals in March 2009, which was eventually lifted in May 2009
Foreign-owned banks received liquidity support from parents
Capital injections USD110bn in BNDS (USD18bn to finance Petrobras shares)
USD2.9bn of capital injected into BTA, KKB, Halyk, Alliance
Total: USD27.4bn: a USD15bn sub loan to Sberbank; USD5.8bn capital injection and a USD6.7bn sub loan to VTB. Around 30 banks received sub debt from state-owned VEB in 2009
Initial capital injection of USD1.2bn into three nationalised banks to be followed by a further USD1.88bn commitment
Bailouts/ defaults/restructuring
One bank (PanAmericano): no government involvement as private owners borrowed USD1.5bn from deposit guarantee fund
Government had to nationalise BTA, Alliance BANK and Temirbank, but senior and subordinated debtholders suffered from significant haircuts
USD5.5bn bailout of Svyaz Bank, KIT Finance, Sobinbank and Globex
Default and liquidation of IIB (Mezhprombank), one of the top 20 banks, in 2010
Total banks cut from 1,136 (in 2007) to 1,087 now
3 banks nationalised and 14 went bankrupt
Most recent regulations:
Curb short selling on foreign currency Anti-cyclical measures from December 2010:
increased reserve requirements from 15% to 20%, higher provisioning requirements on risky retail loans were introduced in December 2010
Extensive changes introduced, aimed at increasing state supervision of the sector:
Right for NBK to purchase over 10% of shares in banks in the event of a breach of normative ratios
Tightening of qualifications to the banks’ management
Limits placed on banks’ ownership by “offshore” entities Changes to the calculation of normative ratios
(current liquidity and liabilities-related ratios) to include off-balance-sheet liabilities
Key regulatory changes that could be introduced in 2011 include consolidated banking oversight and greater control over the banks’ single- and related-party exposure
Improvements in the capital framework, regulation of related-party exposure and securities trading
Capital requirements raised to USD3m from 2010 and to USD6m from 2012 (only 80% likely to comply)
Basel II/III unlikely to be adopted in the medium term
Measures to limit currency speculation and tighten currency controls
Planned increase in minimum capital requirement to USD15m from USD9m by 1 January 2012 was accepted by the Ukrainian court. Around 69 Ukrainian banks could be adversely affected
Anti-crisis introduction of 0% reserve requirement on foreign currency loans was abolished; 20% mandatory reserve requirement introduced from October 2010
As at November 2009, NBU prohibited foreign-exchange lending to individuals
Source: HSBC
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cSummary of support measures during the crisis (cont’d) Middle East
UAE Qatar Saudi Arabia
Support during the crisis:
Government provided significant support through CBUAE short-term facilities (USD13.5bn) and MoF deposits convertible into subordinate debt (USD19bn in total):
Most deposits were converted during 2009
USD9bn support package launched in Q4 2008, including equity injections and liquidity support
Government provided significant support during the crisis in the form of deposit injections
Aggressive interest rate cuts SAMA increased dollar-swap facilities and limited issuance of T-
Bills to SAR3bn per week
Liquidity support USD13.5 short-term funding and USD13.5bn MoF deposits, convertible into Tier 2 capital
Special liquidity facility to support DW restructuring
Government purchased the entire portfolio of locally listed equities for cash and bonds
Purchase of bank loans (including real estate) Substantial deposits in all banks
Injections of SAR34bn in the form of deposits in 2008, SAR57bn in 6m of 2009
Capital injections Most banks converted MoF deposits into subordinate debt in 2009 USD4.4bn injection of perpetual Tier 1 securities by AD government
and USD1.1bn by Dubai
QCB purchased 10% stakes in local banks during 2008-09 and plans to increase it by another 10% in Q1 2011 to support continued growth
None
Bailouts/ defaults/restructuring
None None None
Most recent regulations:
Tightening of provisioning requirements and recognition of bad loans
Restrictions on Islamic banking by conventional banks Reserve requirements were reduced to 7% of demand deposits and to 4% of savings and time deposits
Source: HSBC
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cRisks/strengths Asia
China India Hong Kong Korea Singapore Thailand
Strengths Strong domestic liquidity supported by high savings rate; average loan-deposit ratio of 69% for the banking system as at December 2010
Strong profitability on the back of a favourable macro backdrop
Stable retail deposit funding base
Sound liquidity
Very well capitalised compared with peers in the region
Funded through deposits and maintain relatively liquid balance sheets
Strong regulatory oversight
Reduced dependence on wholesale funding
Improving asset quality owing to recovery in the economy and massive NPL sales
Well-capitalised banking system, with average Tier 1 and capital adequacy ratios at 11.3% and 14.3%, respectively, as at H1 2010
Strong franchise supporting stable funding base;
Good liquidity (loan-to-deposit ratio of 71%) and capitalisation (CAR above 16%)
Reasonable profitability Good quality assets, suffered
limited impact during the global crisis
Conservative provisioning
Stable deposits (85-80% loan to deposits) and low level of wholesale funding resulted in strong liquidity and sector stability
improved earnings quality and capital
good asset quality owing to tight credit control
solid regulation, adoption of Basel II
Risks Reliability of information disclosure is limited by its fragmented nature, and unreported activity related to informal collateralisation and loan sell-down, which distort the size and industry breakdown of the loan portfolio
Problem loans may be masked by high credit growth
Vulnerable to real estate market and asset price correction
Capital levels are low relative to credit growth and profitability metrics
Accelerated pace of loan growth with possibility of an asset bubble, masking potential weakness of asset quality and performance of restructured loans
Potential need for capital in public banks to support growth
Low earnings diversification of public banks
Risk of excessive credit growth owing to loose monetary policy
Increase in mainland China exposure may lead to credit quality concerns
Lower NIM could hurt profitability
Household debt in Korea remains high
High exposure to construction/real estate sector
Restructuring of the shipping and shipbuilding sector in 2011 will keep loan provision high
Borrower concentration and real estate exposure remains significant (about 50% of SGD loans)
Significant exposure outside Singapore
Margin pressure from competition; fee income to remain volatile
Ongoing political uncertainty – credit inflow and strengthening currency could impair the credit quality of exporters and contribute to the creation of an asset bubble
Pressure on fee income from government consumer protection measures
High credit concentration (300% of Tier 1 for top 20 borrowers)
Source: HSBC Brazil and CIS
Brazil Kazakhstan Russia Ukraine
Strengths Its largely local funding base insulates it from the volatility in international capital markets
Strong capitalisation, stable margins None of the private banks defaulted during the
crisis
Good system liquidity Funding composition has improved in non-
defaulting banks following deleveraging, mostly through deposits from state-owned companies
Government support, particularly to top state-owned banks
Improved profitability Strong, although potentially volatile, domestic
funding base
Significant number of banks with foreign capital (47% of sector assets)
Risks Asset quality could deteriorate when new loans start to season
Medium-sized banks could have quite high external leverage
Liquidity is a still priority and a risk
Quality of assets remains a risk factor Poor transparency of loan portfolio performance Concentrated funding Corporate governance Quality of earning questionable owing to high
accruals of interest
Limited control of securities operations Gaps in monitoring of related-party transactions Risk management and corporate governance
Undercapitalisation Asset and earning quality Weak corporate governance Limited liquidity with high loans/deposits of
almost 200%
Source: HSBC
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cRisks/strengths (cont’d) Middle East
UAE Qatar Saudi Arabia
Strengths Capitalisation appears sufficient to absorb NPL increase Inter-Emirates support (by Abu Dhabi to Dubai) is a stabilising factor
Strong growth Healthy asset quality with NPLs at 1.7% Good liquidity: deposits provided a strong funding base – 2005-09
CAGR of 20% for demand deposits and 47% for time deposits Solid capitalisation
NPLs are adequately covered Comfortable liquidity levels Adequate capital adequacy ratios Prudent and strict regulator ensures Saudi banks’ readiness to cope
with downturns
Risks NPLs expected to peak in 2011 Liquidity pressure to remain;
Pressure on NIM High loan/GDP of close to 90% Concentration risk likely to increase Concentrated funding (mostly deposits) with increasing costs
High credit concentration High deposit concentration. Top 20 deposits account for 20-40% of
the total on Moody’s estimates Mismatch in maturity profile of assets and liabilities Political instability
Source: HSBC
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Credit spreads are fairly well explained by ratings alone A convenient initial reference point for investors
trying to evaluate risk/reward across regions,
industries, and countries, is a company’s credit
rating. Even though rating agencies are sometimes
criticised for being behind the curve, it is hard to
ignore that rating differences are able to explain
differences in credit spreads fairly well. For
example chart 1 shows that currently over 70% of
the average spread differences among names in
the Emerging Market Bond Index (EMBI) and
Corporate Emerging Market Bond Index
(CEMBI) are explained by their average credit
ratings from the three major agencies.
Chart 1: spreads vs ratings for EMBI and CEMBI names, 17 February 2011
y = 0.14x + 4.27
R2 = 0.71
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)
Log(
Spre
ad)
Source: Bloomberg, Reuters, HSBC Calculations
But differences in sector are also important Even though, as chart 1 demonstrates, credit ratings
account for a large part of the spread differences
among names, an aggregated chart, such as the one
above, does not reveal the systematic differences that
Relative value framework
It matters little to credit investors whether their carry comes from a
Chinese bank or a Brazilian oil producer, as long as the
underlying risk is comparable
Traditional credit analysis helps with the choice by examining
management, capital structure, and local knowledge, but pays
less attention to regional, industry, and country-specific
differences that are priced into credit spreads
HSBC introduces a framework that is able to account for these
macro-level differences systematically, and highlights trading
opportunities by giving a clearer view of how much of the
underlying story is priced into credit spreads
Keerthi Angammana Analyst HSBC Bank plc ++44 207 991 5431 [email protected]
Olga Fedotova Analyst HSBC Bank plc +44 207 9923 707 [email protected]
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exist among spreads due to duration, industry sector,
or region. In contrast, chart 2 highlights financials in
black, and sovereigns in red to illustrate the
systematic differences between the sectors. The
fitted black line (representing financial institutions)
being to the left of (or above) the red line
(representing sovereigns) indicates that on average
financial sector credits trade as if they were lower
rated than those of a sovereign issuer of the
same rating.
Chart 2: spreads vs ratings for EMBI and CEMBI names for Sovereigns and Financials, 17 Feb 2011
y = 0.15x + 4.00
R2 = 0.72
y = 0.14x + 4.35
R2 = 0.75
4.04.5
5.05.5
6.06.5
7.07.5
0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)
Log(
Spre
ad)
Gov ernment Financial
Source: Bloomberg, Reuters, HSBC Calculations
In terms of terminology, we use the horizontal
distance between the fitted lines representing
different sectors as a measure of relative value
that is expressed in rating notches. For example in
chart 2, since on average financials offer a spread
pick-up over similarly-rated sovereigns, we would
call the financials ‘cheap’ to sovereigns, or say
that the sovereigns are “rich” relative to
financials, to a degree measured by the fitted
horizontal distance between the two lines.
There is an advantage to expressing relative
spreads in rating notches (rather than as a simple
difference in spread) because rating notches are
naturally adjusted to reflect the fact that
percentage spread differences are more important
than absolute spread differences. So, for example,
for a security to be cheaper by one notch
represents the same opportunity whether it is
relative to an A-rated security or a BB-rated
security, which makes for easier comparisons than
if richness or cheapness were expressed in terms
of a spread difference.
Richness or cheapness expressed in this way is
naturally risk-adjusted for volatility through its
association with ratings. However we emphasise
that to be a true valuation measure it has to be
combined with a fundamental and a directional
view on the likely evolution of richness and
cheapness in the relevant sector. At this stage we
focus our attention exclusively on the volatility
adjustment, without trying to understand if the
cheapness represents a true opportunity, or
whether it is just another way of expressing the
beta of a sector.
Chart 2 is for illustrative purposes, and for clarity
shows regressions for just two sectors (Financials
and Sovereigns). But in the full model we capture
multiple differences by simultaneously fitting the
sector (Government, Financial, Energy,
Communications), region (Asia, Eastern Europe,
Middle East, and Latin America), and duration.
Chart 3 shows how the differences among sectors
have evolved over time.
It can be seen from chart 3 that the financial sector,
for example, currently trades around 2½ rating
notches cheaper than sovereigns, but that difference
has been as much as four notches in the past. This
also provides a convenient way of evaluating the
downside risk associated with the extra carry of 2½
rating notches: this equates to 1½ notches, on the
assumption that conditions could revert back to
where they were in April 2009.
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Chart 3: richness/cheapness measured in rating notches (negative numbers indicate richness), EMBI + CEMBI
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
Feb-
09
Jun-
09
Sep-
09
Jan-
10
May
-
Aug-
10
Dec
-10
Rich
/Che
ap
Govt Fin Energy Comm
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
Feb-
09
Jun-
09
Sep-
09
Jan-
10
May
-
Aug-
10
Dec
-10
Rich
/Che
ap
Govt Fin Energy Comm
Source: Bloomberg, Reuters, HSBC Calculations
Chart 4 shows the relative spread distribution over
the last two years. The fairly linear relationships
among the sectors supports the argument that the
corporate EM sectors are a leveraged play on
Sovereigns, with the Financials being the
most leveraged.
Chart 4: size- and duration-weighted sector spreads vs Government spreads, Feb 2009-Feb 2011, EMBI + CEMBI
200
400
600
800
1000
1200
1400
200 400 600Gov ernment OAS (bp)
Sect
or O
AS (b
p)
Gov t Fin Energy Comm
Source: Bloomberg, Reuters, HSBC Calculations
Regional differences also matter Chart 5 quantifies the widely held perception that
Asian credits, for example, are rich relative to
Eastern European credits. However, comparison
with chart 3 shows that regional differences are in
general smaller than the differences due to its
sector, although the recent spread widening in the
Middle East is significant.
Chart 5: richness/cheapness (in rating notches) for different regions (negative numbers indicate richness)
-1.5-1.0-0.50.00.51.01.52.0
Feb-
09
Jun-
09
Sep-
09
Jan-
10
May
-
Aug-
10
Dec-
10
Rich
/Che
ap
Asia EE LatAm MidEast
-1.5-1.0-0.50.00.51.01.52.0
Feb-
09
Jun-
09
Sep-
09
Jan-
10
May
-
Aug-
10
Dec-
10
Rich
/Che
ap
Asia EE LatAm MidEast
Source: Reuters, Bloomberg, HSBC Calculations
Chart 6 is similar to Chart 4, and plots regional
spreads relative to Asia. In this it appears that
Eastern Europe is a leveraged play on Asia during
sell-offs (The black circles appear to fall on a line
with a higher slope than the red).
Chart 6: size- and duration-weighted sector Spreads vs Asia, Feb 2009-Feb 2011, EMBI + CEMBI
0200400600
80010001200
100 300 500 700
Asia OAS (bp)
Reg
ion
OAS
(bp)
Asia EE LatAm MidEast
Source: Bloomberg, Reuters, HSBC Calculations
However this chart does not show the relative
ratings of the regions, and indeed chart 7 shows
how ratings for Eastern European credits were
generally worse than for their peers during the
first half of 2009, which may be a better
explanation for worse spread performance than
assuming higher beta. Charts 5, 6, and 7 highlight
the advantage of our methodology of fitting all
sectors and regions simultaneously relative to
rating rather than the usual approach of using
index sectors, because it adjusts naturally for
credit quality.
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Chart 7: issue-weighted average rating for the different regions, February 2009 - March 2011
BB
BB+
BBB-
BBB
BBB+
A-
BB
BB+
BBB-
BBB
BBB+
A-
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct-0
9D
ec-0
9Fe
b-10
Apr-1
0Ju
n-10
Aug-
10Oc
t-10
Dec
-10
Feb-
11
Asia EE LatAm MidEast
BB
BB+
BBB-
BBB
BBB+
A-
BB
BB+
BBB-
BBB
BBB+
A-
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct-0
9D
ec-0
9Fe
b-10
Apr-1
0Ju
n-10
Aug-
10Oc
t-10
Dec
-10
Feb-
11
Asia EE LatAm MidEast
Source: Bloomberg, Reuters, HSBC Calculations
Chart 8 shows the average rating for the different
sectors has evolved over time
Chart 8: Issue-weighted average rating for different industry sectors, Feb 2009-March 2011
BB
BB+
BBB-
BBB
BBB+
A-
BB
BB+
BBB-
BBB
BBB+
A-
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct-
09De
c-09
Feb-
10Ap
r-10
Jun-
10Au
g-10
Oct-
10De
c-10
Feb-
11
Gov Fin Ener Comm
BB
BB+
BBB-
BBB
BBB+
A-
BB
BB+
BBB-
BBB
BBB+
A-
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct-
09De
c-09
Feb-
10Ap
r-10
Jun-
10Au
g-10
Oct-
10De
c-10
Feb-
11
Gov Fin Ener Comm
Source: Bloomberg, reuters, HSBC Calculations
Combining the effect of sector, region, and duration Simultaneously allowing for differences in sector,
region, and duration allows us to calculate an
adjusted measure that we call “Implied Rating”,
which is a measure that should be globally
comparable, and represents the theoretical spread
the bond would have if there were no differences
in sector, region, or duration.
The difference between the implied and actual rating
of a bond gives a measure of possible mispricing.
Obviously, at this point it is not possible to form an
opinion as to whether the mispricing is more likely
to be resolved through a spread adjustment or
through a rating change, but it does give the analyst a
clear picture of what is priced into spreads. In Chart
9 the vertical black arrow points to the actual rating
of the selected name, and the grey arrow points to
the implied rating.
Chart 9: illustration of implied rating and actual credit rating
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)
Log(
Spre
ad)
Rating
Source: Bloomberg, Reuters, HSBC Calculations
Working with an implied rating has several
advantages because it does not change if the
spread does not move relative to the market. This
is a useful feature to have, and ensures that
changes in implied ratings are driven by
idiosyncratic changes in the spread of the credit
rather than changes in overall market spreads.
Broadly speaking, all credit spreads move in the
same direction unless there is a specific reason for
a particular credit to buck the trend. The size of
the co-movement is quantified as the credit's
‘beta’, or sensitivity to the market, and represents
how many basis points the credit typically moves
when the market moves by a single basis point.
When looking for relative value trades, it is
typical to look for movements that cannot be
explained through the beta. This is a good
approach in theory, but often breaks down in
practice because betas are not stable, and it is not
clear over what period they should be calculated
in order to be relevant for the future.
However, since changes to the implied rating
exclude changes that are related to the market, and
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since the implied rating is a spot estimate that
depends on history, it is not subject to
inaccuracies resulting from a beta calculated over
a possibly unrepresentative historical period.
Differences among sovereigns must also be accounted for While we have developed a single measure of
relative valuation accounting for the differences
among regions and sectors, often two companies
from different countries are compared solely on
the basis of where they trade relative to the
sovereign, and a key question is whether the
underlying sovereign itself is trading rich or cheap.
We have developed a separate quantitative model
that attempts to answer this question using credit
ratings, consensus growth forecasts, and
consensus inflation forecasts (see Emerging
Sovereigns: A new tool for identifying
opportunities in sovereign CDS, January 2010).
The output of the model is also an ‘Implied
Rating’, which is the theoretical rating that the
credit would have if it fell exactly on the fitted
relationship between spreads and ratings, and the
Forecast Adjusted Rating (FAR) is the rating the
model assigns to the credit. A sample output is
shown below for Russia.
Chart 10: evolution of rating, implied rating, and forecast adjusted rating (FAR), Mar 2010-Mar 2011
BBB
BBB+
A-
A
BBB
BBB+
A-
A
3-M
ar
12-A
pr
22-M
ay
1-Ju
l
10-A
ug
19-S
ep
29-O
ct
8-D
ec
17-Ja
n
26-F
eb
Russia FAR Average Implied
BBB
BBB+
A-
A
BBB
BBB+
A-
A
3-M
ar
12-A
pr
22-M
ay
1-Ju
l
10-A
ug
19-S
ep
29-O
ct
8-D
ec
17-Ja
n
26-F
eb
Russia FAR Average Implied
Source: Reuters, Bloomberg, HSBC Calculations
The difference between implied- and forecast-
adjusted ratings indicate the richness or cheapness
that the countries credit spreads are currently trading
relative to their ratings, growth, and inflation
forecasts, and chart 11 shows the results for the
countries associated with the banks in this report.
Chart 11: relative richness/cheapness of selected countries expressed in rating notches (negative numbers indicate richness)
Country Rich/Cheap Country Rich/CheapBrazil -3.0 Russia -1.7China 1.8 Saudi Arabia 2.0Hong Kong -1.7 Singapore N/AIndia 0.2 Thailand -0.9Kazakhstan 0.6 Ukraine -0.4Korea 1.3 UAE 3.5Qatar 4.7
Source: HSBC Calculations
Our methodology in practice, ITAU vs Brazil
Chart 12 shows the OAS of ITAU 2020
(Baa2/NR/BBB-) and Brazil 2021
(Baa3/NR/BBB-) over the last year.
Chart 12: ITAU 2020 vs Brazil 2021, Mar 2010-Mar 2011
50
100150200250300350
400
Mar
-10
Jun-
10
Sep-
10
Dec-
10
Mar
-11
OAS
(bp)
0
50
100
150
200
250
Diff
(bp)
ITAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
50
100150200250300350
400
Mar
-10
Jun-
10
Sep-
10
Dec-
10
Mar
-11
OAS
(bp)
0
50
100
150
200
250
Diff
(bp)
ITAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
Source: Bloomberg, HSBC Calculations
It would seem, at first glance, that ITAU is several
rating notches cheaper than Brazil considering
that it is better rated, and offers a spread pick-up
of around 150bp. However we have seen that
financial companies generally trade at several
notches cheaper than sovereigns. Our model
adjusts for the difference in sector and calculates a
richness or cheapness using ratings that may be
compared between the two bonds. This shows that
63
Global Emerging Markets – Credit Strategy EM Banks March 2011
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the risk-adjusted spread pick-up between ITAU
and Brazil is only around 1 rating notch.
Chart 13: relative richness/cheapness, ITAU vs Brazil
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Ric
h/C
heap
(not
ches
)
-1.00
0.00
1.00
2.00
3.00D
iffer
ence
I TAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Ric
h/C
heap
(not
ches
)
-1.00
0.00
1.00
2.00
3.00D
iffer
ence
I TAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
Source: Bloomberg
Rating change or spread change?
The framework for relative value presented so far
has focused on identifying richness or cheapness
relative to ratings, region, sector, and duration.
However it is agnostic about whether the
discrepancy would be resolved through a change
in spread or through a change in rating, and
generally speaking we leave this judgement to the
analyst. However we have produced a
fundamental scorecard that tries to separate the
better credits from the weaker ones.
The usual way to make such a scorecard is to
subjectively decide the weights that are to be
used. However recognising that the market pays
different levels of attention to factors based on
current conditions, we have attempted to weight
the factors on the basis of ability to explain
implied ratings using a discriminant analysis of
the factors. The model finds that currently the
most important factors that determine where EM
bank bonds trade are, in order of importance,
sovereign support, country inflation, NPLs/total
loans, ROE, loans/deposits, costs/income, and
loans/assets. However we have found that
including sovereign support and inflation merely
generates a scorecard that mimics ratings. We
have therefore removed the sovereign support and
inflation factors and chart 14 shows the
richness/cheapness relative to the scorecard value,
and chart 15 shows the credit rating relative to the
scorecard value.
As with any technique that attempts to automate
valuations, some of the scorecard values appear
unrealistic, but we keep it as a quantitative tool
that gives an additional perspective to the analysis
of the credits.
The benchmark for measuring relative
performance of our EM fundamental
recommendations is the universe of securities in
the Emerging Market Bond Index (EMBI)
combined with those in the Corporate Emerging
market Bond Index (CEMBI).
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Richness/cheapness relative to fundamental scorecard, 3 March 2011
WOORIBVTB
VEBBNK UOBSP
UKRSIB
SDBC
SBIIN
SBERRU
SABBAB
RSHBOCBCSP
NBADUH
KKB
KEB
KDB
ITAU
INDKOR
ICICI
ICBCAS
HSBKKZ
HANABK
GPBRU
EXIM UK
EXIM CH
EURDEV
EIBKOR
DBSSP
DBKAZ
DAHSIN
COM QATCITNAT
CINDBK
BTAS
BRADES
BOIIN
BOBIN
BNKEA
BNDES
BKM OSC
BCHINA
BBLTB
BANVOR
BANBRA AXSBIN
ATFBP
ALLIBKALFARU
ADCB
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4Adjusted Scorecard
Ric
h/C
heap
Source: Bloomberg/Reuters, HSBC Calculations
Relationship between scorecard value and credit rating, 3 March 2011
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
WOORIB
VTBVEBBNK
UOBSP
UKRSIB
SDBC
SBIINSBERRU
SABBAB
RSHB
OCBCSP
NBADUH
KKB
KEB
KDB
ITAU
INDKOR
ICICI
ICBCAS
HSBKKZ
HANABK
GPBRU
EXIMUK
EXIMCH
EURDEV
EIBKOR
DBSSP
DBKAZ
DAHSIN
COMQAT
CITNAT
CINDBK
BTAS
BRADES BOIINBOBINBNKEA
BNDES
BKMOSC
BCHINA
BBLTB
BANVOR
BANBRA
AXSBIN
ATFBP
ALLIBK
ALFARU
ADCB
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5Adjusted Scorecard
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
WOORIB
VTBVEBBNK
UOBSP
UKRSIB
SDBC
SBIINSBERRU
SABBAB
RSHB
OCBCSP
NBADUH
KKB
KEB
KDB
ITAU
INDKOR
ICICI
ICBCAS
HSBKKZ
HANABK
GPBRU
EXIMUK
EXIMCH
EURDEV
EIBKOR
DBSSP
DBKAZ
DAHSIN
COMQAT
CITNAT
CINDBK
BTAS
BRADES BOIINBOBINBNKEA
BNDES
BKMOSC
BCHINA
BBLTB
BANVOR
BANBRA
AXSBIN
ATFBP
ALLIBK
ALFARU
ADCB
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5Adjusted Scorecard
Source: Bloomberg, Reuters, HSBC Calculations
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bank profiles
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Asian banks
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Credit growth and risks understated Loan growth in the first 11 months of 2010 kept
up its momentum at 19.4% y-o-y, with total new
loans (RMB and FX) spiking up to RMB7.79trn
(USD1.18trn), exceeding the government’s
RMB7.5trn new-loan target for the whole year.
Moreover, according to Fitch estimates, around
RMB3trn of additional credit, in the form of either
undiscounted acceptances or credit-related wealth
management and trust products, has not been
reflected in the banks’ balance sheets. If the
RMB3trn is incorporated, total new credit would
reach RMB10.8trn (USD1.63trn) – growth of
27% y-o-y, or 29% of nominal GDP. Comparing
the strong credit expansion against 16% nominal
GDP growth in 9M10 suggests to us a degree of
credit misallocation that is likely to be reflected in
banks’ asset quality. Year-to-date, new lending to
corporates was mainly distributed to the
infrastructure, manufacturing and real-estate
development sectors, which contributed 47%,
14% and 7% of total loans outstanding. Lending
to households grew at an unprecedented 42% y-o-
y as of September 2010, of which 55% was in the
form of mortgages. Note, loans to households
account for 20% of loans outstanding.
China banks
New credit in 2010 estimated to reach RMB10.8trn (USD1.6trn)
Local government exposure likely to weigh on asset quality
Banks’ capital structures to remain under pressure
Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]
Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]
China – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) 9.1 10.0 8.9 Balance sheet ratios: Nominal GDP (USDbn) 4,913 5,631 6,593 Total assets (USDbn) 9,128 11,536 13,526* GDP per capita (USD) 3,699 4,219 4,915 Liquid assets/total assets Total loan growth (%) 15 33 20 CPI, average (% y-o-y) -0.7 3.3 3.9 Loans/total assets (%) 51 54 54 Policy rate, end-year (%) 5.31 5.81 6.31 Retail loans/gross loans 18 19 22 Trade balance (USDbn) 196.1 176.5 180.3 Impaired loans/gross loans** 2.4 1.6 1.2* Current account balance (USDbn) 284 250 260 Reserve coverage of Impaired loans** 116 155 203* Current account balance (% GDP) 5.8 4.4 3.9 Gross loans/customer deposits 67 70 69 Total deposit growth (%) 19 28 38 Gross external debt (USDbn) 350.0 330.0 360.0 Capital/total assets (%) 6.1 5.6 6.0 Private sector external debt (USDbn) Profitability ratios: Central government balance (% GDP) -2.2 -2.8 -2.5 Cost/income ratio Gross public external debt (% GDP) 18.0 18.4 18.7 ROA 1.0 0.9 N/A International reserves (USDbn) 2,399 2,550 2,700 Net interest margin Cost of Risk Banking assets/GDP (%) 231 240* N/A Market share (as % of sector assets): Total loans/GDP (%) 125 130* N/A Largest 5 banks 51 51 50* Retail loans/GDP (%) 24 28* N/A State-controlled banks*** 60 60 N/A Total deposits/GDP (%) 180 190* N/A Foreign-owned banks 2 2 N/A
* as of Sep 2010 ** of commercial banks; *** large commercial banks & policy banks Source: The Central Bank of China, estimates HSBC Economics
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Considering both mortgage loans and loans to
property developers, lending to the real estate
sector rose by 34% y-o-y and accounted for 19%
of total loans.
Headline asset quality continued to improve, with
commercial banks’ gross NPL ratio down to 1.2% as
at September 2010, from 1.6% at end 2009, and the
provision coverage ratio up to 203% from 155%
over the same period. However, the real concerns
over the banking system’s asset quality lie in the
estimated RMB2trn of non-performing loans to local
government financing vehicles (LGFVs), which are
not yet captured in the above indicators. In July, the
Ministry of Finance, the National Development and
Reform Commission, the People’s Bank of China
and the China Banking Regulatory Commission
(CBRC) issued guidelines for cleaning up LGFVs.
In mid-October, China Securities reported that
around 26% of the RMB7.66trn lending to LGFVs is
problematic – ie has been extended to borrowers
who have encountered financial difficulties and
consequently are having problems servicing their
debt. If the implied RMB2trn is counted as NPLs,
we estimate that the NPL ratios of commercial banks
and the banking sector would rise to 5.1% and 7.0%,
from 1.3% and 2.8%, respectively (Figure 2).
According to 21st Century Business News, the
results of CBRC verification show that RMB3.6trn,
or 49% of lending to LGFVs, is guaranteed by local
governments, which equates to around 60% of
China’s current public debt level, or 10% of
nominal GDP.
The capital level of China’s commercial banking
sector has kept trending upwards. The total capital
adequacy ratio and the Tier 1 ratio edged up to
11.6% and 9.5%, from 11.4% and 9.0%,
respectively, in December 2009, thanks to strong
profit generation and recapitalisation activities.
After very strong loan growth in 2009, China’s
banks conducted, or announced, large capital-
raising plans during that year. The top five banks
alone either completed, or announced, a total of
RMB416bn (USD62bn) raised via either common
equity or convertible bonds this year. However, as
we expect credit growth to remain relatively
robust, banks’ capital structures will likely remain
under some pressure, in our view.
We believe China’s bank regulator has been well
aware of the potential risks of continuous high
loan growth and for this reason has imposed
higher capital and provision requirements (eg,
total provisions/total loans of 2.5x on top of the
existing 150% loan-loss coverage-ratio
requirement). Given China banks’ central role in
providing financing and driving economic growth,
capital misallocation is likely to persist, in our
view. In addition, we continue to have concerns
over asset quality, especially over loans
guaranteed by local governments. Consequently,
we believe the contingent risk that China’s
banking industry poses to the sovereign credit
profile is high.
Potential impact on banking system if 26% of LGFV lending were to be counted as NPLs (as of June 2010)
New (RMBm) Total loans NPLs LLRs NPL ratio Loan loss coverage
Commercial banks 34,993 455 846 1.3% 186% Policy banks & credit cooperatives 12,408 867 324 7.0% 37% Banking system 47,401 1,322 1170 2.8% 89% 26% LGFV Adj NPLs LLRs Adj NPL ratio Adj loan loss coverage
Commercial banks 1,314 1,769 846 5.1% 48% Policy banks & credit cooperatives 677 1,544 324 12.4% 21% Banking system 1,992 3,314 1170 7.0% 35%
Source: CBRC, HSBC
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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China Development Bank Increasing China’s competitiveness Key events and risks to monitor
Loan provisioning could rise due to LGFV exposure Funding costs could rise if CDB bonds are designated 20% risk-weight
Credit profile outlook (Neutral)
We continue to view CDB’s credit profile as linked closely to the sovereign, given the ownership and role it plays in China’s economy. We note that the bank is commercially oriented and has a niche in financing medium-term infrastructure projects, which we view positively. The downside risk to our recommendation include: any adverse exposure to local government financing vehicles (LGFVs), which could weigh on asset quality and the bank’s capital structure. However, the credit profile of CDB is strongly linked to that of the government and is likely to move with the latter, which is both an upside and a downside risk. HSBC FI Research view
CDB’s net income rose 31% y-o-y to RMB33.2bn (USD4.9bn) in FY09, thanks to lower provisions on loans and investment securities. Loan growth was 28% during the year with most new loans flowing to public infrastructure, petrochemical projects and public highways. Asset quality deteriorated, with gross NPLs up 25%. Capital level weakened, with Tier 1 down to 8.8% in FY09 from 11.3% in FY08 on rapid credit expansion. Total CAR held up at 11.8% due to a RMB40bn sub-debt issued in the year. Note that local media outlet China Securities reported China policy banks accounted for 30% of RMB7.66trn lending to LGFVs and 26% of total LGFV loans are high risk. Given CDB’s traditional role in supporting public infrastructure projects, especially those without easy access to credit from commercial banks, CDB may have a relatively high exposure to LGFVs and its underlying asset quality may be weaker than that implied by NPL ratios. Its conversion to a commercial bank allowed it to solicit customer deposits, which grew 58% in FY09. Despite the commercialisation, CDB is wholly owned by the government and will continue to fulfil its policy role. According to CBRC, the risk-weight of RMB bonds issued by CDB before 2010 will remain at 0% but might be extended beyond 2011. CDB has a funding advantage as RMB bonds issued by other commercial banks carry a 20% risk-weight.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
China Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's Aa3 PositiveSub-debt S&P AA- StableMoody’s Senior unsecured Aa3 Positive Major shareholders (as at Dec’09) Bank-deposit Ministry of Finance 51.3%Sub-debt Central Huijin Investment Ltd 48.7%Financial strength S&P Senior unsecured AA- Stable Bloomberg Sub-debt SDBC Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
SDBC ’14 (A+/Aa3/AA-) 600m 4.75%SDBC ’15 (A+/Aa3/AA-) 1,000m 5.0%
Bank in brief
China Development Bank Corporation (CDB) was one of three policy banks established in China in 1994 pursuant to a Special Decree of the State Council (the country’s highest administrative body) as a policy-oriented statutory financial institution. In December 2008, as part of a commercialisation process, the bank was reorganised by as joint-stock corporation that is 51% owned by the Ministry of Finance and 49% by Central Huijin Investment. The bank had 35 branches and 3 representative offices. Assets totalled RMB4,540bn (USD666bn) as at Dec09.
China Development Bank Corporation: financial summary (consolidated)
Year to December (USDm) 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009
Income statement Growth (y-o-y %) Interest income 14,543 19,725 28,972 28,544 Loans 16.5 12.5 27.0 27.8Interest expense -7,919 -10,545 -17,046 -17,679 Assets 21.9 25.1 32.0 18.8Net interest income 6,624 9,180 11,926 10,865 Pre-provision profit 29.0 24.7 31.3 -13.8Other operating income -38 -505 538 746 Net income 21.4 6.9 -14.4 31.3Operating income 6,586 8,675 12,464 11,610 Profitability Operating expenses -1,046 -1,434 -2,055 -2,482 ROAA 1.3 1.1 0.8 0.8Pre-provision profits 5,540 7,241 10,409 9,128 Pre-provision profits/Average assets 2.1 2.1 2.2 1.5Provisions for loan losses -493 -1,411 -5,635 -2,976 Net interest margins 2.53 2.89 2.60 1.89Pre-tax 5,047 5,830 4,774 6,153 Cost-income ratio 15.9 16.5 16.5 21.4Taxation -1,579 -1,945 -1,133 -1,276 Asset quality Net income 3,468 3,885 3,640 4,864 Gross NPL ratio 0.72 0.59 0.96 0.94 Gross NPLs (USDm) 1,769 1,976 1,954 4,093Key balance sheet items Loan Loss Res/NPLs 191 251 210 215Deposits 19,900 20,258 35,943 56,848 Capital structure Advances 255,638 287,602 417,347 533,502 Total CAR 8.1 12.8 11.3 11.8Total assets 296,530 370,896 559,501 664,986 Tier-1 ratio na na 10.1 8.8Total equity 20,268 44,765 50,883 55,473 TCE/total tangible assets na 12.1 9.1 8.3 Funding Loan-to-deposit ratio 1285 1420 1161 938 Loan/Assets 86.2 77.5 74.6 80.2
Source: CDB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Export Import Bank of China Championing China abroad Key events and risks to monitor
Strong credit growth could lead to asset impairment down the road Profile could evolve with China’s ‘go global’ push
Credit profile outlook (Neutral)
The state sets the strategic direction but allows management a degree of independence in balancing policy goals and commercial objectives. Information disclosure remains thin, so future performance may surprise. Nevertheless CEXIM continues to play an important policy role in promoting trade and its credit profile is inextricably linked to the China sovereign. Taken all together, we have a Neutral fundamental recommendation on the issuer. The risks to our recommendation, to both the upside and the downside, are directly linked with the owner, the state and changes in its credit profile and relationship with CEXIM. HSBC FI Research view
Export Import Bank of China’s (CEXIM) net income in 2009 rose 13% y-o-y as loan-loss provisions fell 63% y-o-y. Net interest income declined 3% over the year due to a sharp drop in net interest margin, despite strong loan growth of 34%. Disbursement on export seller’s credit increased by 33% to RMB173bn in FY09 while actual disbursement on export buyer’s credit was up 61% to RMB4.31bn. Asset quality improved with CEXIM’s NPL ratio declining to 1.10% in FY09 from 1.52% in FY08. Capitalisation improved slightly, with an equity/asset ratio of 1.3% in FY09, down from 1.2% in FY08.
CEXIM’s credit profile is underpinned by government support mechanisms designed to ensure its financial profile is not compromised while it carries out its function of facilitating trade. The support mechanism includes certain funding advantages and government fiscal subsidies to cover its policy objectives. We believe that unlike the move to commercialise CDB, CEXIM will continue to remain a policy bank, so the question of a dilution in the government’s shareholding should not arise.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
China Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's Aa3 PositiveSub-debt S&P AA- StableMoody’s Senior unsecured Aa3 Positive Major shareholders (as at Dec’09) Bank-deposit Government of China 100%Sub-debt Financial strength S&P Senior unsecured AA- Stable Bloomberg Sub-debt EXIMCH Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
EXIMCH ’14 (A+/Aa3/AA-) 1,000m 5.25%EXIMCH ’15 (A+/Aa3/AA-) 1,000m 4.875%
Bank in brief
CEXIM is one of China’s policy banks and is directly wholly owned by the Chinese government. It was established in 1994, pursuant to a special decree of the State Council, as a policy-oriented statutory financial institution. CEXIM is the only export credit agency in China and is subject to the supervision and direction of the PBOC, CBRC, Ministry of Finance, Ministry of Commerce and NDRC. Total assets amounted to RMB792bn (USD119bn) at end-2009.
Export Import Bank of China: financial summary
Year to December (USDm) 2006 2007 2008* 2009* Year to December (%) 2006 2007 2008* 2009*
Income statement Growth (y-o-y %) Interest income 1,053 1,704 3,223 3,475 Loans 31.7 38.4 39.7 33.8Interest expense -1,003 -1,373 -2,702 -2,963 Assets 26.1 46.6 69.4 23.5Net interest income 51 331 521 512 Pre-tax income -8.9 -60.4 1480.5 23.4Other operating income 108 -141 390 353 Net income 23.2 23.6 1931.1 13.5Operating income 158 190 911 865 Profitability Operating expenses -102 -167 -290 -327 ROAA 0.04 0.03 0.44 0.35Pre-provision profits 57 24 622 538 ROAE 1.57 1.49 26.64 28.37Impairment losses - - -244 -91 Net interest margins** 0.19 0.88 0.82 0.49Non-operating profit - - 28 64 Cost-income ratio 64.2 87.6 31.8 37.8Pre-tax 57 24 407 510 Asset quality Taxation -46 -9 -87 -141 Gross NPL ratio 3.47 2.45 1.52 1.10Net income 11 14 320 369 Gross NPLs (USDm) 1,030 1,077 1,005 968 Loan Loss Res/NPLs 34.2 53.6 74.5 naKey balance sheet items Capital structure Deposits 3,875 4,351 6,471 7,511 Total CAR na na na naAdvances 29,332 43,380 64,804 86,698 Total equity/total assets 2.2 2.4 1.2 1.3Total assets 33,096 51,856 93,966 116,030 Funding Total equity 713 1,246 1,111 1,492 Loan-to-deposit ratio 757 997 1001 1154 Loan/Assets 88.6 83.7 69.0 74.7
* FY08 and FY09 numbers are stated according to new accounting standard which was adopted by the bank in 2009. **Based on HSBC estimates. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: CEXIM, HSBC
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Growth of lending into China is a concern Loan growth in the Hong Kong banking sector has
been strong, reaching 26% y-o-y as of September
2010 compared with flat loan growth as at
December 2009. Lending for financing trade grew
by 54% y-o-y while loans to be used in Hong Kong
grew by 21% y-o-y and loans to be used outside
Hong Kong grew by 41% (Figure 1). Strong
growth in trade financing is not surprising given the
sharp drop-off in trade in 2009. However, credit
expansion into Hong Kong raises some concerns,
particularly as it seems to be pouring into the
property sector (Figure 2). Lending to the property
sector in Hong Kong grew by 18% y-o-y as of
September 2010. Lending to the property sector
comprises construction, property development and
mortgages and accounted for 52% of lending in
Hong Kong, or 38% of loans of Hong Kong banks
as at September 2010.
There are signs that funds are being directed into
Mainland China by Hong Kong and Mainland
corporates although there is no clarity on how
these funds are being used in Mainland China.
Our concern is that much may be finding their
way into property.
Hong Kong Banks
Outsized banking sector reflects its financial centre status
Banks maintain liquid balance sheets and are well capitalised
Banks’ significant lending growth into China is a worrying trend
Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]
Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]
Hong Kong SAR – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) -2.8 7.0 5.2 Balance sheet ratios: Nominal GDP (USDbn) 210.6 226.8 237.08 Total Assets (USDbn) 1,364 1,350 1,546* GDP per capita (USD) 30,068 32,252 33,693 Liquid assets/total assets N/A N/A N/A Total Loan growth (%) 11 0 27* CPI, average (% y-o-y) 0.5 2.3 4.4 Loans/Total assets (%) 30 31 34* Policy rate, end-year (%) 0.50 0.50 0.50 Retail loans/gross loans 27 28 24** Trade balance (USDbn) -26.9 -39.2 -26.1 Impaired loans/gross loans 1.2 1.4 0.8** Current account balance (USDbn) 15.1 21.8 17.7 Reserve coverage of Impaired loans N/A N/A N/A Current account balance (% GDP) 7.2 8.6 7.5 Gross Loans/Customer deposits 53 50 60* Total Deposit growth (%) 3 5 5* Gross external debt (USDbn) 673.0 720.1 784.9 Capital adequacy ratio 14.8 16.8 16.1** Private sector external debt (USDbn) 663.0 Profitability ratios: Central government balance (% GDP) 1.6 2.5 3.1 Cost/income ratio 45.1 49.7 49.7** Gross public external debt (% GDP) 0.3 ROA N/A N/A N/A International reserves (USDbn) 255.8 267.0 279.4 Net interest margin 1.8 1.5 1.3** Cost of Risk N/A N/A N/A Banking assets/GDP (%) 641 692* N/A Market share (as % of sector assets): Total loans/GDP (%) 201 239* N/A Largest 5 banks 63 66 68*** Retail loans/GDP (%) 153 178* N/A State-controlled banks N/A N/A N/A Total Deposits/GDP (%) 391 394* N/A Foreign-owned banks 94 94 94***
* as of Nov 2010, ** as of Sep 2010, *** as of Jun 2010 Source: The Hong Kong Monetary Authority, estimates HSBC Economics
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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1. Loans in Hong Kong by use (as at September 2010)
HKDm % y-o-y % total
Loans for financing trade 256,379 54% 6% HKD 68,611 8% FC 187,768 80% Loans for use in HK 3,050,061 21% 74% HKD 2,595,386 19% FC 454,675 29% Loans for use outside of HK 784,761 41% 19% HKD 185,442 34% FC 599,319 43% Loans where place of use unknown 34,844 29% 1% HKD 6,770 26% FC 28,074 30% Total 4,126,045 26% 100%
Source: HKMA
2. Loans for use in HK by economic sector (as of Sep-10)
HKDm % chg y-o-y
% total
Manufacturing 167,554 21% 5% Transport and transport equipment 167,179 12% 5% Electricity and gas 39,573 28% 1% Recreational activities 3,591 32% 0% Information technology 41,475 22% 1% Construction, property dev’t & inv. 813,792 23% 27% Wholesale and retail trade 233,301 53% 8% Miscellaneous 1,583,597 17% 52% Hotels, boarding houses & catering 38,063 10% 1% Financial concerns 245,130 9% 8% Stockbrokers 108,120 157% 4% Professional and private individuals 1,008,658 13% 33% purchase of flats in Home Ownership 49,562 -7% 2% purchase of other residential properties 722,543 14% 24% All others 183,626 16% 6% Loans and advances for use in HK 3,050,061 21% 100% Property related 1,585,897 18% 52%
Source: HKMA
However, concerns over credit misallocation are
mitigated by strong capital levels and the still-liquid
balance sheet of the banking sector. The capital
adequacy ratio of the sector stood at 16.2% while the
loan-deposit ratio was 59% as at June 2010.
Given its status as a financial centre, total
credit/GDP is understandably high, standing at
252% (bank credit/GDP was 221%) as at June
2010. However, the contingent risk to the
sovereign is viewed as low, in our view, given the
strength of the banking sector.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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BOC Hong Kong Leading lender in Hong Kong Key events and risks to monitor
Strong credit growth could put pressure on capital structure Vulnerable to headline risk of its parent Likely to benefit from development of renminbi business in Hong Kong
Credit profile outlook (Neutral)
As the second-largest bank in Hong Kong, BOCHK has a strong domestic franchise and its credit profile is underpinned by the strength of its parent, Bank of China, which is majority owned by the government of China. We have a long-term fundamental recommendation of Neutral on the issuer. Risks to our view include: headline risk from its parent, for instance on provisioning regarding exposure to local government financing vehicles (LGFVs) in 2011. Thinning capitalisation as a result of credit expansion represents a downside risk to our view. Upside risks would include a significant jump in profitability.
HSBC FI Research view
BOC Hong Kong (BOCHK) reported a 7.5% increase in net income for H1 2010 to HKD7.2bn on the back of the reversal of impairment charges on both loans and investment securities. Net interest income barely changed, thanks to strong loan growth (+23% y-o-y), which offset a 21bps decline in net interest margin over the year. Loan portfolio expanded 13% h-o-h, with strong growth in property development, trade finance and use for overseas. The bank’s on-balance sheet exposure to mainland China grew 17% in H1 10, not as aggressively as other HK banks, which may be attributable to the strong presence of its parent, Bank of China. Asset quality remains strong with gross NPLs down 26% h-o-h and loan loss coverage up to 174% from 128% at end 2009. Capital levels remain strong, as reflected by its total CAR, Tier 1 and tangible common equity/total assets of 16.2%, 11.3% and 8.4% at end June 2010. Overall profitability remains good, with ROA of 1.2% in H1 10. Despite strong loan demand, HK banks may continue to come under pressure to attract deposits both in Hong Kong and the mainland. This, in our view, will put a strain on HK banks’ loan growth and downward pressure on margins. We have a Neutral fundamental recommendation on the credit.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A Stable Moody's Aa1 PositiveSub-debt A- S&P AAA StableMoody’s Senior unsecured NR Major shareholders (as at Jun’10) Bank-deposit Aa3 Stable Bank of China Limited 66.06%Sub-debt A1 Stable Shareholding of Bank of China Limited Financial strength C+ Stable Central Huijin 67.53%S&P Senior unsecured A- Positive Bloomberg Sub-debt BBB+ BCHINA Financial strength B
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BCHINA ’20 (A-/A1/BBB+) [LT2] 2,500m 5.55%
Bank in brief
BOCHK is the second-largest banking group in Hong Kong and is one of the three HKD note-issuing banks. In 2003, the bank was appointed by the PBOC as the sole clearing bank for renminbi business in Hong Kong. BOCHK assets totalled HKD1,302bn (USD168bn) and accounted for 13% of deposits and 14% of loans in the HK banking sector. At end-June 2010, the bank had 269 branches in Hong Kong and 23 branches and sub-branches on the mainland. In 2009, BOCHK transferred its mainland branches and sub-branches to Nanyang Commercial Bank (China), BOCHK’s wholly-owned subsidiary incorporated in China.
BOC Hong Kong: financial summary
Year to December (USDm) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010
Income statement Growth (y-o-y %) Interest income 5,903 4,531 2,797 1,373 Loans 19.1 11.7 12.3 23.1Interest expense -3,417 -1,942 -484 -220 Assets 16.8 7.5 5.7 13.6Net interest income 2,486 2,589 2,313 1,153 Pre-provision profit 34.3 -14.0 -17.0 -9.4Other operating income 1,007 690 1,048 460 Net income 11.6 -78.4 310.6 7.5Operating income 3,493 3,278 3,361 1,614 Profitability Operating expenses -996 -1,126 -1,566 -583 ROAA 1.6 0.3 1.2 1.2Pre-provision profits 2,497 2,152 1,795 1,030 Pre-provision profits/Average assets 2.0 1.5 1.2 1.3Impairment allowances -186 -1,615 154 21 Net interest margins 2.07 2.00 1.69 1.58Disposals/fair value adj 136 -15 202 77 Cost-income ratio 28.5 34.4 46.6 36.2Other income 4 2 7 -0 Asset quality Pre-tax income 2,451 524 2,157 1,128 Gross NPL ratio 0.4 0.5 0.3 0.4Taxation -424 -138 -345 -182 Net NPL ratio 0.3 0.3 0.2 0.1Minority interests -48 43 -41 -21 Gross NPLs (USDm) 231 276 228 169Net income 1,980 429 1,771 925 Loan Loss Res./NPLs 77 108 128 174 Capital structure Balance sheet summary Total CAR 13.1 16.2 16.9 16.2Deposits 101,714 103,556 108,626 114,555 Tier-1 ratio 12.2 10.9 11.6 11.3Advances 53,860 60,578 67,980 76,691 TCE/total tangible assets 8.9 7.4 8.7 8.4Total assets 136,836 148,028 156,402 167,192 Funding Total equity 12,183 10,907 13,623 14,064 Loan-to-deposit ratio 53.0 58.5 62.6 66.9 Loan/Assets 39.4 40.9 43.5 45.9
Source: BOCHK, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bank of East Asia Looking to China for growth Key events and risks to monitor
China’s macro outlook given BEA’s 62% loan exposure to the sector Exposure to commercial real estate property in the US could weigh on earnings LD ratio of 83% is high compared with peers in Hong Kong
Credit profile outlook (Underweight)
We think BEA’s weak profitability and strong credit growth will put pressure on the bank’s capital levels. In addition, exposure to real estate in China could weigh on asset quality should there be a downturn in China property. Hence we are inclined to the view that BEA’s credit profile will weaken over two years. The upside risks to our view include substantial improvements in asset quality and capitalisation.
HSBC FI Research view
Bank of East Asia (BEA) reported a 65% increase in net income to HKD4.2bn. Excluding disposal gains and valuations losses on own debt issued as well as dividends on hybrid Tier 1s, the bottom line is flat compared with last year. Headline asset quality indicators improved, with gross NPLs down 35%. Loan-loss coverage improved from 55% in 2009 to 69% in 2010, but remains lower than its peers in the region. Our concerns are growing in tandem with the bank’s aggressive expansion in China. The bank’s credit growth was 22% over the year, more than 52% of which was contributed by lending to China. If the end use of credit is considered, BEA’s non-bank exposure to mainland China increased 55% and accounted for 62% of the bank’s loan book. The bank’s capital levels remained relatively unchanged in 2010, with a total CAR of 13.2% and a Tier 1 ratio of 9.8%. On a sequential basis (h-o-h), total CAR and Tier 1 slipped by 50-60bp on 6% credit growth, which pushed up risk-weighted assets by 10% in H2 2010. We think the bank will face capital pressure if it continues to increase its balance sheet at such a pace. We expect new supply from BEA to be significant this year, as the bank has GBP300m UT2 and USD600m LT2 to be called early next year, although the call is still subject to regulatory approval. We are Underweight on the credit on concerns over the bank’s underlying asset quality and capital pressure, and reiterate a sell trading call on BNKEA 8.5% ’49-19c.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured - Moody's Aa1 PositveSub-debt - S&P AAA StableMoody’s Senior unsecured A2 Stable Major shareholders (as at Jun’10) Bank-deposit A2 Criteria CaixaCorp 14.99%Sub-debt A3 Guoco Management Co Ltd 9.12%Financial strength C- S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ BNKEA Financial strength B
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BNKEA ’20 (NR/A3/BBB+) [LT2] 600m 6.125%BNKEA ‘49-19c (NR/Ba3/BBB-) [T1] 500m 8.5%BNKEA ’17-12c (NR/A3/BBB+) [LT2] 600m L+52bpsBNKEA ’49-12c (NR/Baa3/BBB) [UT2] GBP300m 6.125%
Bank in brief
BEA is the largest independent local bank in Hong Kong. At June 2010, the bank’s consolidated assets were HKD478bn (USD62bn) and accounted for 3% of customer deposits in Hong Kong. The bank’s core businesses are deposit-taking and home mortgage lending in Hong Kong. BEA operates in HK, mainland China, Macau, the US, UK, Canada and Southeast Asia. Bank of East Asia (China) has 78 branches and contributed 35% of profit before tax in H110.
Bank of East Asia: financial summary
Year to December (USDm) 2007 2008 2009 2010 Year to December (%) 2007 2008 2009 2010
Income statement Growth (y-o-y %) Interest income 2,347 2,243 1,564 1,757 Loans 34.4 3.5 7.4 22.2Interest expense -1,581 -1,371 -693 -785 Assets 33.9 4.8 5.1 23.1Net interest income 766 872 870 973 Pre-provision profit 0.6 -83.6 498.7 4.0Other operating income 363 -43 444 462 Net income 20.6 -99.1 6476.9 64.7Operating income 1,130 829 1,314 1,435 Profitability Operating expenses -601 -742 -791 -890 ROAA 1.2 0.0 0.6 0.9Pre-provision profits 528 87 524 545 Pre-provision profits/Average assets 1.2 0.2 1.0 0.9Provisions for loan losses -28 -72 -143 -37 Net interest margins* 1.8 1.8 1.7 1.78Other impairment losses -23 -50 -5 -3 Cost-income ratio 53.2 89.5 60.2 62.1Disposals 138 50 14 60 Asset quality Valuation gains on inv ppty 38 -22 27 55 Gross NPL ratio 0.6 0.7 1.0 0.5Profits of associates 12 7 34 44 Net NPL ratio 0.4 0.5 0.8 0.4Pre-tax income 665 1 451 664 Gross NPLs -USDm) 159 205 316 1,592 Taxation -124 12 -111 -109 Loan Loss Res./NPLs 56.1 65.8 54.9 69.2Net income 531 5 331 545 Capital structure Balance sheet summary Total CAR 12.6 13.8 13.3 13.2Deposits 36,423 41,780 44,173 54,069 Tier-1 ratio 7.4 9.1 9.4 9.8Loans 30,171 31,448 33,762 41,217 TCE/total tangible assets 7.1 7.3 7.3 7.7Total assets 50,495 53,284 55,980 68,797 Funding Total equity 3,902 4,192 5,097 6,265 Loan-to-deposit ratio 82.8 75.3 76.4 76.2 Loan/Assets 59.8 59.0 60.3 59.9
* Based on our estimates. Source: Bank of East Asia, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Citic Bank International Leveraging China connectivity Key events and risks to monitor
Mainland exposure accounts for 44% of loan book Facilitates overseas expansion and investments by China corporates Will benefit from RMB settlement business in Hong Kong
Credit profile outlook (Neutral)
While the bank’s franchise in Hong Kong is small, we think its standalone credit profile will remain stable in 2011 on the strength of its capital structure and a favourable business cycle in Hong Kong. The downside risks include: excessive exposure to China corporates while the upside is related to significant improvements in financial performance. Majority shareholding by China Citic Bank is a positive for CBI.
HSBC FI Research view
Citic Bank International’s H1 2010 net income jumped by 38% y-o-y to HKD587m on stronger net interest income (+26%) and lower impairment charges (-45%). Non-interest income increased by 13.2% y-o-y, mainly on gains from FX dealing. Overall profitability was held back by rising operating expenses (+21%), which the bank attributed to preparation for network expansion in Asia. Loans and deposits growth rebounded 20% and 19% respectively in H1 10, which the bank credited to business referral from its parent, China Citic Bank. Loan growth came mainly from lending to wholesale and retail trade (+135% h-o-h), manufacturing (+44%) and trade finance (60%). Asset quality remains stable, with gross NPLs up 7% h-o-h but down 21% from a year ago. The gross NPL ratio edged down to 1.62% in H1 10 from 1.78% in H2 09, on a higher loan base. Capital levels deteriorated slightly due to balance sheet expansion, with Tier 1 and tangible common equity/total assets down from 11.9% and 10.2% at end-2009 to 10.3% and 8.8% in H1 10, but remain adequate, in our view. Total CAR rose to 18.0% from 16.4% during the same period thanks to the USD500m sub-debt issued in June 2010. We view the bank’s credit profile as stable, do not expect any swings in core credit indicators, and have a Neutral fundamental recommendation.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured BBB+ Stable Moody's Aa1 PositiveSub-debt BBB S&P AAA StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Nov’10) Bank-deposit Baa2 Citic Int’l Financial Holdings 100%Sub-debt Baa3 Shareholding of Citic Int’l Financial Holding Financial strength D+ China Citic Bank 70%S&P BBVA 30%Senior unsecured -- Bloomberg Sub-debt -- CINDBK Financial strength --
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
CINDBK ’20 (BBB/Baa3/NR) [LT2] 500m 6.875%CINDBK’17-12c (BBB/Baa3/NR) [LT2] 250m L+175bpsCINDBK ’49-12c (BBB-/Ba1/NR) [UT2] 250m 9.125%
Bank in brief
Citic Bank International (CBI) was established in 1922, providing corporate and retail banking and treasury services. The bank operates with around 1,500 employees and 30 branches in Hong Kong, with a presence in Macau, Shanghai and the US. The bank is also on track to expand in the ASEAN region. At end June 2010, the bank’s assets totalled HKD143bn (USD18bn), and accounted for 1.7% of deposits and 2.1% of loans in the banking system. Its wholly owned subsidiary CITIC Ka Wah Bank (China) has gained regulatory approval to offer onshore RMB and foreign currency banking services.
Citic Bank International: financial summary (consolidated)
Year to December (USDm) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010
Income statement Growth (y-o-y %) Interest income 648 516 382 177 Loans 30.5 11.0 -2.8 20.2Interest expense -469 -318 -132 -48 Assets 23.5 10.0 -1.4 22.2Net interest income 179 199 250 129 Pre-provision profit -89.1 303.0 206.1 22.0Other operating income -12 39 162 68 Net income -88.4 20.6 642.7 38.0Operating income 168 237 412 197 Profitability Operating expenses -151 -170 -206 -93 ROAA 0.1 0.1 0.8 0.9Pre-provision profits 17 67 206 104 Pre-provision profits/Average assets 0.1 0.4 1.3 1.2Impairment allowances -13 -49 -72 -15 Net interest margins 1.86 1.53 1.73 1.69Disposals/fair value adj 10 3 10 2 Cost-income ratio 90.1 71.7 49.9 47.2Pre-tax income 14 21 144 90 Asset quality Taxation - -5 -22 -15 Gross NPL ratio 1.2 1.9 1.8 1.6Net income 14 16 123 76 Net NPL ratio 1.0 1.5 1.4 1.2 Gross NPLs (USDm) 97 179 168 179 Loan Loss Res./NPLs 38.9 36.2 47.9 45.7 Capital structure Balance sheet summary Total CAR 15.8 14.7 16.4 18.0Deposits 10,768 12,301 12,153 14,387 Tier-1 ratio 10.1 9.6 11.9 10.3Advances 8,683 9,701 9,419 11,251 TCE/total tangible assets 8.7 7.8 10.2 8.8Total assets 14,199 15,717 15,491 18,396 Funding Total equity 1,235 1,230 1,577 1,618 Loan-to-deposit ratio 80.6 78.9 77.5 78.2 Loan/Assets 61.2 61.7 60.8 61.2
Source: Citic Bank International, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Dah Sing Banking Group More risk for higher profits Key events and risks to monitor
Overall margins still under pressure Overseas lending grew 21% h-o-h and accounts for 25% of loan book Policy tightening in China could have asset-quality implications
Credit profile outlook (Neutral)
We believe the cyclical strength of the economies of Hong Kong and China will allow the bank to preserve its credit profile in 2011. We have a Neutral recommendation on its fundamentals. Risks to our recommendation, to both the upside and the downside, are related to the profitability in the home market, also the growth in lending into China may become an asset-quality risk.
HSBC FI Research view
Dah Sing Banking Group reported a 65% increase in net income to HKD507m for 1H10. The improvement was driven by lower operating expenses (-33% y-o-y) and a marked decrease in loan-loss provisions (-87%). Net interest income dropped 6% y-o-y, dragged down by weakening net interest margin (-12bps). The loan portfolio expanded 11% h-o-h in H1 2010, on property-related lending, trade finance and overseas loans. Overseas loan growth came mainly from lending in China, which more than doubled in H1 2010. The expansion in China may have benefited from tighter credit quotas faced by mainland lenders, especially in certain industries, which we see as a potential risk to asset quality should the economy slow or the property market correct. Asset quality has improved significantly, with gross NPLs dropping 36% in H1 2010 and loan-loss coverage ratio up to 162% from 123% at end-2009. Capital levels remains sound, with CAR, Tier 1 and tangible common equity/total assets standing at 17.2%, 10.7% and 9.0%, respectively. As we had expected, net interest margin may remain under pressure from strong competition in asset pricing and deposit taking. Room for further credit-cost reduction is likely to be limited. Although overall profitability is low, there is enough improvement in credit metrics for ratings to remain stable, in our view.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile (on DSB) FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A- Stable Moody's Aa1 PositiveSub-debt BBB S&P AAA StableMoody’s Senior unsecured A3 Stable Major shareholders (as at Jun’10) Bank-deposit A3 Dah Sing Financial Holdings 74.13%Sub-debt Baa1 Shareholding of DSFH Financial strength C David Shou-Yeh Wong 40.15%S&P Mitsubishi UFJ Financial Gp 15.07%Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB DAHSIN * Note: S&P ratings are unsolicited
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
DAHSIN’20 (BBB+/Baa1/NR) [LT2] 225m 6.625%DAHSIN’13 (A-/A3/NR) 175m L+138bpsDAHSIN ’49-17c (BBB/Baa2/BBB-) [UT2] 200m 6.253%DAHSIN ’17-12c (BBB+/Baa1/BBB) [LT2] 150m 5.451%DAHSIN ’16-11c (BBB+/Baa1/BBB) [LT2] 150m L+75bps
Bank in brief
Dah Sing Banking Group (DSBG) is the holding company for the DSFH Group’s banking subsidiaries, including Dah Sing Bank (DSB), MEVAS Bank Ltd and D.A. H. Holdings. DSB accounts for 96% of DSBG’s assets. DSBG holds 48 branches in Hong Kong and 15 branches in Macau. The group also owns 20% interest in Bank of Chongqing. The group has assets totalling HKD119bn (USD15bn) and shares 1.3% of the sector’s deposits. DSFH also operates in insurance business. Lending outside HK accounts for 25% of the loan portfolio.
Dah Sing Banking Group: financial summary
Year to December (USDm) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010
Income statement Growth (y-o-y %) Interest income 750 592 390 167 Loans 26.5 6.2 -3.6 2.6Interest expense -485 -309 -114 -38 Assets 13.6 -3.1 1.1 -0.6Net interest income 265 284 275 128 Pre-provision profit 18.5 -13.7 -58.2 112.4Other operating income 115 104 26 24 Net income -33.1 -76.4 218.5 65.3Operating income 380 387 301 152 Profitability Operating expenses -163 -200 -223 -83 ROAA 0.7 0.2 0.5 0.9Pre-provision profits 217 187 79 70 Pre-provision profits/Average assets 1.6 1.3 0.5 0.9Provisions for loan losses -23 -85 -55 -5 Net interest margins 2.16 2.11 1.95 1.9Gains on disp/revaluation 46 -8 7 1 Cost-income ratio 43.0 51.6 73.9 54.4Profits of associates/JVs 11 16 26 14 Asset quality Gain on sub debt buyback - - 31 -7 Gross NPL ratio 0.46 1.70 0.96 0.53Impairment on AFS/HTM -133 -84 - - Net NPL ratio 0.22 0.80 0.40 0.22Pre-tax income 117 27 88 73 Gross NPLs (USDm) 36 134 71 45Taxation -14 -3 -11 -8 Loan Loss Res./NPLs 128.8 81.9 123.4 162.0Net income 103 24 78 65 Capital structure Balance sheet summary Total CAR 15.5 15.2 16.8 17.2Deposits 9,733 10,566 11,551 11,542 Tier-1 ratio 9.1 8.1 10.2 10.7Advances 8,387 8,968 8,638 9,544 TCE/total tangible assets 7.2 6.5 8.8 9.0Total assets 14,860 14,501 14,654 15,223 Funding Total equity 1,185 1,057 1,392 1,479 Loan-to-deposit ratio 86.2 84.9 74.8 82.7 Loan/Assets 56.4 61.8 58.9 62.7
Source: Dah Sing Banking Group, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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ICBC (Asia) Tapping cross-border flows Key events and risks to monitor
Strong lending growth into China and China-related corporates raises concerns Potential strain in funding as it does not have the retail funding breadth of peers
Credit profile outlook (Neutral)
Considering the potential support from its parent, we view the bank’s credit profile as stable and have a Neutral recommendation on the credit. However the bank’s standalone profile is likely to slip in 2011. The downside risks to our view include: strong loan growth puts pressure on the capital structure and funding. The upside risk is related to significant improvement in credit indicators.
HSBC FI Research view
ICBC (Asia) H1 2010 net income rose 32% y-o-y to HKD1,229m on higher interest income (+16%) and lower provisions (-21%). Higher interest income is in line with robust loan growth of 43% y-o-y. The sharpest credit expansion was in loans for trade finance (+404% y-o-y, 108% h-o-h) and for use outside Hong Kong (+45% y-o-y, 16% h-o-h). Lending for overseas use, the property-related sector, and trade finance accounted for 30%, 27% and 18% of the bank’s loan book. By geography, mainland China has taken over Hong Kong as the ultimate risk counterpart of ICBC (Asia)’s loan portfolio, accounting for 51% of the bank’s loan balance. This is due to the bank’s strong credit growth in mainland China (+104% y-o-y, 51% h-o-h), which is partly attributable to client referrals from the bank’s parent, ICBC, and tighter credit quotas for mainland banks in H1 2010. Asset quality remains comfortable with gross NPLs down 11% h-o-h and provision coverage up to 86% in H1 2010 from 66% in FY09. Strong credit growth has put the bank’s funding and capital levels under pressure, with the loan-to-deposit ratio up to 102% in H1 2010 from 91% in FY09 and the bank’s tier-1 capital ratio down to 8.4% from 9.0% in the same period, which is the lowest among the HK banks we cover. Note that at end December 2009, the bank’s HKD loan-to-deposit ratio had reached 124%. With continued strong credit growth, the bank’s funding and capitalisation should remain under pressure, which could be partly eased by the USD500m sub-debt issue this year.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured A- RWP Moody's Aa2 PositiveSub-debt BBB+ S&P AAA StableMoody’s Senior unsecured NR Stable Major shareholders (as at Nov’10) Bank-deposit A2 ICBC 72.81%Sub-debt A3 Shareholding of ICBC (as at Jun’10) Financial strength C- Central Huijin 35.4%S&P Ministry of Finance 35.3%Senior unsecured -- Bloomberg Sub-debt -- ICBCAS Financial strength --
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
ICBCAS ’20 (BBB+/A3/NR) sub 500m 5.125%
Bank in brief
ICBC (Asia) is the HK subsidiary of Industrial & Commercial Bank of China (ICBC) and is to be privatised by its parent by December 2010. ICBC (Asia) was established in 1964 as Union Bank Limited and acquired by ICBC in 2000. It provides retail, commercial and corporate banking services, with 44 branches in Hong Kong. The bank’s assets totalled HKD256bn (USD33bn) as of June 2010, and accounted for 3% of deposits and 5% of loans in the HK banking sector. The bank also conducts offshore RMB business and banking services in mainland China through its wholly owned subsidiary, Chinese Merchant Bank.
ICBC (Asia): financial summary
Year to December (USD m) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010
Income statement Growth (y-o-y %) Interest income 1,134 996 578 323 Loans 60.9 12.6 7.3 43.3Interest expense -828 -611 -190 -102 Assets 31.4 1.2 11.0 17.2Net interest income 306 385 388 222 Pre-provision profit 23.7 22.3 13.3 20.8Other operating income 101 97 152 71 Net income 29.2 -39.8 160.7 32.3Operating income 407 482 541 293 Profitability Operating expenses -145 -161 -175 -88 ROAA 0.9 0.5 1.2 1.0Pre-provision profits 262 321 365 206 Pre-provision profits/Average assets 1.2 1.3 1.4 1.4Impairment provisions -17 -156 -75 -27 Net interest margins 1.47 1.55 1.56 1.51Gains on revaluation/disp 4 -29 102 11 Cost-income ratio 35.7 33.4 32.4 29.8Profits of associates 1 0 3 1 Asset quality Pre-tax income 250 137 396 190 Gross NPL ratio 0.53 0.65 0.92 0.66Taxation -44 -12 -70 -32 Net NPL ratio 0.43 0.44 0.62 0.41Net income 206 124 326 158 Gross NPLs (USDm) 83 115 175 156 Loan Loss Res./NPLs 51.9 74.4 65.9 85.8 Capital structure Balance sheet summary Total CAR 13.0 13.6 14.9 13.4Deposits 17,627 17,830 20,784 23,198 Tier-1 ratio 7.3 7.3 9.0 8.4Advances 15,598 17,688 18,960 23,701 TCE/total tangible assets 7.3 6.7 8.0 7.2Total assets 24,647 25,104 27,849 32,844 Funding Total equity 1,924 1,798 2,356 2,483 Loan-to-deposit ratio 88.5 99.2 91.2 102.2 Loan/Assets 63.3 70.5 68.1 72.2
Source: ICBC (Asia), HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Wing Hang Bank Growth in property and China Key events and risks to monitor
HK property market accounts for 37% of loan portfolio China and Macau account for 33% of loans
Credit profile outlook (Neutral)
Wing Hang’s capitalisation is strong. However, its balance sheet has become less liquid as it pushes for earnings growth. As a result, its loan-to-deposit ratio and loan-to-asset ratio is at its highest for at least the past five years. The fast expansion in China and property market represents one of the main downside risks to our Neutral view should the economy correct. The upside risks include: substantial lowering of sector concentration in its loan portfolio. However, the strength of the Hong Kong and China economies should ensure stability in the bank’s credit profile in 2011.
HSBC FI Research view
Wing Hang Bank’s H1 2010 net profits increased by 49% y-o-y to HKD761m, on the back of strong loan growth (+16% y-o-y) and a write-back of loan-loss provisions. Net interest margin improved to 1.91% from 1.79% a year ago, boosted by the bank’s treasury operations and higher proportion of loan assets. The main drivers of loan growth are the HK property sector, and loans for use in China and Macau. Over the year, loans for use in China grew 49% and accounted for 20% of the bank’s loan book. Deposit growth has not kept pace with loan expansion, as the 1.6% decline in the deposit base in H1 10 shows. As a result, the loan-to-deposit ratio edged up to 74.4%, close to the upper limit of the bank’s target (70%-75%). Asset quality continued to improve, with gross NPLs down 18% h-o-h and provision coverage ratio up to 65% from 60% at end 2009. Capital indicators remain adequate with total CAR and Tier 1 at 17.0% and 10.4% in H1 10. The bank’s overall profitability has trended up, with ROA progressing to 1.0% in H1 10 from 0.7% in H1 09. However, fast expansion in China is a risk factor to be watched carefully in our view, especially when the economy slows or the property market sees significant correction. We expect the bank’s credit ratings to remain stable and maintain a Neutral recommendation on the credit.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Hong Kong Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A- Stable Moody's Aa1 PositiveJunior sub-debt BBB S&P AAA StableMoody’s Senior unsecured - Stable Major shareholders (as at Jun’10) Bank-deposit A2 The Bank of New York Mellon 20.28%Junior sub-debt Baa1 The Fung Family 20.07%Financial strength C+ Aberdeen Asset Mgmt & sub 8.00%S&P Senior unsecured - Bloomberg Sub-debt - WINHAN Junior sub-debt -
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
WINHAN ‘49-17c (BBB/Baa1/NR) [UT2] 400m 6.0%WINHAN ’49-13c (BBB/Baa1/NR) [UT2] 225m 9.375%
Bank in brief
Wing Hang Bank is the holding company and the principal operating company of the group, providing corporate and retail banking, FX and treasury services. The bank has a network of 65 branches, with a presence in Macao and mainland China through subsidiaries Banco Weng Hang and Wing Hang Bank (China) Ltd. At end June 2010, the bank’s assets totalled HKD146bn (USD19bn). The bank has deposits of HKD124bn, accounting for 2% of the sector’s deposits. The bank’s exposure to mainland China accounts for 22% of its loan portfolio.
Wing Hang Bank: financial summary
Year to December (USDm) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010
Income statement Growth (y-o-y %) Interest income 939 749 507 264 Loans 26.5 6.0 1.3 15.5Interest expense -629 -435 -190 -94 Assets 14.3 -3.8 9.5 3.5Net interest income 310 314 317 170 Pre-provision profit 6.6 12.0 -42.4 16.9Other operating income 112 172 51 35 Net income 22.3 -42.8 3.7 48.5Operating income 422 486 368 205 Profitability Operating expenses -167 -200 -203 -100 ROAA 1.6 0.8 0.9 1.0Pre-provision profits 255 286 165 105 Pre-provision profits/Average assets 1.5 1.6 0.9 1.1Provisions for loan losses -0 -57 -7 6 Net interest margins 1.90 1.84 1.82 1.91Impairment losses on AFS - -38 10 1 Cost-income ratio 39.7 41.2 55.1 48.8Gains on revaluation/disp 31 4 12 7 Asset quality Profits of associates 15 -20 5 1 Gross NPL ratio 0.44 0.71 0.51 0.37Pre-tax income 300 175 185 119 Net NPL ratio 0.29 0.41 0.40 0.29Taxation -40 -26 -29 -21 Gross NPLs (USDm) 42 73 53 43Net income 260 149 155 98 Loan Loss Res./NPLs 74.4 75.4 60.4 65.2 Capital structure Balance sheet summary Total CAR 16.7 15.4 17.8 17.0Deposits 14,607 14,860 16,273 15,944 Tier-1 ratio 8.5 8.4 10.7 10.4Advances 9,840 10,499 10,630 11,870 TCE/total tangible assets 6.7 7.0 7.7 8.3Total assets 17,899 17,341 18,973 18,801 Funding Total equity 1,347 1,368 1,617 1,716 Loan-to-deposit ratio 67.4 70.7 65.3 74.4 Loan/Assets 55.0 60.5 56.0 63.1
Source: Wing Hang, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Macro backdrop favourable but supply risk is high The credit cycle remains strong in India with
banking-sector loan growth of 19% y-o-y as of
September 2010, supporting economic growth
that HSBC’s economists expect to reach 8.8% in
the fiscal year 2010/11. Compared with its peers
in Asia, this credit cycle probably has a long way
to run. Overall indebtedness in the country
remains low with total credit/GDP of 58% as at
June 2010. Such a trend should sustain the
profitability of Indian commercial banks as
measured by return on average assets (ROAA) at
above 1% in the foreseeable future, particularly
given the favourable backdrop.
Higher policy rates in 2011 may lead to valuation
losses at banks on government bond portfolios in
2011 but we doubt that will derail the credit
growth cycle. Note HSBC Economics forecasts
the policy rate will rise 125bps to 7.5% in 2011.
Overall asset quality looks good; commercial
banks had a net NPL ratio of 2.52% as at March
Indian Banks
Strong credit growth raises concerns on underwriting standards
India’s favourable macro backdrop should help banks’ profitability
Increasing USD demand by corporates raises the risk of more
USD supply by banks
Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]
Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]
India – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) 7.4 9.1 8.1 Balance sheet ratios: Nominal GDP (USDbn) 1,227 1,533 1,874 Total Assets (USDbn) 1,029 1,335 N/A GDP per capita (USD) 1,037 1,305 1,578 Liquid assets/total assets N/A N/A N/A Total Loan growth (%) 21.1 16.6 N/A CPI, average (% y-o-y) 10.9 11.8 7.1 Loans/Total assets (USDbn) 57.3 58.0 N/A Policy rate, end-year (%) 4.75 6.25 7.50 Retail loans/gross loans 21.3 19.0 N/A Trade balance (USDbn) -106.5 -136.5 -162.0 Impaired loans/gross loans 2.4 2.5 N/A Current account balance (USDbn) -27.0 -57.5 -74.4 Reserve coverage of Impaired loans 52.1 51.5 N/A Current account balance (% GDP) -2.2 -3.8 -4.0 Gross Loans/Customer deposits 73.9 73.6 N/A Total Deposit growth (%) 22.4 17.0 N/A Gross external debt (USDbn) 262.3 300.0 370.0 Capital/total assets 7.0 7.1 N/A Private sector external debt (USDbn) N/A N/A N/A Profitability ratios: Central government balance (% GDP) -6.9 -5.5 -4.8 Cost/income ratio 45.4 45.8 N/A Gross public external debt (% GDP) 5.3 N/A N/A ROA 1.1 1.1 N/A International reserves (USDbn) 81.31 75.06 N/A Net interest margin 2.7 2.7 N/A Cost of Risk N/A N/A N/A Banking assets/GDP (%) 101 N/A N/A Market share (as % of sector assets): Total loans/GDP (%) 59 N/A N/A Largest 20 banks 57.0 56.7 N/A Retail loans/GDP (%) 10 N/A N/A State-controlled banks 71.9 73.7 N/A Total Deposits/GDP (%) 80 N/A N/A Foreign-owned banks 8.5 7.2 N/A
Data pertain to fiscal year, e.g. 2009 numbers are for FY2009/10 (April 2009 – March 2010) Source: Reserve Bank of India, CIA, estimates HSBC Economics.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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2010. But quality has slipped among banks that
have reported in Q2 FY2011 (for the period
ending September 2010). That was probably
caused by aggressive loan growth and less-than-
stringent underwriting standards, in our view. We
think loan losses will remain elevated in 2011 but
will remain manageable with the favourable
backdrop and strong profitability.
Banking-sector funding is stable, coming largely
through deposits, with the loan-to-deposit ratio at
73% as at September 2010.Capitalisation of
commercial banks appears adequate; the total
capital adequacy ratio (CAR) was 14.5% as of
March 2010, up from 14% a year earlier.
We view the contingent risk to the government as
low, particularly due to the low level of private
indebtedness in the country.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Axis Bank Strong growth Key events and risks to monitor
Strong credit growth raises concerns about credit underwriting standards Rapid growth in international operations suggests higher USD debt supply risk Profitability supports credit profile
Credit profile outlook (Neutral)
Concern over the bank’s rapid balance sheet expansion is offset by demonstrated profitability and India’s favourable macro outlook, in our view. We think the bank’s credit profile will remain stable in the year ahead. Excessive debt supply is the downside risk to our recommendation, while a substantial improvement in the bank’s financial performance is the upside risk. HSBC FI Research view
Axis Bank reported a 36% jump in net income for Q3 FY 2011 (the three months ending Dec 2010) to INR8.91bn (USD199m), on higher interest income and lower loan loss provisions. Overall profitability was good, with an ROAA of 1.8% in the quarter. Lending growth was 46% y-o-y. Lending to real-estate-related sectors grew by 53% y-o-y and accounted for 17% of the loan book. Asset quality remains stable: the net non-performing asset ratio fell to 0.3% from 0.5% a year ago and the loan loss coverage ratio rose to 83% from 69% over the same period. However, we advise caution given the bank’s strong loan growth and relatively high concentration on the property sector, which makes it vulnerable to any correction in the real estate market. Robust loan growth has put the bank’s capital structure under some pressure, with total CAR and Tier 1 ratio sliding to 12.5% and 8.9%, respectively, from 16.8% and 11.8% a year ago. If we included 9M FY 2011 profits, the ratios would be higher at 13.8% and 11.2%. Management indicates that the bank will start to address the Tier 1 ratio in FY 2012 aiming for a target range of 8.5-9%. Therefore, a capital increase could be on the cards if the bank’s asset growth continues at the current rate. International assets rose 83% y-o-y and 21% q-o-q on strong demand from Indian corporates overseas. We suspect further new supply from the bank if the current strong demand is sustained
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
India Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt BB+ S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010) Bank-deposit Ba1 Stable Unit Trust of India 23.78%Sub-debt Baa3 Stable Life Insurance Corp of India 9.60%Financial strength C- Stable General Insurance Corp 1.89%S&P Overseas Investors 46.02%Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ AXSBIN Financial strength C
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
AXSBIN’15 (NR/Baa2/BBB-) 350m 5.25%AXSBIN’16 (NR/Baa2/BBB-) 500m 4.75%
Bank in brief
Axis Bank is the tenth largest domestic bank and third largest private sector bank in India. It began operations in 1994 as UTI Bank and was renamed Axis Bank in 2007. The bank had assets of INR1,998bn (USD45bn) as at September 2010. The public shareholding is 53.81%. The bank operates with 1,095 branches and over 4,846 ATMs, and has a market share of about 3% of banking system deposits.
Axis Bank: financial summary (non-consolidated)
Year to March (USDbn) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011
Income statement Growth (y-o-y %) Interest income 1.6 2.2 2.5 0.9 Loans 61.8 36.7 27.9 45.7Interest expense -1.0 -1.5 -1.4 -0.5 Assets 49.6 34.8 22.3 37.4Net interest income 0.6 0.8 1.1 0.4 Pre-provision profit 76.1 67.3 40.7 20.6Other operating income 0.4 0.6 0.9 0.3 Net income 62.5 69.5 38.5 35.9Operating income 1.0 1.4 2.0 0.6 Profitability Operating expenses -0.5 -0.6 -0.8 -0.3 ROAA 1.2 1.4 1.5 1.8Pre-provision profits 0.5 0.8 1.1 0.4 Pre-provision profits/average assets 2.4 2.9 3.2 3.3Provisions for loan losses -0.1 -0.2 -0.3 -0.1 Net interest margins 3.5 3.3 3.8 3.8Pre-tax 0.4 0.6 0.8 0.3 Cost-income ratio 49.2 43.4 41.4 42.4Taxation -0.1 -0.2 -0.3 -0.1 Asset quality Net income 0.2 0.4 0.5 0.2 Gross NPAs (USDbn) 0.11 0.19 0.30 0.30 Key balance sheet items Net NPA ratio 0.36 0.35 0.36 0.34Deposits 20.2 24.3 31.6 34.6 Coverage ratio 49.8 63.6 72.4 82.7Advances 13.7 16.9 23.3 27.5 Capital structure Total assets 25.2 30.5 40.4 46.0 Total CAR 13.7 13.7 15.8 12.5Total equity 2.0 2.1 3.6 4.1 Tier-1 ratio 10.2 9.3 11.2 8.9FX assets & liabilities TCE/total tangible assets 8.0 6.9 8.9 9.0FX assets 1.8 3.9 4.2 n.a Funding FX liabilities 1.6 2.4 3.7 n.a Loan-to-deposit ratio 68.1 69.5 73.8 79.3 Loan/assets 54.4 55.2 57.8 59.8
Source: Axis Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bank of Baroda Focused on quality of growth Key events and risks to monitor
Growth and exposure to foreign lending could entail material risk NPAs may be understated owing to the presence of restructured loans Funding position is strong with a loan-to-deposit ratio of 74%
Credit profile outlook (Neutral)
We have some concerns about BOB’s rapid credit growth, which could translate into asset quality concerns in future. Nevertheless its credit profile is underpinned by the government’s majority stake in the bank and hence our outlook for the bank’s credit profile remains stable. Downside risk includes that aggressive loan growth put capital under pressure, while a substantial improvement in the bank’s financial performance is the upside risk.
HSBC FI Research view
Bank of Baroda reported a 28% increase in net income to INR10.7bn (USD0.2bn) for Q3 FY 2011 (three months ending Dec 2010) on higher net interest income (+43% y-o-y). Margin expansion has been impressive, up 25bp over the year to 3.20%. Provisions were up by 25% y-o-y, mainly owing to provisions for depreciation on investment. Loan loss provision itself, however, fell 6.5% over the year. Overall profitability was strong, as reflected by ROAA of 1.3% in Q3 FY 2011, driven by extremely strong credit growth of 33% y-o-y and 7.4% q-o-q. Lending overseas rose by 37% y-o-y and 7.7% q-o-q, and accounted for 27% of the bank’s loan book. The bank’s asset quality was stable, as reflected by a gross NPA ratio of 1.3% and loan loss coverage of 85.5% at end-Dec 2010, which is relatively unchanged from the previous quarter. The strong credit growth has put a strain on the bank’s capital structure, as the total CAR and Tier 1 ratio fell to 12.5% and 7.7% in Q3 FY 2011 from 13.2% and 8.2% in Q2 FY 2011, respectively. In April-December 2010, the bank raised INR7.1bn in Tier 1 and INR15bn in UT2 securities, and it has said its strategy is to continue above-average credit growth rate. Although this will boost the bank’s profitability on the back of a favourable macro backdrop, capital levels will come under pressure, in our view.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
India Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt [UT2] BB- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010) Bank-deposit Ba1 Stable Government of India 53.81%Sub-debt Baa3 Stable Life Insurance Corp of India 7.08%Financial strength D+ Stable S&P Senior unsecured BBB- Stable Bloomberg Sub-debt [UT2] BB BOBIN Financial strength C
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BOBIN’15 (BBB-/Baa2/NR) 500m 5%
BOBIN’15 (BBB-/Baa2/NR) 350m 4.75%BOBIN’22-17c (BB-/Baa3/BB) [UT2] 300m 6.625%
Bank in brief
BOB was established in 1908 and was listed in 1996. It had assets totalling INR3,129bn (USD70bn) as at Sep 2010. The bank had 38,960 employees, 3,100 domestic branches and 48 foreign branches as at Mar 2010. Its market share of domestic deposits is at 5.6%. International assets account for 25% of the bank’s balance sheet. BOB has a strong presence in agricultural lending, with 59% of branches in rural and semi-urban areas.
Bank of Baroda: financial summary (non-consolidated)
Year to March (USDbn) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011
Income statement Growth (y-o-y %) Interest income 2.7 3.1 3.7 1.3 Loans 27.6 34.3 22.2 32.7Interest expense -1.8 -2.1 -2.4 -0.7 Assets 25.5 26.2 22.8 30.8Net interest income 0.9 1.1 1.3 0.5 Pre-provision profit 21.3 43.8 15.3 46.3Other operating income 0.5 0.6 0.6 0.1 Net income 39.8 55.2 37.3 28.4Operating income 1.4 1.6 1.9 0.7 Profitability Operating expenses -0.7 -0.7 -0.8 -0.2 ROAA 0.89 1.10 1.21 1.34Pre-provision profits 0.7 0.9 1.1 0.4 Pre-provision profits/average assets 1.81 2.07 1.92 2.32Provisions for loan losses -0.2 -0.2 -0.2 -0.1 Net interest margins 2.90 2.91 2.74 3.2Pre-tax 0.5 0.7 0.9 0.3 Cost-income ratio 50.9 45.9 44.0 37.6Taxation -0.2 -0.2 -0.3 -0.1 Asset quality Net income 0.4 0.4 0.7 0..2 Gross NPAs (USDbn) 0.46 0.38 0.54 0.62Key balance sheet items Net NPA ratio 0.47 0.31 0.34 0.38Deposits 35.0 39.8 53.9 62.6 Coverage ratio 75.1 75.6 74.9 85.5Advances 24.6 29.6 39.1 46.1 Capital structure Total assets 41.4 46.9 62.3 72.8 Total CAR 12.9 14.1 14.4 12.5Total equity 2.5 2.7 3.4 4.0 Tier-1 ratio 7.6 8.5 9.2 7.7FX assets & liabilities TCE/total tangible assets 6.1 5.6 5.4 5.5FX assets 10.4 12.1 17.5 n.a Funding FX liabilities 10.8 12.7 18.0 n.a Loan-to-deposit ratio 70.2 74.5 72.6 73.6 Loan/assets 59.4 63.2 62.9 63.3
Source: BOB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bank of India Corporate focus Key events and risks to monitor
Lending to corporate sector is high, accounting for 57% of domestic loans Strong growth in FX loans raises concerns about further USD debt supply Rising rates could strain corporate cash flows
Credit profile outlook (Neutral)
While some of the bank’s credit metrics are showing the strain caused by rapid growth, we think the bank’s credit profile will remain stable against the backdrop of a favourable macro environment. Hence we maintain our Neutral fundamental recommendation on the credit. The downside risk to our recommendation is significant deterioration in credit metrics, while the upside risk is further improvement in profitability. HSBC FI Research view
Bank of India (BOI) reported a 61% jump in net income to INR6.53bn (USD0.1bn) for Q3 FY 2011 (three months ending Dec 2010) on higher net interest income and declining provisions. The improvement in net interest margins (+49bp over the year) and robust loan growth (23% y-o-y) have held profitability up. Margin expansion mainly came from a 37bp rise in the yield on advances and a 29bp drop in the cost of deposits. Overall profitability was still behind peer levels, as reflected by ROAA of 0.9% duringQ3 FY 2011. Domestic credit expansion came mainly from lending to corporates, which grew 47% y-o-y and accounted for 58% of the bank’s domestic loan book. At the industry level, lending to infrastructure rose by 54% y-o-y and had a share of 13% of total domestic credit. Asset quality improved, with gross NPAs down 7% over the quarter and loan loss coverage up to 74.5% from 70% a quarter ago. However, the bank’s capital structure was under pressure, owing to sub-par profitability and strong loan growth. The total CAR and Tier 1 ratio slipped to 12.4% and 8.0% in Q3 FY 2011, respectively, from 13.0% and 8.4% in Q3 FY 2011. Financial Chronicle reported that the bank has said it will explore various options to raise capital, which is reasonable to support future credit growth.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
India Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured -- Moody's Baa3 StableSub-debt -- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Mar 2010) Bank-deposit Ba1 Stable Government of India 64.47%Sub-debt Baa3 Stable Life Insurance Corp of India 8.56%Financial strength D+ Stable Lazard Asset Management 2.71%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ BOIIN Financial strength C
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BOIIN’15 (--/Baa2/BBB-) 750m 4.75%
BOIIN’21 (--/Baa2/BBB-) 500m 6.25%
BOIIN’21-16c (--/Baa3/BB) [UT2] 240m 6.625%
Bank in brief
Established in 1906, BOI is the fifth-largest bank in India, with assets totalling INR2,896bn (USD65bn) as at Sep 2010. The bank operates 3,208 branches domestically, has a network of 29 overseas branches and has 40,155 employees. It has a 5.0% share of domestic banking deposits. BOI’s subsidiaries include BOI Shareholding Ltd (a joint venture with the Stock Exchange of Mumbai to manage clearing activities), Star Dai-Ichi Life Insurance, PT Bank Swadesi in Indonesia and BOI Tanzania in Tanzania.
Bank of India: financial summary (non-consolidated)
Year to March (USDm) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011
Income statement Growth (y-o-y %) Interest income 2.8 3.4 3.9 1.2 Loans 33.3 25.9 17.9 22.8Interest expense -1.9 -2.2 -2.7 -0.8 Assets 26.1 26.1 21.9 19.9Net interest income 1.0 1.1 1.3 0.4 Pre-provision profit 54.5 47.4 -13.8 22.9Other operating income 0.5 0.6 0.6 0.1 Net income 78.9 49.7 -42.1 61.1Operating income 1.5 1.8 1.8 0.6 Profitability Operating expenses -0.6 -0.6 -0.8 -0.3 ROAA 1.3 1.5 0.7 0.9Pre-provision profits 0.9 1.1 1.0 0.3 Pre-provision profits/average assets 2.3 2.7 1.9 1.9Provisions for loan losses -0.2 -0.3 -0.5 -0.1 Net interest margins 3.0 3.0 2.5 3.1Pre-tax 0.6 0.9 0.5 0.2 Cost-income ratio 41.7 36.2 43.8 47.3Taxation -0.2 -0.2 -0.2 -0.1 Asset quality Net income 0.5 0.6 0.4 0.1 Gross NPAs (USDbn) 0.44 0.51 1.09 1.01Key balance sheet items Net NPA ratio 0.52 0.44 1.31 0.88Deposits 34.5 39.2 51.4 56.2 Coverage ratio 81.3 74.6 65.5 74.5Advances 26.1 29.5 37.7 42.9 Capital structure Total assets 41.2 46.6 61.5 66.5 Total CAR 12.0 13.0 12.6 12.4Total equity 2.4 2.8 3.2 3.6 Tier-1 ratio 7.7 8.9 8.6 8.0FX assets & liabilities Total equity/total assets 5.9 6.0 5.2 5.4FX assets 1.7 1.7 2.7 n.a Funding FX liabilities 1.4 2.1 2.3 n.a Loan-to-deposit ratio 75.6 75.3 73.3 76.3 Loan/assets 63.5 63.4 61.3 64.4
Source: BOI, HSBC Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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ICICI Bank Growth challenges Key events and risks to monitor
Credit growth and domestic acquisitions are likely to put downward pressure on capital
Rollover risk from over USD3bn in redemptions in 2012 Rising domestic rates likely to weigh on securities portfolio
Credit profile outlook (Neutral)
The bank has always indicated that it would resume growth once a better foundation was in place; this means there will be some pressure on its credit metrics and the risk of fresh USD supply is now much higher, in our view. The bank is still more profitable than peers and the macro environment remains favourable. We therefore expect its credit profile to be stable in the year ahead. The downside risk to our recommendation is excessive acquisition appetite and credit growth, while the upside risk is lower-than-expected bond supply.
HSBC FI Research view
ICICI Bank reported a 31% rise in net income to INR14.37bn (USD0.3bn) for Q3 FY 2011 (the three months ending Dec 2010) on higher interest income and lower loan loss provisions. Overall profitability was impressive, as reflected by ROAA of 1.5% for the quarter. However, the bank expects margin pressure owing to higher funding costs. Loan growth was 15% y-o-y and 6% q-o-q, the strongest growth being in domestic corporates. Loan loss coverage edged up to 72% in Q3 2011 from 69% in Q2 2011. The bank has achieved the 70% coverage requirement three months earlier than the deadline set by the RBI. A strong provisioning level pushed down the net NPA ratio to 1.16% from 1.37% a quarter ago, and its capital structure is superior to those of peers, with total CAR and Tier 1 ratios of 20.0% and 13.7% at end-Dec 2010. The loan-to-deposit ratio worsened to 95% in Q3 FY 2011 from 87% in Q2 FY 2011, but remains adequate, in our view. Overall in our view this is a good set of results that further strengthens the bank’s credit profile. However, we think the risk of new US dollar supply is relatively high, given that: (1) the bank has indicated a 20% credit growth target for FY 2012; and (2) ICICI faces redemptions of around USD3bn in 2012. We have a Neutral recommendation on the credit.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
India Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt [UT2] BB- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Jul 2010) Bank-deposit Ba1 Stable Deutsche Bank Trust (ADRs) 28.9%Sub-debt Baa3 Stable Life Insurance Corp India 10.5%Financial strength C- Stable Temasek Holdings 5.7%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB ICICI DebtFinancial strength C ICICIBC IN Equity
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
ICICI’16 (--/Baa2/BBB-) 500m 5%ICICI’20 (--/Baa2/BBB-) 1,000m 5.75%ICICI’20 (--/Baa3/--), [LT2 issued by UK sub] 150m 7%ICICI’15 (--/Baa2/BBB-) 750m 5.5%ICICI’49-16c (--/Ba1/--), [UT2 issued by UK sub] 150m 6.375%ICICI’22-17c (BB-/Ba1/BB), [UT2] 750m 6.375%ICICI’49-16c (--/Ba2/BB), [T1] 340m 7.25%
Bank in brief
ICICI Bank used to be a development financial institution before it transformed itself into a diversified financial group in the 1990s. It is now the second-largest commercial bank in India, with assets totalling USD88bn, as well as shares of 6% of loans and 5% of deposits in the banking system at end-Sep 2010. The bank has 2,012 branches and over 35,000 employees. It has a presence in the UK through its subsidiary, ICICI Bank UK Plc, and in Canada through its subsidiary, ICICI Bank Canada.
ICICI Bank: financial summary (non-consolidated)
Year to March (USDbn) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011
Income statement Growth (y-o-y %) Interest income 7.1 6.4 5.6 1.5 Loans 15.2 -3.2 -17.0 15.30Interest expense -5.4 -4.7 -3.8 -1.0 Assets 16.0 -5.1 -4.2 10.30Net interest income 1.7 1.7 1.8 0.5 Pre-provision profit 35.5 12.1 9.0 -1.10Other operating income 2.0 1.6 1.6 0.4 Net income 33.7 -9.6 7.1 30.50Operating income 3.7 3.3 3.4 0.9 Profitability Operating expenses -1.9 -1.5 -1.3 -0.4 ROAA 1.1 1.0 1.1 1.50Pre-provision profits 1.8 1.8 2.1 0.5 Pre-provision profits/average assets 2.1 2.3 2.6 2.40Provisions for loan losses -0.7 -0.8 -1.0 -0.1 Net interest margins 2.2 2.4 2.5 2.60Pre-tax 1.2 1.1 1.2 0.4 Cost-income ratio 50.6 44.1 37.6 42.30Taxation -0.2 -0.3 -0.3 -0.1 Asset quality Net income 1.0 0.8 0.9 0.3 Gross NPLs (USDbn) 1.75 2.00 2.12 2.27Key balance sheet items Net NPA ratio 1.49 1.96 1.87 1.37Deposits 56.3 45.1 45.2 48.4 Coverage ratio* 57.3 53.5 59.5 71.80Advances 51.9 45.1 40.5 46.0 Capital structure Total assets 92.1 78.4 81.3 87.4 Total CAR 14.0 15.5 19.4 20.00Total equity 10.7 10.2 11.5 12.3 Tier-1 ratio 11.8 11.8 14.2 13.70FX assets & liabilities TCE/total tangible assets* 9.0 9.2 10.3 n.aFX assets 15.2 16.1 14.6 n.a Funding FX liabilities 16.4 16.1 15.2 n.a Loan-to-deposit ratio 92.3 100.0 89.7 94.90 Loan/assets 56.4 57.6 49.9 52.60
* Based on our estimate. The intangible asset deducted here, on a consolidated basis, includes deferred tax assets, goodwill and adjustments for less liquid positions Source: ICICI, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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State Bank of India Sovereign proxy Key events and risks to monitor
Recent gains from margin improvements will likely end as rates rise Strong credit growth could translate into future loan losses Capital ratios are likely to face pressure from growth
Credit profile outlook (Neutral)
Strong credit growth in recent years raises concerns about credit underwriting standards and could keep loan provisions high. However, the macro backdrop remains favourable and, as SBI is the largest bank in India and is majority owned by the government, we continue to view its credit profile as stable and hence maintain our Neutral recommendation. The downside risk to our recommendation is substantial deterioration in credit indicators, while the upside risk is the significant improvement in asset quality.
HSBC FI Research view
State Bank of India (SBI) net income rose by 14% to INR28.3bn (USD0.6bn) for Q3 FY 2011 (three months ending Dec 2010). The improvement is mainly due to strong growth in net interest income thanks to significant margin expansion (+79bp) over the year. The better margins were helped by a 72bp decline in costs of deposit on a higher CASA ratio over the year. Provisions jumped 140% y-o-y, as SBI is gradually catching up to meet 70% loan loss coverage requirement by Mar 2012. The bank’s loan loss coverage therefore edged up to 64% in Q3 FY 2011 compared to 56% in Q3 FY 2010. Asset quality showed stabilisation, with gross NPAs up 1% q-o-q and the net NPA ratio down to 1.6% from 1.7% a quarter ago. Lending growth was 21% y-o-y and 7% q-o-q, with the strongest growth coming from the large corporate sector (+28%). Deposit growth has been relatively moderate, at 14% y-o-y and 3% q-o-q, which, together with robust loan growth, has increased the loan-to-deposit ratio to 83% from 78% a year ago. SBI’s capital structure remains stable, with total CAR and Tier 1 staying at 13.2% and 9.6% at end Dec 2010. Note that the bank is currently awaiting approval for the INR200bn rights issue from the government, which holds a 59.4% stake in the bank.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
India Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt - S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Jun 2010) Bank-deposit Ba1 Stable Government of India 59.41%Sub-debt Baa3 Stable Life Insurance Corp of India 6.07%Financial strength C- Stable The Bank of New York 3.22%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ SBIIN Financial strength C
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
SBIIN ’15 (BBB-/Baa2/BBB-) 1,000m 4.5%SBIIN ’14 (BBB-/Baa2/BBB-) 750m 4.5%SBIIN ’49-17c (BB-/Ba2/BB) [T1] 400m 6.439%SBIIN ’49-17c (--/Ba2/BB) [T1] 225m 7.14%
Bank in brief
SBI is the oldest and largest domestic commercial bank in India, with total (non-consolidated) of INR11,045bn (USD248bn) at end-Sep 2010. SBI operates over 12,500 branches and has 200,000 employees. It has an estimated market share amounting to 17% of the banking system’s deposits (23% if we include its associates). The SBI group includes five associated banks, in which SBI has interests ranging from 75% to 100%.
State Bank of India: financial summary (non-consolidated)
Year to March (USDbn) 2008 2009 2010 Q3 FY 2011 Year to March (%) 2008 2009 2010 Q3 FY 2011
Income statement Growth (y-o-y %) Interest income 11.3 13.2 15.5 4.7 Loans 23.5 30.2 16.5 21.3Interest expense -7.4 -8.9 -10.3 -2.7 Assets 27.4 33.7 9.2 n.aNet interest income 3.9 4.3 5.2 2.0 Pre-provision profit 31.1 36.7 2.3 46.5Other operating income 2.0 2.6 3.3 0.7 Net income 48.2 35.5 0.5 14.1Operating income 5.9 6.9 8.4 2.7 Profitability Operating expenses -2.9 -3.2 -4.4 -1.2 ROAA 1.0 1.1 0.9 0.9Pre-provision profits 3.0 3.7 4.0 1.5 Pre-provision profits/average assets 2.0 2.1 1.8 2.2Provisions and contingencies -0.6 -0.8 -1.0 -0.5 Net interest margins 3.1 2.9 2.7 3.61Pre-tax 2.4 2.9 3.0 1.0 Cost-income ratio 49.0 46.6 52.6 45.3Taxation -0.9 -1.0 -1.0 -0.4 Asset quality Net income 1.6 1.9 2.0 0.6 Gross NPAs (USDbn) 2.95 3.25 4.36 5.20Key balance sheet items Net NPA ratio 1.8 1.8 1.7 1.6Deposits 123.7 153.4 179.9 195.5 Coverage ratio 57.6 52.7 56.1 64.1Advances 96.0 112.2 141.3 161.6 Capital structure Total assets 166.1 199.4 235.6 n.a Total CAR 12.6 14.3 13.4 13.2Total equity 11.3 12.0 14.7 n.a Tier-1 ratio 9.1 9.4 9.5 9.6FX assets & liabilities TCE/total tangible assets 6.1 5.7 5.9 n.aFX assets 18.3 27.3 31.8 n.a Funding FX liabilities 18.1 23.0 28.8 n.a Loan-to-deposit ratio 77.6 73.1 78.6 82.7 Loan/assets 57.8 56.3 60.0 n.a
Source: SBI, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Deleveraging continues The sector has been deleveraging as expected,
with credit growth in the low single digits. In
particular, foreign currency lending by Korean
banks is showing year-on-year declines. Hence
the level of indebtedness in Korea as measured by
private credit/GDP has declined from a peak of
184% in December 2008 to 177% in Q1 2010,
although it remains higher than its peers’. Note,
private credit includes private external debt and
corporate debt, which is in addition to loans at
banks and non-bank financial corporations. A
closer inspection reveals that the household sector
remains highly leveraged, which suggests
policymakers may have less flexibility to drive
growth should global growth slow.
Banks’ fundamentals have largely stabilised,
helped by sound regulatory oversight, in our view.
The authorities have shifted from providing
liquidity or capital support to fixing the structural
weaknesses of the banking sector in funding,
liquidity and volatile capital flows. The authorities
Korea – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 Sept. 2010 LTM**
GDP growth (% y-o-y) 0.2 6.1 4.9 Balance sheet ratios: Nominal GDP (USDbn) 842.4 1,002 1,154 Total assets (USDbn) 1,363 1,412 1,511 GDP per capita (USD) 17,287 20,492 23,538 Liquid assets/total assets N/A N/A N/A Total loan growth (%) 17.5 0.6 1.6 CPI, average (% y-o-y) 2.8 3.0 3.8 Loans/total assets (%) 68 71 69 Policy rate, end-year (%) 2.00 2.50 3.50 Retail loans/gross loans 33 35 35 Trade balance (USDbn) 56.1 56.1 52.1 Impaired loans/gross loans 1.14 1.24 2.32 Current account balance (USDbn) 42.7 36.0 31.0 Reserve coverage of Impaired loans 146.3 139.9 94.1 Current account balance (% GDP) 5.1 3.6 2.7 Gross loans/customer deposits 133 126 122 Total deposit growth (%) 17.0 6.2 4.5Gross external debt (USDbn) 399.8 335.0 330.0 Capital/total assets 5.8 6.8 6.8 Private sector external debt (USDbn) 332.0 266.4 256.8 Profitability ratios: Central government balance (% GDP) -4.2 -2.7 -2.0 Cost/income ratio 93.3 90.2 81.2 Gross public external debt (% GDP) 8.0 6.9 6.3 ROA 0.5 0.4 0.5 International reserves (USDbn) 270.3 311.6 355.9 Net interest margin 2.30 1.98 2.30*** Cost of Risk N/A N/A N/A Banking assets/GDP (%) 155 151* N/A Market share (as % of sector assets): Total loans/GDP (%) 131 126* N/A Largest 4 commercial banks 49 49 48 Retail loans/GDP (%) 50 51* N/A State-controlled banks*** 44 45 44 Total Deposits/GDP (%) 181 185* N/A Foreign-owned banks 8 7 8
* as of Sep 2010, ** 9M2010, *** including policy banks, Banking industry indicators are banking account only Source: BOK, FSS, CEIC, estimates HSBC Economics. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
Korean Banks
Deleveraging as expected, with credit growth in low single digits
Authorities have acted to clean up bank balance sheets and
improve funding
Restructuring of the shipping sector will keep provisions elevated
Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]
Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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have also carried out corporate restructurings that
are helping to clean up bank balance sheets.
One area where we think the authorities have not
moved aggressively enough is the build-up of
household debt. We believe they recognise the
problem, and in the past have instituted measures
such as debt-to-income and loan-to-value limits to
curb speculation and safeguard banks’ loan books.
The government also had in place property tax
measures and a supply of public housing that was
meant to prevent an acceleration of home prices.
However, the government seems to be easing off
on some of those measures to alleviate the
downturn in the construction sector.
In addition, household debt in Korea remains
high. Aggregate household debt/GDP was 68% as
at March 2010. Moreover, based on flow of funds
data (comparable across OECD countries) and
stated over disposable income, Korea’s household
debt/disposable income was much higher at 145%
at the end of 2009.
The recent trend in the banking sectors
fundamentals has been mixed. Asset quality
indicators have slipped; the sector’s net non-
performing loan (NPL) ratio rose from 1.24% in
December 2009 to 2.32% in September 2010.
Although asset quality has deteriorated following
the government-initiated corporate restructuring,
there is clarity and predictability to the process
that is reassuring. While we expect provisions to
be elevated, they should be manageable and offset
by current earnings in most cases.
The sector’s capital adequacy ratio (CAR)
improved slightly from 14.4% in December 2009
to 14.6% in September 2010. Similarly, the
funding positions of banks have improved with
the loan-deposit ratio of commercial banks
declining from 109% at the end of 2009 to 106%
at the end of September 2010.
Challenges remain, as we expect the restructuring
of the shipping and ship-building sector in 2011
will keep loan provisions elevated. In addition
banks should need to do more to improve
operating efficiencies and lift profitability, but this
should not detract from the stability of banks’
credit profiles. We still see the contingent risk
posed by banks sector to the sovereign as average,
which takes into account the fact that lending by
policy or specialised banks – KDB, IBK, KEXIM,
NACF and NFFC – accounts for 35% of bank
lending or 40% of GDP as at Q3 2010.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Export-Import Bank of Korea Globalising the national economy Key events and risks to monitor
Vulnerable to global demand and geopolitical risks
Credit profile outlook (Neutral)
We take a favourable view of the level of government support, which should ensure that the ratings move in tandem with the sovereign. We expect total foreign currency funding needs for 2011 to be in the region of USD7-8bn. The risks to our view, to both the upside and downside, are mostly related to the movements in the credit standing of the KEXIM’s owner, the government.
HSBC FI Research view
Export-Import Bank of Korea’s (KEXIM) non-consolidated net income in 2009 decreased by 73% y-o-y to KRW26bn (USD21m) on lower net interest income and higher loan loss provisions. The net interest margin declined to 0.65% in 2009 from 1.45% in 2008 on higher funding costs. Loans grew by 14% y-o-y, mainly attributable to growth in lending to the manufacturing sector (+33%). Disbursements for export credit and import credit during the year were KRW25,251bn and KRW3,623bn, growth of 53% and 3%, respectively. Overseas investment credit disbursement, however, declined by 25% to KRW3,970bn. Funding mainly comes from borrowings. During the year, the bank issued KRW8,150bn won-denominated bonds and USD4bn in the offshore market, of which USD3.5bn in bonds were denominated in US dollars and USD0.5bn in other currencies. The bank’s foreign currency term borrowings outstanding at end-2009 were USD15.4bn, with 40% due before end-2012. The total CAR improved to 11.2% from 8.7% a year ago, thanks to the KRW1,050bn capital injection by the government, which equals to 21% of the capital base before the recapitalisation. Currently the government is encouraging Korean companies to venture abroad to sell services (for instance build power plants) and acquire/develop resources – which we see as areas of growth for KEXIM.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit - - Korean government 73.67%Sub-debt - - Bank of Korea 23.26%Financial strength - - Korea Finance Corporation 3.07%S&P Senior unsecured A Stable Bloomberg Sub-debt - - EIBKOR Financial strength - -
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
EIBKOR 01/21 (A+/A1/A) 1,000m 4%EIBKOR 1/14 (A+/A1/A) 2,000m 8.125%EIBKOR 1/15 (A+/A1/A) 1,500m 5.875%EIBKOR 9/15 (A+/A1/A) 1,000m 4.125%EIBKOR 6/20 (A+/A1/A) 1,250m 5.125%EIBKOR 02/14 (A+/A1/A) 700m 5.25%
Bank in brief
The Export-Import Bank Korea (KEXIM) was established in 1976 as a special financial institution under the Export-Import Bank of Korea Act to facilitate trade. Under the KEXIM Act, the government has to ensure the solvency of KEXIM. The bank had 10 domestic branches, 4 overseas subsidiaries and 15 overseas offices as of Dec 2009. The Ministry of Finance and Economy supervises and oversees the budget of KEXIM. KEXIM’s assets totalled USD36bn at end-2009.
Export-Import Bank of Korea: financial summary (non-consolidated)
Year to December (USDbn) 2006 2007 2008 2009 Year to December (USDbn) 2006 2007 2008 2009
Income statement Growth (y-o-y) Interest income 0.8 1.2 33.4 29.9 Advances 24.0 39.6 58.6 14.0Interest expense -0.5 -0.9 -25.5 -25.3 Assets 15.1 35.5 52.2 16.8Net interest income 0.3 0.3 7.9 4.6 Pre-provision profits -20.5 -13.3 -6.3 29.3Other operating income 0.6 1.1 84.7 52.0 Net income -25.0 9.5 -49.0 -72.5Operating income 0.8 1.4 92.6 56.6 Profitability Operating expenses -0.5 -1.1 -85.9 -48.9 ROAA 1.0 0.9 0.3 0.1Pre-provision profits 0.4 0.3 6.6 7.7 Pre-provision profits/average assets 2.2 1.5 1.0 1.0Provisions for loan losses -0.1 -0.1 -2.1 -7.0 Net interest margins 7.6 4.0 1.4 0.6Pre-tax income 0.2 0.3 4.5 0.7 Cost-income ratio 55.1 76.7 92.8 86.4Taxation -0.1 -0.1 -2.3 -0.2 Asset quality Net income 0.2 0.2 2.2 0.5 Gross NPL ratio 0.34 0.38 0.62 1.13Key balance sheet items Gross NPLs (USDbn) 0.05 0.08 0.16 0.35Borrowings 1.9 2.1 4.2 2.5 Loan Loss Res./NPLs 1301.3 937.3 507.6 304.2Advances 15.5 21.7 26.8 31.2 Capital structure Total assets 18.8 25.6 30.3 36.1 Total CAR 11.9 11.0 8.7 11.2Total equity 5.1 5.3 4.3 5.6 Tier-1 ratio 10.0 9.2 n.a n.aSummary of FX balance sheet TCE/total tangible assets 27.3 20.9 14.1 15.4Borrowings 1.4 1.9 3.8 2.1 Funding Bonds 10.2 15.2 16.0 17.0 Loan-to-deposit ratio n.a n.a n.a n.aLiabilities 11.8 17.2 20.1 19.2 Loan/assets 82.5 85.0 88.6 86.5Assets 12.8 18.2 22.2 20.5 FX loan-to-deposit ratio n.a n.a n.a n.a
Source: Kexim, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Korea Development Bank IPO in the works Key events and risks to monitor
The government expects to have a large majority stake post privatisation Funding in the wholesale market could be more expensive post IPO Finding a profitable niche post IPO is likely to be challenging
Credit profile outlook (Neutral)
Management has clarified that KDB’s debt outstanding at the point of the initial sale will be fully guaranteed by the Korean government, as authorised by the revised KDB Act. An initial public offering (IPO) is expected in 2011. Management has indicated that KDB will focus on corporate banking activities, namely providing term facilities in key sectors, and will increase its commercial focus over time. We expect KDB to continue its track record as a stable performer. The downside risks to our recommendation include aggressive global expansion strategy, while the upside risks are related to more explicit government guarantee.
HSBC FI Research view
Korea Development Bank (KDB)’s consolidated net income rose by 131% to KRW761bn (USD654m) in 2009. The improvement was due to lower net losses from derivatives. Net interest income dropped by 8% y-o-y on lower loan balances (-5% ) and margins (-3bp). Asset quality deteriorated significantly, with gross NPLs up 82% over the year and loan loss coverage ratio down to 83% from 104% a year earlier, despite loan loss provision charges being 1.5 times higher in the year. Capital levels improved, with the total CAR and Tier 1 ratio up to 16.4% and 14.7% in 2009 from 13.6% and 12.2% in 2008, respectively, thanks to a decline in the asset base after KDB transferred KRW19trn in securities holdings and KRW4trn in loan receivables to Korea Finance Corp. During the year, the Korean government injected capital of KRW900bn. In October 2009, KDB Financial Group (KDBFG) and Korea Finance Corporation (KoFC) were established in line with a previously announced move to privatise the commercial operations of KDB while shifting its policy functions to KoFC. KoFC, which was established under the KoFC Act in October 2009, will be wholly owned by the Korean government. KoFC’s mandated policy role will be to assist SMEs and to extend capital to promote national economic growth, while KDBFG will be privatised.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at May 2010) Bank-deposit A1 - Korea Finance Corporation 94.2%Sub-debt - - Korea Government 5.8%Financial strength D Stable S&P Senior unsecured A Negative Bloomberg Sub-debt - - KDB Financial strength - -
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
KDB 3/16 (A+/A1/A) 900m 3.25%KDB 1/14 (A+/A1/A) 2,000m 8%KDB 8/15 (A+/A1/A) 750m 4.375%KDB 9/13 (A+/A1/A) 750m 5.75%KDB 1/13 (A+/A1/A) 1,000m 5.3%
Bank in brief
KDB was incorporated under The Korea Development Act in 1954 to help finance the development of Korean industries. The Act requires the government to ensure the solvency of the bank. The bank had assets totalling USD119bn and operates with 2,327 employees as at end 2009. It has 47 domestic branches and operations in 10 countries. Currently, KoFC holds a 94.3% stake in KDB FG, which owns KDB, Daewoo Sec, KDB Capital, KIAMCO and KDB Asset Mgmt.
KDB: financial summary (consolidated)
Year to December (USDbn) 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009
Income statement Growth (y-o-y %) Interest income 4.2 5.5 6.2 4.4 Loans 1.2% 15.8% 30.2% -4.8%Interest expense -3.6 -5.0 -5.2 -3.7 Assets 9.0% 20.1% 29.3% -26.7%Net interest income 0.6 0.5 0.9 0.7 Pre-provision profit 63.7% 134.1% -68.9% 119.9%Other operating income 1.6 3.6 1.1 1.3 Net income -13.4% -3.4% -83.9% 130.5%Operating income 2.3 4.2 2.0 2.1 Profitability Operating expenses -1.1 -1.5 -1.3 -0.7 ROAA 1.8% 1.5% 0.2% 0.5%Pre-provision profits 1.1 2.7 0.7 1.3 Pre-provision profits/average assets 0.9% 1.9% 0.5% 1.0%Provisions for loan losses -0.0 -0.2 -0.3 -0.7 Net interest margins* 0.2% 0.5% 0.7% 0.7%Non-operating profit 1.3 1.1 0.4 0.5 Cost-income ratio 50.6% 35.4% 65.3% 34.8%Pre-tax income 2.4 3.6 0.7 1.1 Asset quality Taxation 0.1 -0.9 -0.2 -0.2 Gross NPL ratio 0.84% 0.98% 1.19% 2.24%Minority interests -0.3 -0.5 -0.2 -0.3 Gross NPLs (USDbn) 0.52 0.71 0.90 1.67Net income 2.2 2.2 0.3 0.6 Loan Loss Res./NPLs 135% 127% 104% 83%Key balance sheet items Capital structure* Deposits 12.8 13.0 16.5 13.4 Total CAR 17.2% 16.5% 13.6% 16.4%Loans 56.4 65.6 66.5 64.7 Tier-1 ratio 14.8% 14.0% 12.2% 14.7%Total assets 131.5 158.8 159.8 119.5 TCE/total tangible assets 15.5% 14.5% 9.8% 12.3%Total equity 20.7 23.4 16.0 14.9 Funding Summary of FX balance sheet Loan-to-deposit ratio 441% 504% 404% 483%Borrowings 12.2 14.5 14.3 10.7 Loan/assets 42.9% 41.3% 41.6% 54.1%Debentures 10.6 12.7 13.3 9.8 FX loan-to-deposit ratio 1969% 1712% 593% 861%Liabilities 28.9 36.8 38.2 29.5 Assets 41.0 36.6 36.1 27.1
* Non-consolidated. Source: KDB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Industrial Bank of Korea SMEs the primary focus Key events and risks to monitor
Restructuring of shipping sector in 2011 keeps provisions high Weakness in external demand could weigh on SME asset quality Strategy to grow retail deposits should improve funding structure
Credit profile outlook (Neutral)
Management is being more cautious about extending FX loans to SMEs and expects to gradually reduce FX loans by USD1.2bn over the next five years. According to management, exposure to the vulnerable shipping and construction sectors is less than 7% of the loan portfolio, which is low. Recent results show stability in IBK’s credit profile. We expect its ratings to remain stable over the next year. The upside risks to our view include better funding structure, while the downside risks come from underperformance of SME sector which would weigh on asset quality.
HSBC FI Research view
Industrial Bank of Korea’s (IBK) net income rose 66.2% y-o-y to KRW365bn (USD324m) in Q3 2010. Loan loss provisions, having peaked in Q2 2010, declined 31% in the quarter while net interest income, which is up 21% on the year, was flat over the quarter. Loan growth has been above average, at 8.2% y-o-y and 1.7% q-o-q. Lending has been channelled into the SME and household sector, which grew by 6.1% y-o-y and 19% y-o-y, respectively, and accounted for 78% and 20% of outstanding loans as of Q3 2010. Asset quality slipped in the quarter, with gross NPLs rising 9.2% q-o-q. This is in line with the industry trend and is related to the restructuring and classification of construction and project finance loans in the quarter. Nonetheless, IBK’s overall NPL ratio of 1.85% in Q3 2010 (compared to 1.71% in Q2 2010) remains manageable, while its loan loss reserves/NPLs of 118% remains adequate in our view. IBK’s capital structure remains stable, with a CAR of 12.2% and Tier1 ratio of 9% in Q3 2010 compared to 12% and 8.8%, respectively, in Q2 2010. While the CAR is not particularly high by comparison with the industry, we view it as stable and maintain our Neutral fundamental recommendation on the credit.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit A1 - Korean government 65.0%Sub-debt A2 - Korea Finance Corporation 8.9%Financial strength D+ - KEXIM 2.3%S&P Senior unsecured A Stable Bloomberg Sub-debt A- - INDKOR Financial strength C+ -
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
INDKOR 14 (A+/A1/A) 1,000m 7.125%INDKOR 15 (A+/A1/A) 350m 4.375%
Bank in brief
IBK was set up in 1961 under the IBK Act to promote the independent economic activities of small- and medium-sized enterprises in Korea. Under the Act, the government is obligated to ensure the solvency of the bank. IBK has 595 branche,s and 8 overseas offices and subsidiaries with around 7,178 employees. At end-Sep 2010, the bank’s assets totalled USD145bn, with USD81bn in loans to SMEs. IBK accounted for 20% of the total SME loan market of Korea at end-Jun 2010.
Industrial Bank of Korea: financial summary (non-consolidated)
Year to December (USDbn) 2007 2008 2009 Q3 2010 Year to December (USDbn) 2007 2008 2009 Q3 2010
Income statement Growth (y-o-y %) Interest income 7.4 7.6 6.4 1.8 Loans 14.5 17.7 10.6 8.2Interest expense -4.4 -4.7 -3.6 -0.9 Assets 15.3 18.8 6.4 5.8Net interest income 3.1 2.9 2.8 0.9 Pre-provision profit 22.4 2.8 -13.3 53.2Other operating income 0.8 0.4 -0.1 0.1 Net income 10.9 -34.3 -7.4 66.2Operating income 3.8 3.4 2.7 1.0 Profitability Operating expenses -1.4 -1.2 -1.1 -0.3 ROAA 1.0 0.6 0.5 0.9Pre-provision profits 2.4 2.1 1.6 0.7 Pre-provision profits/average assets 8.1 7.1 5.5 2.0Provisions for loan losses -0.8 -1.1 -0.9 -0.3 Net interest margins 2.53 2.53 2.44 2.71Non-operating profit 0.1 0.0 0.0 0.0 Cost-income ratio 36.3 36.9 40.3 28.4Pre-tax income 1.7 1.0 0.7 0.4 Asset quality Taxation -0.5 -0.3 -0.1 -0.1 Gross NPL ratio 0.72 1.43 1.20 1.85Net income 1.3 0.7 0.6 0.3 Gross NPLs (USDbn) 0.72 1.31 1.20 2.07Key balance sheet items Loan Loss Res./NPLs 203 129 145 118Deposits 39.9 33.9 41.8 48.0 Capital structure Loans 96.5 88.5 95.9 107.7 Total CAR 11.1 11.5 11.9 12.2Total assets 129.0 119.3 124.5 142.4 Tier-1 ratio 8.2 7.4 8.5 9.0Total equity 7.2 6.3 7.6 8.8 TCE/total tangible assets 5.4 4.9 5.7 5.8Summary of FX balance sheet Funding Loans 4.7 6.4 5.3 na Loan-to-deposit ratio 242 261 229 224Deposits 1.6 2.2 2.2 na Loan/assets 74.8 74.1 77.0 75.6Borrowings 3.1 4.4 4.3 na FX loan-to-deposit ratio 287 286 244 naBonds 4.2 4.5 4.6 na
Source: IBK, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Hana Bank Acquisition presents uncertainty Key events and risks to monitor
Regulatory approvals and acquisition funding remain hurdles to the acquisition Longer-term integration issues between KEB and Hana could present risks Niche in household sector and wealth management in Korea
Credit profile outlook (Neutral)
Hana Bank’s parent Hana Financial Group (HFG) has signed an agreement to purchase a 51% stake in Korea Exchange Bank (KEB) from Lone Star Funds for KRW4.75trn (USD4.1bn). The purchase is subject to necessary approvals, which are not expected until March 2011. KEB’s total assets of KRW96trn as at Q4 2010 are equal to 61% of HFG’s consolidated assets as at Q4 2010. Our Neutral fundamental recommendation is based on our expectation of stable performance of key credit indicators. The main risk, to both the upside and downside, is related to the acquisition and its integration with KEB. HSBC FI Research view
Hana Bank reported a 36% y-o-y increase in net profits to KRW268bn for Q4 2010, on higher net interest income, gains on disposals and valuation, and lower loan loss provisions. Loan growth was more robust than for the banking industry as a whole at 4.8% y-o-y and 1.4% q-o-q. Lending to large corporates and household was strong, while lending to SMEs contracted. In contrast to other Korean banks, Hana Bank’s asset quality slipped during the quarter, with gross NPLs up 4% q-o-q, despite this the coverage ratio remains unchanged. The deterioration in asset quality was mainly in the SME sector. Strong lending growth has kept the bank’s loan-to-deposit ratio high, at 111% at end December 2010, which is a higher figure than for its peers in Korea. The bank’s capital structure has come under pressure, with total CAR and tier-1 ratios down to 14.2% and 12.4% in Q4 2010 from 15.7% and 12.5% in Q3 2010, due to around KRW2.4trn dividends paid to its shareholding company for KEB acquisition.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Neg (rfd) Major shareholders (as at Dec 2009) Bank-deposit A1 Hana Financial Group 100%Sub-debt A2 Shareholder of HFG Financial strength C- Angelica Investment Ptd. Ltd 9.62%S&P GS Dejakoo, L.L.C. & affiliates 8.66%Senior unsecured A- Neg (cwn) Korea National Pension Services 4.11%Sub-debt BBB+ - Bloomberg Financial strength C+ - HANABK
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
HANABK 15 (A-/A1/A-) 500m 4.5%HANABK 12 (A+/A1/A-), [Govt guaranteed] 1,000m 6.5%HANABK 16-11c (BBB+/A2/BBB+) [LT2] 400m 5.875%HANABK 17-12c(BBB+/A2/BBB+) [LT2] 500m 5.375%HANABK 49-12c (BB+/NR/BBB) [T1] 200m 8.748%
Bank in brief
Hana Bank, a wholly owned subsidiary of Hana Financial Group (HFG), is the fourth-largest commercial bank in Korea. The bank accounts for 88% of the group’s assets and shares around 11% of Korea banking system’s deposits. The bank operates with 8,528 employees and 660 branches. At end-September 2010 HFG had 8 subsidiaries, including Hana Bank and Hana Daetoo Securities, with assets totalling KRW158trn (USD139bn).
Hana Bank: financial summary (non-consolidated)
Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Net interest income 2.3 2.0 1.5 0.6 Loans 3.6 16.1 -0.8 4.8Other operating income 1.2 0.7 0.5 0.1 Assets 5.5 25.4 -7.6 2.6Operating income 3.5 2.7 2.0 0.7 Pre-provision profit 13.8 -10.7 -29.7 40.2Operating expenses -1.3 -1.1 -1.0 -0.3 Net income 0.5 -54.9 -42.3 35.5Pre-provision profits 2.1 1.6 1.0 0.4 Profitability Provisions for loan losses -0.4 -1.1 -0.6 -0.1 ROAA 0.9 0.4 0.2 0.8Non-operating profit -0.1 0.1 -0.0 -0.0 Pre-provision profits/average assets 1.7 1.3 0.9 1.4Pre-tax income 1.6 0.6 0.3 0.3 Net interest margins 2.31 2.06 1.72 2.24Taxation -0.5 -0.1 -0.1 -0.1 Cost-income ratio 38.8 41.6 51.2 39.6Net income 1.1 0.4 0.2 0.2 Asset quality Key balance sheet items Gross NPL ratio 0.77 1.20 1.05 1.50Customer deposits 84.7 76.8 74.2 82.6 Gross NPLs (USDbn) 0.74 1.06 0.91 1.4Loans 92.8 83.9 81.5 91.7 Loan Loss Res./NPLs 169 127 130 106Total assets 126.4 123.4 111.8 123.0 Capital structure Total equity 8.3 7.5 7.6 7.4 Total CAR 11.7 13.5 15.0 14.2Summary of FX balance sheet Tier-1 ratio 7.7 9.4 11.3 12.4Loans 4.5 5.6 3.8 n.a TCE/total tangible assets 6.6 6.0 6.7 5.9Deposits 2.4 3.5 3.0 n.a Funding Borrowings 6.0 5.5 3.5 n.a Loan-to-deposit ratio 109 109 110 111Bonds 2.1 2.2 2.8 n.a Loan/assets 73.4 68.0 72.9 74.6 FX loan-to-deposit ratio 183 159 128 n.a
Source: Hana Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Kookmin Bank Strengthening controls, trimming costs Key events and risks to monitor
Most exposed to the household sector, which accounts for 57% of its loans Bank CenterCredit in Kazakhstan (42% owned) may require more capital
Credit profile outlook (Neutral)
Kookmin had a poor Q2 2010 which management attributes to conservative provisioning policies following the appointment of new CEOs for Kookmin Bank and its parent KB Financial Group. It appears the bank has new priorities focused on strengthening internal controls and trimming costs ahead of growth through acquisitions. We expect few surprises on asset quality and view the credit and rating profile of the bank as stable. The main risks to our view, to both the upside and the downside, are related to significant unexpected changes in key credit metrics in either direction.
HSBC FI Research view
Kookmin Bank reported a net loss of KRW305bn for Q4 2010, due to one-off expenses from the Early Retirement Program amounting to KRW650bn, which is positive for cost cutting in the long run and has been expected by the market. Net interest income rose 10.6% y-o-y on the sharpest margin improvement among the Korean banks we cover. Net interest margin expanded by 33bps over the year to 2.94% thanks to higher market rates and lower funding costs. Loan growth was muted over the year at 0.6% while deposits grew by 7.1% y-o-y and eased the loan-to-deposit ratio to 107% in Q4 2010 from 114% in Q4 2009. Deposit growth mainly came from saving deposits while CDs dropped 88% y-o-y and accounted for only 2% of the bank’s KRW deposits versus 15% a year ago. Asset quality showed impressive improvement, as the bank made significant write offs of NPLs, and new NPL formation reached the lowest level in the past two years. As a result, the gross NPL ratio declined to 1.79% in Q4 2010 from 2.30% in Q3 2010 while loan loss coverage ratio improved to 120% from 106% during the same period. Capital structure remains strong, as reflected by total CAR, tier-1 and tangible common equity/total assets of 13.4%, 10.9% and 7.5% respectively, as at end December 2010. We have a Neutral recommendation on the issuer.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Mar10) Bank-deposit A1 - KB Financial Group 100%Sub-debt A2 - Shareholding of KBFG Financial strength C- - Korea National Pension Service 4.98%S&P ING Bank N.V. 5.02%Senior unsecured A Stable Sub-debt A- - Bloomberg Financial strength B - CITNAT
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
CITNAT 14 (NR/Aa1/AA) [Covered bond] 1,000m 7.25%CITNAT 11 (A/A1/A) 500m FloatCITNAT 12 (A/A1/A) 300m 5.875%
Bank in brief
Kookmin Bank is the largest bank in Korea with assets of KRW262trn (USD230bn) as at end-September 2010. In October 2008, the banking group was reorganised into a bank holding company, KB Financial Group (KBFG). KBFG is listed, has 9 subsidiaries including Kookmin, which accounts for 97% of the group’s assets. Kookmin had 1,483 branches, 18,422 employees, and 21% of the sector’s deposits at end-September 2010.
Kookmin Bank: financial summary (non-consolidated)
Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %)
Interest income 14.7 15.0 11.3 3.1 Loans 14.5 15.8 -1.8 0.6Interest expense -7.2 -8.5 -6.4 -1.4 Assets 12.1 19.8 -2.1 -0.6Net interest income 7.5 6.6 4.9 1.6 Pre-provision profit 8.4 -21.8 -17.3 -50.0Other operating income 1.7 0.3 0.4 -0.0 Net income 12.2 -45.5 -57.9 -1812Operating income 9.2 6.9 5.2 1.6 Profitability Operating expenses -4.0 -3.5 -2.8 -1.3 ROAA 1.3 0.6 0.2 -0.5Pre-provision profits 5.2 3.4 2.5 0.4 Pre-provision profits/average assets 2.3 1.6 1.2 0.6Provisions for loan losses -0.7 -1.8 -1.9 -0.5 Net interest margins 3.45 2.99 2.41 2.9Non-operating profit 0.3 0.3 -0.0 -0.1 Cost-income ratio 43.2 50.0 52.9 78.2Pre-tax income 4.9 2.0 0.5 -0.2 Asset quality Taxation -1.9 -0.6 -0.0 -0.0 Gross NPL ratio 0.74 1.26 1.11 1.79Net income 3.0 1.4 0.5 -0.3 Gross NPLs (USDbn) 1.4 2.2 2.0 3.2 Key balance sheet items Loan Loss Res./NPLs 193 133 153 120Deposits 150.1 133.7 146.4 158.6 Capital structure Loans 185.5 167.2 167.6 173.5 Total CAR 12.6 13.2 14.0 13.4Total assets 236.6 220.6 220.4 230.2 Tier-1 ratio 9.7 9.9 10.8 10.9Total equity 17.3 14.6 16.6 17.0 TCE/total tangible assets 7.2 6.5 7.5 7.5Summary of FX balance sheet Funding Loans 6.3 7.3 4.8 n.a Loan-to-deposit ratio 124 125 114 107Deposits 1.8 2.4 2.7 n.a Loan/assets 78.4 75.8 76.0 77.0Borrowings 6.1 7.0 5.2 n.a FX loan-to-deposit ratio 349 308 182 n.aBonds 2.9 3.1 3.6 n.a
Source: Kookmin Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Korea Exchange Bank Strength in FX and trade Key events and risks to monitor
Acquisition by Hana Financial Group should benefit credit profile FX funding accounts for 26% of funding, 62% of which is sourced through
deposits The bank’s credit metrics compare well against peers
Credit profile outlook (Neutral)
There is uncertainty over Korea Exchange Bank’s ultimate shareholder as the sale of a majority stake by Lone Star remains incomplete. Risks to our fundamental recommendation, to both the upside and the downside, include the eventual sale by Lone Star and a participation of a banking institution in the shareholder structure. In the meantime the outlook for Korea Exchange Bank’s credit profile remains stable and we maintain our Neutral fundamental recommendation.
HSBC FI Research view
Q4 2010 profits for Korea Exchange Bank (KEB) were KRW236bn, down 23% y-o-y. The decline is attributable to losses in NPL sales and higher taxation. Loan growth has been muted, up 0.3% q-o-q but declining 0.3% y-o-y. New lending has been extended to households and credit cards, while lending towards SMEs and large corporates have seen contraction. Asset quality showed impressive improvement on a sequential basis, with gross NPLs down 13% q-o-q and loan loss coverage up to 131% from 117% a quarter ago, thanks to sales of NPLs. The bank’s loan-to-deposit ratio eased to 103% in Q4 2010 from 105% in Q3 2010 on strong deposit growth. More encouragingly, most of the new deposits came from time deposits (+8% q-o-q) while CDs dropped 27% q-o-q. The bank’s capital structure continues to strengthen, as total CAR and tier-1 ratio went up to 16.3% and 13.2% in Q4 2010 from 15.6% and 12.6% in Q3 2010. This set of results further strengthened KEB’s credit metrics, which already compare well against peers. However, uncertainty remains as the acquisition by HFG is still subject to approval.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ S&P A StableMoody’s Senior unsecured A2 Positive (rfu) Major shareholders (as at Jun 2010) Bank-deposit A2 LSF-KEB Holdings 51.02%Sub-debt A3 KEXIM 6.25%Financial strength C- BOK 6.12%S&P Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB KEB Financial strength C+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
KEB 16 (NR/A2/BBB+) 500 4.875%KEB 12 (A-/A2/BBB+) 300 Float
Bank in brief
KEB was established in 1967 as a policy bank specialising in FX and trade finance. In 2003, US investment fund Lone Star became the largest shareholder with a 51% stake but has been attempting to sell the stake for the past five years. KEB is the fifth-largest commercial bank in Korea, with a 7% deposit share. The bank operates with 354 domestic branches and 27 overseas branches. At the end of September 2010, assets totalled KRW99trn (USD87bn).
KEB: financial summary (non-consolidated)
Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Net interest income 2.0 2.0 1.5 0.5 Loans 19.1 19.2 -2.8 -0.3Other operating income 1.1 0.8 0.7 0.1 Assets 18.1 26.4 -7.1 -0.4Operating income 3.2 2.8 2.2 0.6 Pre-provision profit -3.5 7.0 -20.6 -9.2Operating expenses -1.2 -1.0 -1.0 -0.3 Net income -4.5 -18.6 13.9 -22.9Pre-provision profits 2.0 1.8 1.2 0.3 Profitability Provisions for loan losses -0.3 -0.7 -0.6 -0.1 ROAA 1.3 0.8 0.9 1.0Pre-tax income 1.6 1.1 0.6 0.3 Pre-provision profits/average assets 2.4 2.1 1.6 1.6Taxation -0.6 -0.3 0.1 -0.1 Net interest margins 3.23 2.90 2.39 2.82Net income 1.0 0.7 0.7 0.2 Cost-income ratio 37.3 36.8 44.0 42.6 Asset quality Key balance sheet items Gross NPL ratio 0.61 1.09 0.94 1.26Deposits 48.0 47.5 48.9 53.7 Gross NPLs (USDbn) 0.39 0.65 0.57 0.77 Loans 58.4 54.2 53.8 55.2 Loan Loss Res./NPLs 204 142 153 131Total assets 88.7 87.3 82.7 84.9 Capital structure Total equity 7.2 5.6 6.8 7.1 Total CAR 11.4 12.6 14.9 16.3 Tier-1 ratio 8.6 8.8 11.0 13.2Summary of FX balance sheet TCE/total tangible assets 8.0 6.4 8.2 8.2Loans 5.9 7.6 6.8 n.a Funding Deposits 10.0 10.7 11.6 n.a Loan-to-deposit ratio 122 114 110 102.8Borrowings 6.4 5.9 4.7 n.a Loan/assets 65.9 62.1 65.0 65.1Bonds 0.9 0.9 1.0 n.a FX loan-to-deposit ratio 59 71 58 n.a
Source: KEB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Shinhan Bank New management keeps the course Key events and risks to monitor
Investigation into management conduct raises governance issues Exposure to shipbuilding, real estate and construction sectors at 12% of loans Margins set to improve on higher rates, in our view
Credit profile outlook (Neutral)
The restructuring of the shipping and shipbuilding sector in 2011 could weigh on earnings. The recent controversy surrounding the CEO of Shinhan Financial Group raises questions about the bank’s internal controls, although we view the problem as contained and unlikely to affect the bank’s credit profile. The main risks to our view, both to the upside as well as the downside, are related to significant changes in key credit metrics in either direction.
HSBC FI Research view
Shinhan Bank’s Q4 2010 net income rose by 5.2% y-o-y to KRW194bn on higher net interest income and declining loan loss provisions. Net interest margin rose markedly to 2.17% in Q4 2010 from 2.01% in Q4 2009 on re-pricing of high-cost deposits. Loan growth was 5.9% y-o-y and 1.5% q-o-q, with strongest growth coming from large corporates and mortgage. Asset quality showed significant improvement, with gross NPLs down 25% q-o-q thanks to NPL write-offs and sales during the quarter. As a result, the bank’s gross NPL ratio declined from 1.77% in Q3 2010 to 1.31% in Q4 2010 and loan loss coverage ratio rose to 133% from 109% during the same period. The funding structure has been strained, as the loan-to-deposit ratio edged up to 101% from 98% a quarter ago, due to outflow of deposits (-1.5% q-o-q). Shinhan’s capital structure remains strong with total CAR of 15.9% and tier-1 of 13.2%. Overall profitability is weak as reflected by ROAA of 0.7% for 2010 and 0.3% for Q4 2010. This is within our expectation, and we have a Neutral recommendation on the bank.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A Negative Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit A1 - Shinhan Financial Group 100%Sub-debt A2 - Shareholding of SFG: Financial strength C- - BNP Paribas 6.35%S&P Korea National Pension Fund 4.45%Senior unsecured A- Stable Bloomberg Sub-debt BBB+ SHNHAN Financial strength C+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
SHNHAN 09/15 (NR/A1/A-) 700m 4.375%SHNHAN 12 (NR/A1/A-) 500m 6%SHNHAN 2/16-11c (BBB+/NR/BBB) [UT2] 300m 5.75%SHNHAN 35-15c (BBB+/Ba1/BBB) [T1] 300m 5.663%SHNHAN 36-16c (BBB+/Ba1/BBB) [T1] 350m 6.819%
Bank in brief
Shinhan Bank is part of the Shinhan Financial Group (SFG), which is the second-largest financial group in Korea with assets totalling KRW311trn (USD273bn) at end-September 2010. It is the third-largest bank in Korea with approximately 17% of the sector’s deposits at end-September 2010. The bank accounts for 77% of the group’s assets, and operates 951 branches and had 10,659 employees at end-June 2010.
Shinhan Bank: financial summary (consolidated)
Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Interest income 10.4 10.6 7.7 2.0 Loans 13.8 13.2 -3.3 5.9Interest expense -6.3 -6.9 -4.8 -1.1 Assets 17.7 19.8 -6.4 0.3Net interest income 4.0 3.8 2.9 0.9 Pre-provision profit 64.0 -20.3 -12.2 6Other operating income 2.4 0.8 0.9 0.4 Net income 26.1 -29.5 -48.3 5.2Operating income 6.4 4.6 3.8 1.3 Profitability Operating expenses -2.6 -2.0 -1.9 -0.5 ROAA 1.1 0.6 0.3 0.3Pre-provision profits 3.8 2.6 1.9 0.8 Pre-provision profits/average assets 1.8 1.2 1.0 1.0Provisions for loan losses -0.6 -0.8 -1.0 -0.3 Net interest margins 2.26 2.12 1.72 2.17Non-operating profit -0.1 -0.0 -0.1 0.0 Cost-income ratio 40.3 44.0 48.8 53.8Pre-tax income 3.1 1.7 0.8 0.5 Asset quality Taxation -0.9 -0.4 -0.3 -0.1 Gross NPL ratio 0.73 1.00 1.00 1.31Net income 2.2 1.3 0.6 0.4 Gross NPLs (USDbn) 1.06 1.29 1.29 1.80 Key balance sheet items Loan Loss Res./NPLs 191 164 164 109Deposits 126.2 108.7 119.6 127.2 Capital structure Loans 134.8 118.9 117.4 128.0 Total CAR 12.1 13.4 15.1 15.9Total assets 225.2 210.0 200.6 207.3 Tier-1 ratio 7.6 9.3 11.6 13.2Total equity 12.2 10.1 11.5 13.3 TCE/total tangible assets 6.5 5.6 6.2 7.3Summary of FX balance sheet Funding Loans 8.9 8.1 5.3 n.a Loan-to-deposit ratio 107 109 98 101Deposits 5.0 5.8 4.3 n.a Loan/assets 59.9 56.6 58.5 61.7Borrowings 8.1 7.2 6.6 n.a FX loan-to-deposit ratio 178 139 124 n.aBonds 3.3 3.1 2.6 n.a
Source: Shinhan Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Woori Bank Capital pressure Key events and risks to monitor
Restructuring of shipping/shipbuilding sector in 2011 is likely to weigh on capital
Vulnerable to shipbuilding, real estate and construction sectors (25% of loans)
Credit profile outlook (Neutral)
The outlook for the bank seems uncertain at the moment with the government intent on privatising the bank and asset quality concerns still weighing on earnings. With the local banks out of the picture the likelihood of Woori being privatised in 2011 is low, in our view. With 19% of the Korean banking system’s deposits, we believe the level of government support for the bank will remain very high and thus we maintain our Neutral fundamental recommendation on the company. The downside risks to our view include: privatisation, a significant deterioration in profitability due to high exposure to vulnerable sector. The upside risks are related to improvement in credit metrics or a potential sale to a very strong investor. HSBC FI Research view
Woori Bank Q4 2010 net income rose 14% y-o-y to KRW233bn, on higher interest income and lower loan loss provisions. However, on a sequential basis, provisioning for loan losses jumped 28%. Net interest income grew 6.8% y-o-y on margin expansion from lower funding costs. Gross NPLs dropped 17% q-o-q and loan loss coverage improved to 71% from 63% a quarter ago, but the coverage level remains low compared to last year (114%) and to its peers in Korea. Deleveraging continues, as the bank’s loan book contracted by 2.9% y-o-y and 1.2% q-o-q, which together with strong deposit growth pushed down the loan-to-deposit ratio to 102% in Q4 2010 from 105% in Q3 2010 and 110% a year ago. Capital structure appeared stable during the quarter with total CAR of 14.4% and tier-1 ratio of 11.3%. The overall profitability of the franchise remains weak, as reflected by ROAA of 0.4% for Q4 2010 and 0.5% for 2010. The under-reserving for NPLs and the bank’s ambition to expand in Southeast Asia may put pressure on capital. Media articles are citing the bank’s CEO that Woori is making a shortlist for possible M&A targets in Southeast Asia. We have a Neutral recommendation on the issuer.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Korea Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Oct 2010) Bank-deposit A1 - Woori Financial Group 100%Sub-debt A2 - Shareholding of WFG Financial strength C- - Korea Deposit Insurance Corp 56.97%S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ - WOORIB Financial strength C+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
WOORIB 02/15 (A-/A1/A-) 800m 7%WOORIB 10/15 (A-/A1/A-) 500m 4.5%WOORIB 01/16 (A-/A1/A-) 600m 4.75%WOORIB 16-11c (BBB+/A2/BBB+) [LT2] 1,000m 6.125%WOORIB 37-17c ((BB+/Ba2/BBB) [T1] 1,000m 6.208%
Bank in brief
Woori Bank (Woori) is part of the Woori Financial Group (WFG), which is the largest financial group in Korea. The bank accounts for 79% of the group’s assets and remains the largest profit contributor. Woori has an estimated 18% share of the banking system’s deposits and operates 911 branches with 14,461 employees. WFG had assets totalling KRW297trn (USD260bn) at end-September 2010.
Woori Bank: financial summary (consolidated)
Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Interest income 11.4 12.2 9.0 2.5 Loans 18.7 18.5 -1.1 -2.9Interest expense -6.8 -7.8 -5.4 -1.3 Assets 17.8 16.9 -2.5 0.6Net interest income 4.6 4.3 3.6 1.2 Pre-provision profit 2.2 -27.8 40.2 -11.8Other operating income 0.9 -0.4 0.5 0.1 Net income 2.9 -86.2 307.6 14.1Operating income 5.4 4.0 4.0 1.3 Profitability Operating expenses -2.3 -2.1 -1.7 -0.6 ROAA 0.9 0.1 0.4 0.4Pre-provision profits 3.2 1.9 2.3 0.7 Pre-provision profits/average assets 1.6 1.0 1.3 1.4Provisions for loan losses -0.7 -1.4 -1.5 -0.4 Net interest margins 2.45 2.24 1.88 2.31Non-operating profit 0.0 0.1 0.1 0.0 Cost-income ratio 41.8 51.6 42.2 44.6Pre-tax income 2.4 0.6 0.9 0.3 Asset quality Taxation -0.6 -0.3 -0.2 -0.1 Gross NPL ratio 0.63 1.19 1.60 3.24Net income 1.8 0.2 0.7 0.2 Gross NPLs (USDbn) 0.99 1.77 2.34 5,453 Key balance sheet items Loan Loss Res./NPLs 211 144 114 71Deposits 131.3 120.8 130.4 140.7 Capital structure Loans 154.0 142.0 143.3 143.3 Total CAR 11.7 11.7 14.3 14.4Total assets 215.0 195.7 194.8 202.0 Tier-1 ratio 7.8 7.7 10.3 11.3Total equity 13.2 10.0 11.7 12.6 TCE/total tangible assets 6.1 4.8 5.7 n.aSummary of FX balance sheet* Funding Loans 8.7 10.9 8.4 n.a Loan-to-deposit ratio 117 118 110 102Deposits 4.2 5.7 6.2 n.a Loan/assets 71.6 72.6 73.6 70.9Borrowings 7.9 8.2 6.9 n.a FX loan-to-deposit ratio 209 190 136 n.aBonds 5.6 5.5 5.9 n.a
Source: Woori Bank, HSBC; *FSS standard, non-consolidated bank account. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Well prepared for Basel III Loan growth of the Singapore banks reached 14%
y-o-y as of November 2010 compared with 1.4%
as of December 2009. Loan growth here includes
the growth of the banks’ regional businesses.
Asset quality improved, with the non-performing
loan ratio declining from 2.33% in December
2009 to 1.73% in September 2010. The
capitalisation of the sector is the highest in the
region – the weighted capital adequacy ratio
(CAR) of the three local banks stood at 17.1% as
at September 2010.
Overall indebtedness as measured by total
credit/GDP stood at 354% as at June 2010, which
has been relatively stable over the past two years.
Lending by local banks or bank credit/GDP
(comprising the three local banks) was much
lower at 129% as of September 2010. Given
Singapore’s status as a financial centre, the level
of outstanding credit in relation to the economy is
manageable, in our view. Hence, we judge the risk
posed by the banking sector to the sovereign to be
low, particularly given the strong credit metrics of
the Singaporean banks.
Singaporean Banks
Deposit funding is strong
Asset quality shows improvement
Capitalisation of the sector is the highest in the region
Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]
Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]
Singapore – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 Sep 2010 LTM
GDP growth (% y-o-y) -1.3 14.8 5.2 Balance sheet ratios: Nominal GDP (USDbn) 182.6 225.4 266.0 Total assets (USDbn) 1,376 1,372 1,549 GDP per capita (USD) 36,619 43,460 46,681 Liquid assets/total assets N/A N/A N/A Total loan growth (%) 11.9 1.4 13.6 CPI, average (% y-o-y) 0.6 2.8 3.2 Loans/Total assets (%) 29 31 32 Policy rate, end-year (%) 0.68 0.50 1.10 Retail loans/gross loans 26 28 28 Trade balance (USDbn) 30.2 45.6 53.4 Impaired loans/gross loans** 1.6 2.3 1.7* Current account balance (USDbn) 32.5 45.5 59.2 Reserve coverage of Impaired loans** 109 94 111* Current account balance (% GDP) 17.8 20.2 22.3 Gross loans/customer deposits 80 77 84 Total deposit growth (%) 1.7 6.0 3.7Gross external debt (USDbn) N/A N/A N/A Capital/total assets** 9.4 11.0 10.5* Private sector external debt (USDbn) N/A N/A N/A Profitability ratios: Central government balance (% GDP) -1.4 0.5 0.7 Cost/income ratio** 41.9 38.5 40.0* Gross public external debt (% GDP) N/A N/A N/A ROA** 1.0 1.0 1.2* International reserves (USDbn) 187.2 240.7 286.0 Net interest margin** 2.2 2.2 1.9* Cost of risk N/A N/A N/A Banking assets/GDP (%) 779 746* N/A Market share (as % of sector assets): Total loans/GDP (%) 238 235* N/A Largest 3 banks 31 33 34* Retail loans/GDP (%) 63 63* N/A State-controlled banks 0 0 0* Total Deposits/GDP (%) 311 283* N/A Foreign-owned banks 69 67 66*
* as of Sep 2010 ** asset-weighted average of three local banks. Source: MAS, CEIC, local banks’ company reports, estimates HSBC Economics
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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DBS Bank Margin pressure Key events and risks to monitor
Margins are likely to remain under pressure in a low rate environment Exposure to property accounts for 39% of loans (includes mortgages)
Credit profile outlook (Neutral)
Notwithstanding the headline improvement, the bank seems to be facing challenges in growing its various lines of business. This is reflected by its lower profitability compared to its peers with its return on average assets (ROAA) at 1%. DBS’ standalone credit profile is among the highest in Asia. We view its ratings profile as stable and like this credit as a defensive play. The downside risk to our recommendation is the deterioration in asset quality and capitalisation, while the upside risk is the substantial lowering of sector concentration in its loan portfolio.
HSBC FI Research view
DBS Group Q4 2010 net income jumped 38% y-o-y to SGD678m on lower loan loss provisions for non-Asia exposure. In Q4 2009 The bank disclosed SGD558m bilateral loans to Dubai World Finance and therefore increased provisioning against the exposure during the quarter. Net interest income dropped 2% y-o-y, despite strong credit growth, due mainly to a sharp margin contraction (-23bps over the year) on lower yields on customer loans. Loan growth was strong at 16.7% y-o-y and 3.1% q-o-q, with most significant growth in Greater China ex-HK, at 20% y-o-y and 19.2% q-o-q. The bank’s loan exposure to Greater China as a whole accounted for 32% of the bank’s loan book. Asset quality improved, with gross NPL ratio down to 1.9% in Q4 2010 from 2.1% in Q3 2010 and loan loss coverage ratio up to 91% from 87% during the same period. The bank’s total CAR and tier-1 ratio rose to 18.4% and 15.1% in Q4 2010 from 16.3% and 13.1% in Q3 2010, due mainly to SGD2.5bn preference shares issued in the quarter to replace the tier-1s that are to be called this year, though the call is subject to regulatory approval. DBS’ credit profile is among the highest in Asia; however, aggressive and fast expansion in China raises our concern over the bank’s asset quality in the future should the economy correct. In the year ahead, we still expect DBS’ rating profile to remain stable and have a Neutral recommendation on the credit
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Singapore Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Temasek Holdings 27.6%Sub-debt Aa2 Stable Financial strength B Stable S&P Senior unsecured AA- Stable Bloomberg Sub-debt A DBSSP Financial strength B+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
DBSSP ’15 (AA-/Aa1/AA-) 1,000m 2.375%DBSSP ’17-12c (A+/Aa2/A+) (LT2) 1,500m L+22bpsDBSSP ’17-12c (A+/Aa2/A+) (LT2) 500m 5.125%DBSSP ’19-14c (A+/A1/A) (UT2) 750m 5%DBSSP ’21-16c (A+/A1/A) (UT2) 900m L+61bps
Bank in brief
DBS Bank (DBS) is wholly owned by the DBS Group. It is the largest bank in Singapore with assets totalling SGD279n (USD212bn) as at September 2010. DBS has an estimated 43% share of deposits in the domestic banking system. Its Hong Kong franchise is the sixth-largest by assets. It operates with over 200 branches and 14,000 employees in 15 markets. Singapore and HK accounted for 62% and 21%, respectively of DBS’ operating profit in the first nine months in 2010.
DBS Group: financial summary (consolidated)
Year to December (USDm) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Interest income 6,033 5,741 4,206 1,041 Loans 24.9 18.3 3.3 16.7Interest expense -3,306 -2,701 -1,141 -253 Assets 18.0 10.2 0.8 9.7Net interest income 2,726 3,040 3,064 788 Pre-provision profit 15.5 -4.1 17.7 8.8Other operating income 1,364 1,238 1,478 444 Net income 0.4 -15.3 5.8 37.5Operating income 4,090 4,279 4,542 1,232 Profitability Operating expenses -1,737 -1,877 -1,791 -556 ROAA 1.1 0.8 0.8 1.0Pre-provision profits 2,353 2,402 2,751 676 Pre-provision profits/average assets 1.6 1.4 1.6 1.3Allowances for credit and other losses -409 -628 -1,068 -112 Net interest margins 2.17 2.04 2.02 1.79Share of profits of associates 73 53 45 17 Cost-income ratio 42.5 43.9 39.4 45.1Pre-tax income 2,016 1,827 1,729 582 Asset quality Taxation -391 -315 -196 -51 Gross NPL ratio 1.1 1.5 2.9 1.9Minority interest -113 -148 -129 -48 Net NPL ratio 0.7 0.9 1.8 1.1Net income 1,512 1,364 1,404 483 Gross NPLs (USDbn) 796 1,330 2,759 2,878 Loan Loss Res/NPLs 114.8 96.2 73.2 91.3 Capital structure Key balance sheet items Total CAR 13.4 14.0 16.7 18.4Deposits 98,630 111,000 127,018 134,106 Tier-1 ratio 8.9 10.1 13.1 15.1Advances 72,466 85,507 92,514 108,387 TCE/total tangible assets 7.5 7.0 9.3 7.7Total assets 158,748 174,436 184,101 202,708 Funding Total equity 15,781 16,310 20,997 23,651 Loan-to-deposit ratio 73.5 77.0 72.8 80.8 Loan/assets 45.6 49.0 50.3 53.5
Source: DBS Group, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
100
Global Emerging Markets – Credit Strategy EM Banks March 2011
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OCBC Building wealth management Key events and risks to monitor
Margins under pressure from low rates Managing and integrating BOS franchise is key to improving profitability
Credit profile outlook (Neutral)
The move to acquire ING’s private banking assets in Asia will differentiate and strengthen its franchise, in our view. We think the bank is underrated by S&P and has room for a 1-notch upgrade in the year ahead. In our view credit indicators will remain stable and therefore we have a Neutral fundamental recommendation on OCBC. The main risks to our view are related to significant changes in key credit metrics in both directions.
HSBC FI Research view
OCBC’s 2010 net income was up 15% to SGD2.25bn on higher fee and commission income and lower credit losses, and also reflects the consolidation of Bank of Singapore (previously ING Asia private bank) during the year. The bank’s Q4 2010 results were flat at SGD505m compared with a year earlier due to lower profits from its life insurance business. The bank also experienced narrower margins and higher expenses versus a year earlier due to the consolidation of BOS, which has lower-yielding, higher-quality assets. The pace of loan growth was strong at 23% y-o-y (excluding BOS); the housing, general commerce, and building and construction sectors grew 26%, 52% and 18%, respectively. OCBC’s credit metrics showed improvement, with the net NPL ratio declining to 0.6% in Q4 2010 from 1.1% in Q4 2009. The bank’s CAR and tier-1 ratio increased to 17.6% and 16.3%, respectively, from 16.4% and 15.9%; this improvement was due to issue of shares as scrip dividends and the issue of SGD1bn LT2 by OCBC’s Malaysian and Indonesian subsidiaries. We think the bank is well positioned regionally to capture growth opportunities.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Singapore Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Lee Family 27%Sub-debt Aa2 Stable - Lee Foundation 19.28%Financial strength B Stable Aberdeen Asset Management 5.44%S&P Senior unsecured A+ Stable Bloomberg Sub-debt A OCBCSP Financial strength B+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
OCBCSP ’22-17c (A+/Aa2/A) [LT2] 500m 3.75%OCBCSP ’11 (A/A1/A-) [UT2] 1250m 7.75%OCBCSP ’19-14c (A+/Aa2/A) [LT2] 500m 4.25%
Bank in brief
Overseas-Chinese Banking Corporation (OCBC) is one of the three largest banks in Singapore and accounts for an estimated 28% share of deposits and 33% of loans in the domestic banking system. The bank’s assets totalled SGD224bn (USD170bn) as at September 2010. Its insurance subsidiary, Great Eastern Holdings, is the largest insurance group in Singapore and Malaysia by assets. Outside Singapore, the bank has a strong presence in Malaysia, which contributed 25% of pre-tax income in 9M 2010. Insurance and consumer banking account for 33% of profits. OCBC operates 530 branches and has more than 19,500 employees in 15 countries.
OCBC: financial summary (consolidated)
Year to December (USDm) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %) Interest income 3,494 3,723 2,881 828 Loans 20.2 11.9 1.3 29.8Interest expense -2,005 -1,756 -938 -280 Assets 15.5 3.9 7.1 18.0Net interest income 1,489 1,967 1,943 548 Pre-provision profit 3.7 -1.1 17.3 -1.3Other operating income 1,352 1,162 1,369 399 Net income 3.4 -15.5 12.2 0.6Operating income 2,841 3,129 3,312 947 Profitability Operating expenses -1,115 -1,311 -1,235 -442 ROAA 1.3 1.0 1.1 1.0Pre-provision profits 1,726 1,819 2,077 505 Pre-provision profits/average assets 1.6 1.4 1.6 1.3Amortisation of intangible assets -31 -33 -32 -11 Net interest margins 2.10 2.27 2.23 1.96Provisions for asset impairment -24 -316 -295 -34 Cost-income ratio 39.2 41.9 37.3 46.7Share of profits of associates 14 4 - - Asset quality Pre-tax income 1,685 1,474 1,749 459 Gross NPL ratio 1.7 1.5 1.7 0.9Taxation -236 -159 -268 -64 Net NPL ratio 1.1 0.8 1.1 0.6Minority interest -74 -78 -132 -35 Gross NPLs (USDbn) 864 803 985 711 Net income 1,374 1,236 1,350 360 Loan Loss Res/NPLs 115 129 105 142.9 Capital structure Key balance sheet items Total CAR 12.4 15.1 16.4 17.6Deposits 60,503 63,925 71,630 88,097 Tier-1 ratio 11.5 14.9 15.9 16.3Advances 48,597 54,228 57,567 75,014 TCE/total tangible assets 7.3 7.5 8.7 7.9Total assets 118,983 123,249 138,302 163,820 Funding Total equity 11,475 12,611 15,502 16,894 Loan-to-deposit ratio 80.3 84.8 80.4 85.1 Loan/assets 40.8 44.0 41.6 45.8
Source: OCBC, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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United Overseas Bank Regional focus Key events and risks to monitor
Acquisitions within the region are a possibility based on public company information Domestic market remains competitive Exposure to property (including mortgages) comprises 54% of loans
Credit profile outlook (Neutral)
UOB has a resilient franchise and has recovered well from the recession. The bank has a good customer base in the SME and consumer sectors, and it has been more profitable than peers in Singapore. Its standalone profile is among the strongest in the region and remains stable, in our view. The bank’s credit profile is on an improving trend and it comfortably sits in the AA category, in our view. We expect that S&P will raise UOB’s senior debt rating to AA- in the year ahead. We have a Neutral fundamental recommendation on UOB, as we believe that the standalone profile is stable. The risks to our recommendation, to both the upside and the downside, are mainly related to potential acquisitions and resulting integration challenges.
HSBC FI Research view
United Overseas Bank (UOB) produced a good set of Q3 2010 results, with net income up 38% y-o-y to SGD688m on the back of strong trading and fee income (+48%) and lower loan loss provisions (-43%). Despite credit growth of 8.9% y-o-y, interest income declined 4.5% y-o-y as margins narrowed 32bps to 2.07% over the past year. Overall profitability is strong with return on average assets (ROAA) of 1.4% in Q3 2010. Asset quality improved from a year earlier but slipped in the most recent quarter with gross NPLs rising 2%. Still the bank’s gross NPL ratio of 1.9% and net NPL ratio of 1.1% is unchanged from three months earlier and is among the lowest in our coverage. The strength of the bank’s capital structure is unbeatable in this region with a CAR of 19.9%, tier-1 ratio of 15.1% and common equity/tangible assets of 7.4% as at Q3 2010. The bank’s funding position is strong with a loan-deposit ratio of 81% remaining relatively liquid with loan/assets of 53% as at Q3 2010.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Singapore Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Wee Cho Yaw 17.39%Junior sub-debt A1 Stable Financial strength B Stable S&P Senior unsecured A+ Stable Bloomberg Sub-debt A UOBSP Financial strength B+
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
UOBSP ’13 (A/A1/A-) [UT2] 1000m 4.5%UOBSP ’19-14c (A/A1/A-) [UT2] 1000m 5.375%UOBSP ’49-16c (A/A3/A-) [T1] 500m 5.796%
Bank in brief
United Overseas Bank (UOB) is one of the three largest banks in Singapore with assets totalling SGD202bn (USD154bn). UOB takes around a 35% share of loans in Singapore. The bank’s efforts to diversify its franchise geographically are proceeding meaningfully. In 9M 2010, Malaysia, Indonesia and Greater China contributed 12%, 7% and 4% of pre-tax income respectively. The bank has more than 500 offices in 19 countries including 65 branches in Singapore.
United Overseas Bank: financial summary (consolidated)
Year to December (USDm) 2007 2008 2009 Q3 2010 Year to December (%) 2007 2008 2009 Q3 2010
Income statement Growth (y-o-y %)
Interest income 4,892 4,846 3,549 959 Loans 20.5 7.7 -0.6 8.9Interest expense -2,913 -2,319 -1,021 -285 Assets 8.5 4.6 1.4 15.0Net interest income 1,978 2,528 2,527 674 Pre-provision profit -8.0 12.1 4.1 12.3Other operating income 1,256 1,184 1,191 446 Net income -17.9 -8.2 -1.8 37.6Operating income 3,233 3,711 3,718 1,120 Profitability Operating expenses -1,339 -1,449 -1,427 -424 ROAA 1.3 1.1 1.0 1.4Pre-provision profits 1,894 2,262 2,291 696 Pre-provision profits/average assets 1.7 1.8 1.8 1.9Amortisation of intangible assets -7 -8 -7 -2 Net interest margins 2.04 2.27 2.36 2.07Provisions for asset impairments -199 -570 -771 -102 Cost-income ratio 41.4 39.0 38.4 37.8Share of profits of associates & JVs 137 73 74 22 Asset quality Pre-tax income 1,825 1,757 1,586 614 Gross NPL ratio 1.8 2.0 2.2 1.9Taxation -380 -368 -265 -85 Net NPL ratio 1.1 1.2 1.3 1.1Minority interest -44 -19 -13 -4 Gross NPLs (USDbn) 1,167 1,401 1,609 1,652Net income 1,400 1,369 1,308 525 Loan Loss Res/NPLs 112 106 113 123 Capital structure Key balance sheet items Total CAR 14.5 15.3 19.0 19.9Deposits 72,891 80,296 86,484 103,228 Tier-1 ratio 10.0 10.9 14.0 15.1Advances 63,148 67,840 70,611 83,450 TCE/total tangible assets 7.4 5.2 7.0 7.4Total assets 119,216 124,306 132,093 157,741 Funding Total equity 12,079 10,681 13,634 16,355 Loan-to-deposit ratio 86.6 84.5 81.6 80.8 Loan/assets 53.0 54.6 53.5 52.9
Source: UOB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bangkok Bank Better times ahead Key events and risks to monitor
Political risk, although subdued, remains a concern
Credit profile outlook (Neutral)
We think the ratings of Bangkok Bank will get a lift from a sovereign rating upgrade in 2011. The bank’s credit metrics are strong and its ratings by S&P and Fitch are currently being constrained by the sovereign, in our view. Consequently we have Neutral fundamental recommendation on the bank. The downside risk to our recommendation is sudden political instability, while the upside risk is very strong improvement in financial performance. HSBC FI Research view
Bangkok Bank’s Q4 2010 earnings declined 5.3% y-o-y to THB5.6bn on higher tax expenses. Pre-tax income rose 25% y-o-y due to strong net interest income, investment gains, and fee and service income. Loan growth was healthy at 10% y-o-y, with most of the growth occurring in the fourth quarter, due mainly to demand for working capital from the agro industry. The bank also saw strong domestic and overseas demand for loans for corporate business expansion, which is expected to continue in 2011. Overall profitability is good, as reflected by an ROAA of 1.2% during the quarter, despite credit growth having accelerated. Asset quality has improved significantly, with gross NPLs declining 16% q-o-q and loan loss coverage rising to 159% (from 134% a year ago). The bank’s capital ratios have come down slightly as the total capital adequacy ratio and tier-1 ratio slipped to 16.1% and 12.5%, from 17.0% and 13.6% a quarter ago, attributable to balance sheet expansion and the implementation of new accounting standards. The bank’s funding profile remains adequate, with a loan-to-deposit ratio of 85% in Q4 2010 compared with 79% in Q4 2009 on modest deposit growth over the year. The bank’s balance sheet remains very liquid, as cash and money market funds accounted for 20% of total asset as of December 2010. Overall we believe the bank’s credit profile remains sound and stable, and we view the result as credit neutral. We have a Neutral fundamental recommendation on the issuer.
Analysts Devendran Mahendran Yi Hu
[email protected] [email protected]
+852 2822 4521+852 2996 6539
Thailand Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB NegSenior unsecured BBB+ Stable Moody's Baa1 StableSub-debt BBB S&P BBB+ NegMoody’s Senior unsecured A3 Stable Major shareholders (as at Mar 2010) Bank-deposit Baa1 Stable Sophonpanich family 1.1%Sub-debt Baa1 Stable Thailand Securities Depository Co 4.18%Financial strength D+ Stable State Street Bank and Trust Co 4.08%S&P Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB BBLTB Financial strength C
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BBLTB ’15 (BBB+/A3/BBB+) 400m 3.25%BBLTB ’20 (BBB+/A3/BBB+) 800m 4.8%BBLTB ’29 (BBB/Baa1/BBB) [LT2] 450m 9.025%
Bank in brief
Bangkok Bank is the largest bank in Thailand, with assets totalling THB1,832bn (USD61bn) and deposits of THB1,352bn (USD45bn) as at September 2010. The bank has an estimated 19% share of deposits in Thailand’s banking system and operates 896 domestic branches. The bank was established in 1944 by the Chin Sophonpanich family. The bank has a presence in Hong Kong, Singapore, China, Taiwan, Indonesia, Malaysia, and Vietnam.
Bangkok Bank: financial summary (consolidated)
Year to December (USDm) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010
Income statement Growth (y-o-y %)
Interest income 2,325 2,417 1,899 538 Loans 9.4 16.8 -5.4 9.8Interest expense -963 -830 -459 -121 Assets 6.2 6.9 4.5 10.0Net interest income 1,362 1,587 1,439 417 Pre-provision profit 3.0 5.7 2.3 22.0Other operating income 671 646 783 267 Net income 7.6 5.3 2.6 -5.3Operating income 2,033 2,233 2,222 684 Profitability Operating expenses -1,044 -1,152 -1,147 -349 ROAA 1.2 1.2 1.2 1.2Pre-provision profits 989 1,081 1,075 335 Pre-provision profits/average assets 2.2 2.2 2.1 2.3Provisions for loan losses -162 -197 -221 -55 Net interest margins 3.2 3.4 3.0 3.0Pre-tax income 828 884 853 280 Cost-income ratio 51.4 51.6 51.6 51.0Taxation -267 -275 -245 -106 Asset quality Minority interest -3 -2 -4 -2 Gross NPL ratio 7.86 4.65 4.86 3.62Net income 557 607 605 172 Gross NPLs (USDbn) 2,436 1,586 1,668 1,410 Loan Loss Res/NPLs 82.2 109.5 117.1 158.9 Capital structure Key balance sheet items Total CAR 14.5 13.8 15.5 16.1Deposits 37,893 38,062 40,777 43,117 Tier-1 ratio 12.0 11.2 12.6 12.5Advances 29,003 32,881 32,374 36,684 Total common equity/total assets 10.4 10.5 11.1 11.9Total assets 47,042 48,794 53,100 60,287 Funding Total equity 4,943 5,055 5,917 7,154 Loan-to-deposit ratio 76.5 86.4 79.4 85.1 Loan/assets 61.7 67.4 61.0 60.8
Source: Bangkok Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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EMEA banks
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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The banking system of Kazakhstan has made
good progress on its way to recovery. Asset
quality has stabilised with some modest signs of
improvement, the level of capital has edged back
into positive territory and profitability is also on
the rise. But while the worst seems to be over,
there are still many challenges ahead, the key ones
being a fragile domestic operating environment
and the unfavourable conditions prevailing in
global financial markets.
Growth rates are likely to remain constrained by
the difficult economic environment in the near to
medium term. In addition, banks are now focusing
more on quality rather than on balance sheet size.
The government of Kazakhstan, prompted by the
recent financial crisis, has adopted a number of
measures aimed at stabilising its domestic
banking system. The state interventions coupled
with an increasingly positive macroeconomic
story have started to bear fruit.
Most importantly the capitalisation of the banking
system, insolvent during the crisis, has returned
into positive territory. Tier 1 capital amounted to
KZT1,424.9bn (USD9.82n) while Tier 2 capital
stood at KZT456.3bn (USD3.15bn) as of 1
January 2011.
Tier 1 capital and total capital funded 11.8% and
15.2% of the aggregate banking assets,
respectively, as of 1 January 2011. This result
represented a real turnaround over the situation
one year before when the total banking capital
was negative.
An adequate capital buffer is a crucial
precondition for restoring the health and stability
to the Kazakh banking system. Even though
significant improvement has already been
achieved, the highly risky operating environment
may require still more robust capital levels.
Banking system asset growth has been lagging
behind the economy. The consolidated assets of the
banking sector increased by 4.2% y-o-y to
KZT12,038.1bn (USD83.0bn) as of 1 January 2011
while GDP expanded by 7% in real terms in 2010.
However, the lending operations remained
burdened by asset quality problems and the weak
operating environment. The aggregate loan
portfolio contracted by 5.9% or KZT572.8bn
(USD3.95bn) during 2010. Loans accounted for
75.3% of total assets of the sector as of 1 January
2011, down from 83.4% a year before. The
scarcity of funding and very limited, if any, access
to international resources are likely to hamper the
Kazakh banks
Bank capital returning to positive territory
Loan growth lagging economy and likely to remain subdued in
2011
Changing funding mix favours deposits
Accruals on troubled loans may be inflating profits
Pavel Simacek, CFA Analyst HSBC plc +44 20 7992 3714 [email protected]
Ksenia Mishankina Analyst HSBC plc +44 20 7992 3703 [email protected]
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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ability of banks to resume active lending
operations and constrain their growth in the near
to medium-term.
The whole concept of funding banking operations
in Kazakhstan has been shattered by the financial
crisis. The banks – historically heavily dependent
on external borrowings – were suddenly cut off
from international capital markets. The resulting
scarcity of international funding led to substantial
shifts in the funding mix and triggered a fierce
competition for deposits. The external debt of
banks was reduced by some USD29bn during the
crisis and the aggregate banking assets shrank.
During 2010, the total liabilities of the sector
dropped 14.5% to KZT10,715.4bn (USD73.86bn).
This contraction could not be offset even by a
12.5% growth in corporate deposits and 16.2% in
retail deposits. The shortfall was covered by the
government with state loans advancing by 22.9%
during 2010.
The aggregate net income for the banking sector,
excluding Alliance Bank, Temirbank and BTA
Bank, which completed restructuring, amounted to
KZT1,426.7bn (USD9.83bn) as of 1 January 2011, a
material improvement on the massive loss of
KZT2,834.2bn (USD19.4bn) reported in 2009. The
banking system of Kazakhstan seems to be on its
way to restoring profitability and overcoming the
devastating impact of the global financial crisis.
However, caution is needed when interpreting the
profitability data. The banks have restructured a
significant portion of their loan books hit by the
crisis and granted the borrowers repayment
holidays of up to three years. A portion of these
restructured exposures may never become
performing, while the interest income on them is
still being accrued by lenders thus inflating the
real bottom line profitability and capital.
Kazakhstan – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) 1.2 7.0 6.5 Balance sheet ratios Nominal GDP (USDbn) 116.2 133.05 152.3 Total assets (USDbn) 100.16 78.95 82.98 GDP per capita (USD) 6,918 8,969 11,424 Liquid assets/total assets 15.0% 26.4% 18.4% Total loan growth (%) 4.1 -15.1 -5.3 CPI, average (% y-o-y) 6.5 7.3 8.0 Loans/total assets (USDbn) 77.6 83.4 75.3 Policy rate, year end (%) 7.0 7.0 7.5 Retail loans/gross loans 16.2 20.0 24.8 Trade balance (USDbn) 15.2 24.3 31.9 Impaired loans/gross loans 8.0% 36.5% 32.5% Current account balance (USDbn) -4.2 4.9 7.4 Reserve coverage of Impaired loans 138% 103% 95% Current account balance (% GDP) -3.9 1.4 3.9 Gross loans/customer deposits 1.14 1.36 1.28 Total deposit growth (%) 19.3 -28.7 0.4Gross external debt (USDbn) 111.7 111.7 116.7 Capital/total assets 12.3 -8.5 11.0 Private sector external debt (USDbn) 108.5 107.7 112.0 Profitability ratios Central government balance (% GDP) -3.1 -1.2 -1.3 Cost/income ratio NA NA 71.4% Gross public external debt (% GDP) 3.2 4.0 4.7 ROA 0.00% -0.02% 0.01% International reserves (USDbn) 44.5 55.9 73.7 Net interest margin 3.33% 3.86% 3.04% Cost of risk NA NA 3.8 Banking assets/GDP (%) 68.0 62.4 NA Market share (% of sector assets) Total loans/GDP (%) 55.1 46.6 NA Largest 20 banks 99.1 98.6 98.0 Retail loans/GDP (%) 11.0 11.6 NA State-controlled banks NA 26.5 22.3 Total deposits/GDP (%) 40.3 36.1 NA Foreign-owned banks NA NA 31.3
Source: AFN, Fitch, estimates HSBC Economics
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Alliance BankStill on life support Key events and risks to monitor
Alliance Bank has yet to demonstrate the viability of its current business model. The level of capitalisation remains low with IFRS total capital still negative. The bank may face problems in recovering some troubled loans.
Credit profile outlook (initiate at Underweight)
Alliance Bank is currently majority owned by the state through Samruk-Kazyna National Welfare Fund (SK). This quasi-sovereign ownership is the key to its creditworthiness. However, SK has declared its intention to sell its stake in Alliance Bank. The bank’s stand-alone credit profile is rather weak. The uncertainty surrounding the future ownership structure and weak fundamentals support our Underweight view. Risks to our view include a sale to a strong strategic investor.
HSBC FI Research view
Alliance Bank is the sixth-largest bank in Kazakhstan with around 4.1% of total banking assets on its balance sheet (USD2.7bn as of 30 September 2010). Before the crisis pushed Alliance Bank into default, it was one of the fastest-growing financial institutions in Kazakhstan, with the majority of its pre-crisis liabilities consisting of debt denominated in foreign currencies. An inability to refinance maturing debt coupled with a deposits outflow and alleged fraudulent activities brought the bank down in April 2009. The bank has come out of debt restructuring recently with a new strategic focus on small and medium size enterprises and retail. The bank reported a net profit of KZT340.87bn (USD2.3bn) for 9M10 inflated by a one-off restructuring income of KZT320.36bn (USD2.2bn) and a positive contribution from FX operations. This was a significant improvement over a loss reported for the corresponding period of 2009. However, in 2011 management expects a much lower result of around KZT36.07bn (USD24.9m).
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakhstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured Caa2 Dev Major shareholders (as of Jan 2011) Bank-deposit B3 Samruk-Kazyna National Sub-debt (dom) Caa3 Welfare Fund 67%Financial strength E S&P Senior unsecured B- Stable Bloomberg Sub-debt CCC ALLIBK
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
ALLIBK 10 ½ 17 (B-/Caa2/B-) (sinkable) USD615 10 ½%ALLIBK Var 03/20 (B-/Caa2/B-) (sinkable) USD219 4.7% (variable)
Bank in brief
Samruk-Kazyna National Welfare Fund is the majority shareholder of Alliance Bank with 67% of common shares. Following the default of the bank on its obligations in April 2009, creditors became owners of 33% in a debt-to-equity swap. The debt restructuring was completed in March 2010 and the bank received a capital injection of USD3.7bn while the regulatory capital reached USD344.6m.
Alliance Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 1,483 1,380 577 321 Loans 32.2 -47.1 -43.8 -14.5Interest expense -758 -837 -546 -337 Assets 26.1 -35.5 -44.0 -6.6Net interest income 725 544 31 -15 Pre-provision profit 144.0 -75.8 na naOther operating income 127 -197 -731 13 Net income 204.7 na na naOperating income 853 347 -700 -2 Profitability Operating expenses -183 -182 -136 -147 ROAA 4.1 -40.5 -51.1 40.1Pre-provision profits 670 165 -836 -149 Pre-provision profits/average assets 7.9 2.1 -21.2 -5.4Provisions for loan losses -208 -3,378 -1,183 -906 Net interest margins 16.4 6.6 0.5 -0.3Non-operating profit 0 0 0 2,175 Cost-income ratio 21.4 52.4 -19.5 naPre-tax income 462 -3,213 -2,020 1,120 Asset quality Taxation -105 3 0 -17 Gross NPL ratio na 15.2 52.5 72.9Net income 348 -3,210 -2,020 1,103 Gross NPLs (USDm) na 886 2,470 3,002Key balance sheet items Loan loss res./NPLs na 251.9 123.9 90.1Deposits 2,006 1,564 1,036 1,150 Capital structure Loans 6,796 3,586 1,642 1,411 Total CAR 19.0 na na naTotal assets 9,631 6,191 2,824 2,652 Tier-1 ratio 17.0 na na naTotal equity 1,319 -1,879 -3,543 -859 Funding Summary of FX balance sheet Loan-to-deposit ratio 338.8 229.3 158.5 122.6Loans 3,464 1,761 870 719 Loan/assets 70.6 57.9 58.2 53.2Deposits 369 440 121 116 FX loan-to-deposit ratio 939.9 400.5 718.1 620.0Borrowings 2,874 3,187 1,704 168 Bonds 2,570 2,191 2,276 1,061
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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ATF BankForeign owner improves credit profile Key events and risks to monitor
Significant erosion of asset quality. Implementation of more efficient cost control. Thinning capitalisation levels.
Credit profile outlook (Neutral)
ATF Bank is owned by UniCredit Group of Italy and is being increasingly integrated into the parent organisation. The strengthening ties with a reputable international parent are the main factor underpinning the credit profile of ATF Bank. Despite the high likelihood of support from UniCredit the weak credit indicators support our Neutral recommendation. Risk to our view is mostly driven by any changes in the relationship with the owner.
HSBC FI Research view
ATF Bank’s profitability came under significant pressure during H1 2010, when the bank reported a loss of KZT17.6bn (USD121m). The bottom line was constrained by escalating fee and commission expenses, which reached KZT9.63bn (USD66.35m), 14 times the H1 2009 figure.
The bank is exposed to the troubled real estate and construction sectors, which represented 14.7% and 5% respectively of the loan book as at 30 June 2010. The exposure to those sectors could further constrain performance and erode the capital base. ATF Bank has been lessening its reliance on external public markets funding and in October 2010 repaid a USD200m Eurobond.
Total equity fell to KZT48.6bn (USD330m) in H1 2010 and funded 4.4% of total assets at the end of the period. The level of capitalisation seems to be thin and additionally depressed by negative bottom-line results.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakhstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Watch
negative Moody's Baa2 Stable
Sub-debt BBB- S&P BBB StableMoody’s Senior unsecured Ba2 Stable Major shareholders (as at June 2010) Bank-deposit Ba2 UniCredit Group 99.71%Sub-debt B1 Financial strength E+ S&P NR Senior unsecured Bloomberg Sub-debt ATFBP Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
ATFBP 9 05/11/16 (BBB/Ba2/NR) USD350 9%ATFBP 9 ¼ 02/14 (BBB/Ba2/NR) USD297 9 ¼%ATFBP 9 ¼ 04/12 (BBB/Ba2/NR) USD200 9 ¼%
Bank in brief
ATF Bank is the fifth largest bank in Kazakhstan by assets and is fully owned (by UniCredit Group (99.71% as at 30 June 2010). ATF Bank offers a portfolio of services to both retail and corporate clients in Kazakhstan, Russia, and Kyrgyzstan, but its main focus is the domestic market.
ATF Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (USDm) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y %) Interest income 883 988 797 683 Loans 49.6% 2.0% -2.5% -7.4%Interest expense -590 -624 -503 -457 Assets -0.6% 3.5% 3.1% 5.1%Net interest income 293 364 294 226 Pre-provision profit 63.2% 63.0% 14.9% -54.8%Other operating income 63 117 124 30 Net income 68.6% na na naOperating income 356 481 418 256 Profitability Operating expenses -166 -166 -123 -124 ROAA 0.7% -0.7% -5.3% -7.0%Pre-provision profits 190 315 295 132 Pre-provision profits/Average assets 2.4% 3.8% 4.2% 1.8%Provisions for loan losses -96 -388 -705 -704 Net interest margins 5.3% 5.0% 4.5% 3.4%Non-operating profit 16 - - 8 Cost-income ratio 46.7% 34.6% 29.5% 48.3%Pre-tax income 109 -73 -411 -570 Asset quality Taxation -50 13 40 56 Gross NPL ratio na 2.3% 14.3% 35.3%Net income 59 -60 -371 -508 Gross NPLs na 163 900 2,187Key balance sheet items Loan Loss Res./NPLs na 331.1% 114.8% 59.1%Deposits 3,158 2,841 3,381 3,852 Capital structure Loans 6,498 6,611 5,249 4,896 Total CAR 14.1% 16.5% 12.1% naTotal assets 8,169 8,435 7,087 7,499 Tier-1 ratio 9.2% 11.0% 8.2% naTotal equity 621 793 408 330 Funding Summary of FX balance sheet Loan-to-deposit ratio 205.8% 232.7% 155.3% 127.1%Loans na na 3,796 na Loan/assets 79.5% 78.4% 74.1% 65.3%Deposits na na 2,190 na FX loan-to-deposit ratio na na 173.3% naBorrowings na na 2,562 na Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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BTA BankClimbing back after falling off a cliff Key events and risks to monitor
Bank’s profitability is likely to suffer from a high level of problematic assets. The bank receives funding from the owner, but it comes at a relatively high cost. The ability to collect NPLs could boost performance and increase recovery rates.
Credit profile outlook (initiate at Underweight)
BTA Bank has turned from a privately owned into a quasi-sovereign institution held by the Samruk-Kazyna National Welfare Fund (SK). The relationship with SK is the bank’s main credit driver. However, the bank is struggling to recover from its recent failure, the credit fundamentals remain weak further undermined by very high NPLs, as a result of which we establish an Underweight recommendation. The downside risks to our recommendation include inability to clean up its loan portfolio while on a sale to a strong strategic investor would represent a significant upside risk.
HSBC FI Research view
BTA Bank defaulted on its liabilities in April 2009 and has since restructured its obligations, a process it completed in September 2010. Since then, the bank has worked hard to restore its business and its credibility. The profitability of the bank is likely to remain under pressure, although release of provisions might improve it.
In February 2011, the bank filed another claim, amounting to USD1.2bn, against its former chairman, Mukhtar Ablyazov, bringing the total claims against him to USD3.3bn. It is questionable whether any of the claims can be successful.
BTA Bank’s government stake may be divested through a so-called “people’s IPO” or direct sale or a mixture of the two. The most discussed strategic investor in press reports is Sberbank. We would view a significant participation of the Russian banking giant in the ownership structure as positive for the credit profile and potential upside risk to our view.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakhstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured NA Major shareholders (as at March 2011) Bank-deposit Caa3 RUR Samruk-Kazyna 81.5%Sub-debt NA Financial strength E S&P Senior unsecured B- Stable Bloomberg Sub-debt NA BTAS
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
BTAS Var 07/20 (restructured, NR) USD5,211 VariableBTAS 10 ¾ 07/18 (B-/NR/NR) USD2,082 10 ¾%BTAS7.2 07/01/25 (CC/NR/NR) (sinkable) USD497 7.2%
Bank in brief
BTA Bank is the third largest bank in Kazakhstan. After a massive default on its obligations, the bank was effectively nationalised, with Samruk-Kazyna, the National Welfare Fund, taking an 81.5% stake. During the restructuring, debt was reduced to USD4.2bn from USD16.65bn and its maturity was substantially extended.
BTA Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 2,640 3,295 1,609 1,079 Loans 77.1 -32.1 -35.6 -28.1Interest expense -1,463 -1,732 -1,744 -1,666 Assets 47.7 -28.4 -10.3 -11.6Net interest income 1,177 1,563 -135 -587 Pre-provision profit 88.2 -21.4 nm nmOther operating income 454 -64 -2,057 -162 Net income 65.6 nm nm nmOperating income 1,631 1,499 -2,192 -749 Profitability Operating expenses -463 -564 -410 -459 ROAA 2.5 -45.2 -53.5 -30.5Pre-provision profits 1,168 935 -2,603 -1,208 Pre-provision profits/Average assets 5.6 4.3 -18.5 -9.7Provisions for loan losses -592 -10,616 -4,945 -3,016 Net interest margins 5.9 6.2 -0.6 -2.8Non-operating profit 32 -194 9 421 Cost-income ratio 28.4 37.6 -18.7 -61.2Pre-tax income 608 -9,875 -7,539 -3,804 Asset quality Taxation -80 1 -4 17 Gross NPL ratio 0.8 49.3 77 naNet income 528 -9,874 -7,543 -3,787 Gross NPLs (USDbn) 165 11,560 16,409 naKey balance sheet items Loan Loss Res./NPLs [is this correct?] 689.2 87.1 87.2 naDeposits 5,413 7,330 4,421 4,631 Capital structure Loans 19,743 13,378 7,014 5,079 Total CAR 17.6 na na naTotal assets 25,424 18,153 13,267 11,812 Tier-1 ratio 16.9 na na naTotal equity 3,750 -6,145 -11,388 -11,868 Funding Loan-to-deposit ratio 364.7 182.5 158.7 109.7 Loan/Assets 77.7 73.7 52.9 43.0Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Development Bank of KazakhstanSpecial mission and status Key events and risks to monitor
Funding options are limited, as Development Bank of Kazakhstan (DBK) is not allowed to collect deposits
DBK focuses on a few large projects with substantial repayment periods Political pressures may influence business decisions
Credit profile outlook (Overweight from Neutral)
Due to its government ownership and development mission, DBK’s credit risk is closely aligned with that of Kazakhstan and will move in line with it. The current favourable macroeconomic story supports the recovery and government finances thus also strengthening the credit profile and importance of DKB. Consequently we change our recommendation from Neutral to Overweight. Risks to our view include adverse developments in the local economy and weak commodity prices.
HSBC FI Research view
Its development mission shapes DBK’s strategy and its credit profile. In 2010 the bank participated in 10 strategic government projects with a total value of USD4bn. According to preliminary data, DBK’s 2010 net income stood at KZT2.8bn (USD19.3m) while total assets advanced by 13.0% to close the year at USD6.5bn. In 2011 management expects the bottom line to reach KZT4bn (USD27.3m) mainly due to lower provisioning requirements. DBK reported consolidated IFRS assets of KZT928.7bn (USD6.3bn) as of 30 September 2010. Its balance sheet is highly liquid with resources waiting to be deployed. While profitability is not of key importance, the bank booked a net income of KZT3.9bn (USD27.2m) in 9M10, a significant improvement on the same period of 2009 when it recorded a loss of KZT11.9bn (USD79.9m).
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakhstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Stable Moody's Baa2 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011) Bank-deposit Baa3 Samruk-Kazyna National 100%Sub-debt NA Welfare Fund Financial strength NA S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA DBKAZ
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD500 5 ½%
DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD277 5 ½%
Bank in brief
Samruk-Kazyna National Welfare Fund is the sole owner of DBK and exercises ownership rights on behalf of the Kazakhstan government. DBK was set up in accordance with the law on the Development Bank of Kazakhstan in 2001 and enjoys special status including immunity from prudential and reserve requirements.
Development Bank of Kazakhstan: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sept 2010
Year to December (%) 2007 2008 2009 LTM Sept 2010
Income statement Growth (y-o-y) Interest income 110 233 283 351 Loans 54.1 143.4 7.3 56.9Interest expense –42 –107 –126 –173 Assets 54.9 36.2 124.9 9.3Net interest income 68 127 157 178 Pre-provision profit 0.0 184.8 106.9 -3.1Other operating income –10 5 41 15 Net income –17.7 –27.0 na naOperating income 58 132 199 193 Profitability Operating expenses –21 –25 –19 –19 ROAA 1.3 0.7 –6.4 -3.2Pre-provision profits 37 107 180 175 Pre-provision profits/average assets 2.0 3.9 4.3 2.9Provisions for loan losses –6 –85 –497 –366 Net interest margins 5.5 6.5 5.1 3.7Non-operating profit 0 0 0 0 Cost-income ratio 36.4 18.9 9.4 9.6Pre-tax income 31 22 –317 –192 Asset quality Taxation –7 –4 50 31 Gross NPL ratio na 0.1 6.6 5.4Net income 24 18 –267 –160 Gross NPLs (USDm) na 1 126 147Key balance sheet items Loan loss res./NPLs na 7601 426 406Deposits 16 5 304 112 Capital structure Loans 640 1,553 1,357 2,140 Total CAR na na na naTotal assets 2,301 3,126 5,726 6,289 Tier-1 ratio na na na naTotal equity 837 797 1,813 1,862 Funding Summary of FX balance sheet Loan-to-deposit ratio 4045 29707 446 1917Loans 606 1,505 1,296 na Loan/assets 27.8 49.7 23.7 34.0Deposits 16 4 304 na FX loan-to-deposit ratio 3847 35475 426 naBorrowings 425 1,150 2,898 na Bonds 344 345 346 na
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Eurasian Development BankPromoting regional integration Key events and risks to monitor
The key driver of credit quality for Eurasian Development Bank (EDB) is its relationships with shareholding member states – these appear secure due to the bank’s development mission, high political profile and direct government ties.
EDB is a relative newcomer to the lending market with untested credit skills.
Credit profile outlook (Overweight)
EDB’s ownership – two-thirds by Russia and the rest by Kazakhstan and smaller states in the region – and the privileges it enjoys in these countries, represent the main props to its credit profile. EDB high political profile, its regional importance and support of member states with growing economies support our Overweight view. Risks to our view include major changes in political sentiment towards the bank.
HSBC FI Research view
EDB’s total assets amounted to USD2.5bn as of H1 2010, up only 1% on 2009. The bank is not a very active lender with loans to customers accounting for mere 27.4% of total assets as of H1 2010. A net profit for H1 2010 stood at USD7.3m, down from USD30.2m in H1 2009. Profitability came under pressure due to growing expenses related to newly raised debt.
EDB’s strategy calls for an increase in its investment portfolio to USD4.4bn by the end of 2013. A strong emphasis is placed on developing economic and trade relations among the member states, including an increase in mutual trade of USD1.6bn and investments of USD1.2bn by 2013. Its plans also for projects funded by the bank to result in a production of goods with a total annual value of USD3.6bn and to stimulate production in related supplier sectors of the economy.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings (Russia) Fitch Fitch BBB- Positive Senior unsecured BBB Positive Moody's Baa2 Stable Sub-debt NA S&P BBB Stable Moody’s Senior unsecured A3 Stable Major shareholders (as of Jan 2011) Bank-deposit NA Russian Federation 67%Sub-debt NA Kazakhstan 33%Financial strength NA S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA EURDEV
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
EURDEV7 3/8 09/14 (BBB/A3/BBB+) USD500 7 3/8%
Bank in brief
EDB is a regional development bank with a mandate to promote economic integration and development of its member states, Russia, Kazakhstan, Tajikistan, Armenia and Belarus, where the bank is exempt from taxes and the supervision of local regulatory bodies.
Eurasian Development Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 59 108 108 0 Loans na 164.6 39.8 13.4 Interest expense –13 –29 –44 –0 Assets 69.6 52.9 24.3 1.0 Net interest income 46 79 64 47 Pre-provision profit 303.0 3.9 8.4 –45.1Other operating income 10 –12 11 12 Net income 297.4 3.3 –1.9 –57.5Operating income 56 67 74 59 Profitability Operating expenses –16 –26 –30 –35 ROAA 3.8 2.4 1.8 0.7Pre-provision profits 40 41 45 25 Pre-provision profits/average assets 3.8 2.5 2.0 1.0Provisions for loan losses –1 –1 –5 –8 Net interest margins 5.7 5.3 3.5 2.6Non-operating profit - - - - Cost-income ratio 28.3 38.5 39.8 58.5Pre-tax income 39 41 40 17 Asset quality Taxation - - - - Gross NPL ratio na na na naNet income 39 41 40 17 Gross NPLs (USDm) na na na naKey balance sheet items Loan loss res./NPLs na na na naDeposits 0 0 0 0 Capital structure Loans 165 436 609 690 Total CAR na na na naTotal assets 1,313 2,008 2,495 2,521 Tier-1 ratio na na na naTotal equity 854 1,531 1,634 1,655 Funding Summary of FX balance sheet Loan-to-deposit ratio 0.0 0.0 0.0 0.0Loans 165 436 528 612 Loan/assets 12.5 21.7 24.4 27.4Borrowings 407 474 48 57 FX loan-to-deposit ratio nm nm nm nmBonds 0 0 675 670
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Halyk Bank The worst seems to be over Key events and risks to monitor
Still weak asset quality is threatened by real estate exposure. Deposit concentration is concerning, with the bank’s 10 largest customer deposits
accounting for 47% of the total.
Credit profile outlook (Neutral, downgrade from Overweight)
Halyk Bank’s creditworthiness remains under pressure due to the still challenging operating environment and fragile economic recovery. This, coupled with the low, albeit stabilising, quality of the loan book prompts us to change our fundamental view to Neutral from Overweight. Risks to our view include: significant swings in asset quality and profitability. A substantial diversification in the funding structure would put upward pressure on our view.
HSBC FI Research view
Halyk Bank reported total assets of KZT2,063.9bn (USD14.0bn) as of 30 September 2010. The bank controlled 16.7% of the aggregate banking assets in Kazakhstan, making it the second larges bank in its domestic market. NPLs (at least 90 days in arrears) amounted to 17.5%, up from 16.7% at the end of 2009.
Halyk Bank keeps its balance sheet liquid, with around 34.5% of assets invested in cash and highly liquid instruments at the end of the first nine months of 2010. This cushion should be sufficient to meet unexpected swings in business or outflow of funds. Another safety buffer is represented by capital with the total capital ratio amounting to 22.5% and the Tier 1 standing at 18.4%.
Profitability has been recovering strongly. Net income stood at KZT26.00bn (USD179m) for 9M 2010, up more than 2.8 times from KZT9.27bn (USD62.3m) in 9M 2009. This improvement was mainly driven by falling provisions, potentially signalling asset deterioration has now bottomed out.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazahstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B+ Stable Moody's Baa2 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Ba3 Stable Major shareholders (as of Jan 2011) Bank-deposit Ba2 Holding Group Almex 54.37%Sub-debt NA Samruk-Kazyna 20.91%Financial strength D- GDR holders 20.04%S&P Senior unsecured B+ Stable Bloomberg Sub-debt NA HSBKKZ
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
HSBKKZ7 ¼ 05/17 (B+/Ba3/B+) USD638 7 1/4%HSBKKZ7 ¼ 01/21 (B+/Ba3/B+) USD500 7 1/4%HSBKKZ9 1/4 10/13 (B+/Ba3/B+) USD490 9 1/4%HSBKKZ7 3/4 05/13 (B+/Ba3/B+) USD270 7 3/4%
Bank in a capsule
Halyk Bank boasts a strong retail franchise and a dense territorial coverage, operating a branch network consisting of 629 outlets with 1,686 ATMs and 3,835 point-of-sale terminals. Its overseas presence, though, is modest with subsidiaries in Russia, Kyrgyzstan and Georgia. In addition to standard banking services, it is also active in pensions, insurance, leasing, brokerage and asset management.
Halyk Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sept 2010
Year to December (%) 2007 2008 2009 LTM Sept 2010
Income statement Growth (y-o-y) Interest income 1,082 1,601 1,313 1,215 Loans 74.5 14.2 -4.6 -3.4Interest expense -502 -837 -699 -620 Assets 60.9 3.5 22.5 2.0Net interest income 580 764 614 596 Pre-provision profit 62.6 16.6 23.1 -16.1Other operating income 337 347 418 378 Net income 49.2 -64.1 9.1 105.4Operating income 917 1,111 1,032 974 Profitability Operating expenses -326 -410 -329 -382 ROAA 3.1 0.9 0.9 1.6Pre-provision profits 591 702 703 592 Pre-provision profits/average assets 5.6 5.2 5.7 4.3Provisions for loan losses -173 -507 -573 -321 Net interest margins 6.7 6.0 5.3 4.7Non-operating profit 0 -60 0 0 Cost-income ratio 35.6 36.9 31.9 39.2Pre-tax income 418 134 129 271 Asset quality Taxation -87 -13 -22 -50 Gross NPL ratio na 6.40 16.7 17.5Net income 331 121 107 221 Gross NPLs (USDm) na 690 1,508 1,585Key balance sheet items Loan loss res./NPLs na 137.9 92.5 103.9Deposits 7,760 7,176 8,586 9,278 Capital structure Loans 8,630 9,831 7,637 7,410 Total CAR 12.9 13.4 20.6 22.5Total assets 13,233 13,662 13,634 13,976 Tier-1 ratio 10.6 9.9 16.9 18.4Total equity 1,336 1,581 1,893 2,094 Funding Summary of FX balance sheet Loan-to-deposit ratio 111.2 137.0 88.9 79.9Loans 3,476 4,510 3,969 3,611 Loan/assets 65.2 72.0 56.0 53.0Deposits 3,213 3,322 4,747 4,282 FX loan-to-deposit ratio 108.2 135.8 83.6 84.3Borrowings 1,423 1,690 236 184 Bonds 1,203 1,656 1,406 1,435
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Kazkommertsbank Big may not mean crisis proof Key events and risks to monitor
The bank is still burdened with many problematic exposures. Concentration on both sides of its balance sheet represents a challenge. Tight liquidity results in a negative liquidity gap in the shortest maturity bracket.
Credit profile outlook (Neutral, downgrade from Overweight)
KKB is one of the largest private banks in the CIS and the market leader by total assets in Kazakhstan. As of January 2011, KKB had accumulated on its books 20.19% of the country’s aggregate banking assets. However, credit volumes stayed flat in H1 2010, reflecting a still difficult economic situation and a scarcity of funding. Therefore we downgrade KKB to Neutral from Overweight. Risks to our view include significant changes in the operating environment or credit profile, which is strongly influenced by the asset quality.
HSBC FI Research view
KKB has been focusing on asset quality and liquidity management. The former remains a challenge, with some 22.3% of gross loans more than three months overdue as of 30 September 2010, up from 21.3% at the end of 2009. The bank is working hard to find solutions with its borrowers. The level of provisions reached 20.3% of gross loans, up from 19.0% during the same period.
Capitalisation remained almost flat during the first nine months of 2010 with the BIS total capital ratios and Tier 1 ratios easing modestly to 20.6% and 16.0%, respectively, from 20.1% and 15.9% at the end of 2009.
KKB booked a profit of KZT15.72bn (USD108.3m) in the first nine months of 2010, up from KZT14.60bn (USD98.0m) in 9M 2009. The bank is also gradually repaying government funds received during the crisis to restore itself to non-state ownership.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Kazakhstan Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured B2 Negative Major shareholders (as of Jan 2011) Bank-deposit Ba3 Central Asian Investment Co. 23.83%Sub-debt Caa1 Mr. N.S. Subkhanberdin 9.32%Financial strength E+ Alnar Capital Holding 28.76%S&P Samruk-Kazyna 21.26%Senior unsecured B Stable Bloomberg Sub-debt CCC+ KKB
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
KKB7 ½ 04/16/13 (B-/B2/B) USD443 8 ½%KKB7 ½ 11/29/16 (B-/B2/B) USD356 7 ½%KKB8 11/03/15 (B-/B2/B) USD270 8%KKB8 04/07/14 (B-/B2/B) USD255 7 7/8%
Bank in brief
KKB is the largest bank in Kazakhstan. It is majority held by private investors; however, Samruk-Kazyna National Welfare Fund (SK) acquired a minority stake during the crisis in an effort to stabilise the financial sector. SK currently owns 21.26% though it is in the process of reviewing its holdings, many of which will be divested this year. It is quite possible that KKB will be included on the sell list as it does not represent a strategic investment.
Kazkommertsbank: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sept 2010
Year to December (%) 2007 2008 2009 LTM Sept 2010
Income statement Growth (y-o-y) Interest income 2,583 3,165 2,524 2,054 Loans 41 –9 1 0 Interest expense –1,402 –1,507 –1,216 –1,076 Assets 23 –13 –1 4 Net interest income 1,181 1,658 1,308 978 Pre-provision profit 98 14 32 –40Other operating income 270 16 397 157 Net income 108 –65 –6 6 Operating income 1,451 1,675 1,705 1,135 Profitability Operating expenses –255 –283 –208 –234 ROAA 2.1 0.7 0.7 0.8Pre-provision profits 1,196 1,392 1,497 901 Pre-provision profits/average assets 5.4 6.0 8.5 5.0Provisions for loan losses –607 –1,268 –1,313 –686 Net interest margins 6.1 8.0 7.8 4.8Non-operating profit 12 –28 31 1 Cost-income ratio 17.6 16.9 12.2 20.6Pre-tax income 601 95 215 217 Asset quality Taxation –130 72 –86 –80 Gross NPL ratio 2.1 6.0 21.3 22.3Net income 471 168 129 137 Gross NPLs (USDm) 437 1,208 3,827 4,093Key balance sheet items Loan loss res./NPLs 266.6 198.1 89.0 90.9Deposits 7,426 8,103 8,602 9,965 Capital structure Loans 19,631 17,744 14,562 14,634 Total CAR 15.2 17.7 20.1 20.6Total assets 24,865 21,632 17,440 18,273 Tier-1 ratio 11.7 13.5 15.9 16.0Total equity 2,648 2,597 2,626 2,748 Funding Summary of FX balance sheet Loan-to-deposit ratio 264.4 219.0 169.3 146.9Loans 12,239 11,744 9,351 8,779 Loan/assets 79.0 82.0 83.5 80.1Deposits 2,926 4,431 4,340 4,600 FX loan-to-deposit ratio 418.3 265.1 215.5 190.9Borrowings 7,553 4,074 2,216 1,864 Bonds 6,136 5,611 3,125 2,669
Source: Company financial reports. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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State-led growth Qatar is pushing hard for infrastructure development,
especially since winning the 2022 World Cup bid.
Investment proposals are being chalked out and the
country has ample resources for a booster package.
The country’s finance minister has said that the state
is planning to allocate 40% of budgeted expenditure
to infrastructure development in 2011 against 30% in
2010. Our equity research team expects this
investment trend to continue and projects a 13%
compounded annual growth rate in lending between
2009 and 2012. This compares with the MENA
average of 10% during the same period and will
likely stimulate loan growth in Qatari banks.
The lending pattern in the country has undergone
a structural shift in the past few years. According
to the Qatari central bank, private sector credit
comprised only 65% of total domestic credit at the
end of 2010 compared with 73% at the end of
2008. The trend has been fairly unidirectional to
date and this will likely continue to be the case
given the strong pipeline of ongoing and
upcoming projects. Our equity research team
forecasts a public sector financing requirement of
USD64bn between 2011 and 2014 based on
ongoing projects. Such loans would usually yield
rates lower than prevailing commercial levels,
which would squeeze banks’ margins. However,
we expect volume growth to outpace margin
decline, allowing banks to post earnings growth.
Qatar does not have any large specialised
government lending institutions so commercial
banks have historically been the intermediary of
choice. The only specialised government-
promoted development bank, Qatar Development
Bank, has a lean balance sheet (end-2009 asset
size: QAR3.2bn or USD0.9bn) compared with
large domestic commercial banking peers like
Qatar National Bank (end-2010 asset size:
QAR223bn or USD61.2bn). Commercial banks
therefore have a clear advantage on balance sheet
strength and will likely lead the lending franchise
in the medium term.
Qatari banks’ capitalisation levels are similar to
those of peers in the region, with Tier 1 ratios at
around 11%. Loan-to-deposit ratios, however, are
on the high side in Qatar (>100%, with the
notable exception of Qatar National Bank),
suggesting generally aggressive lending. This risk
is partially offset by a sound depositor base.
Overall deposits increased at double-digit rates (in
percentage point terms) in the last three years.
Furthermore, the share of private deposits in total
deposits increased from 62% in 2008 to 74% at
end-2010 – in contrast to the UAE, where public
sector deposits form a larger chunk. This
Qatar banks
Strong loan growth outlook underpinned by state spending plans
Margins likely to shrink as public sector lending gains pace
Concentrated commercial banking sector will continue to lead
domestic lending activities
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Aybek Islamov* Analyst (Equity Research0 HSBC Bank plc + 44 20 7992 3624 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
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reinforces the local economy and banking system,
and helps Qatari banks access the wholesale
market with ease and efficiency. The five-year
paper of the two leaders in the banking sector
yields less than 4%.
The region has a history of supporting local banks
through recapitalisation, de-risking of books and,
recently, the issuance of central bank bonds.
However, recent legislation to segregate Islamic
banking activities from those of commercial
banks is a paradigm shift. The long-term impact
of this change is still uncertain, but we expect a
large share of the local Islamic finance borrowers
to switch to conventional products offered by the
commercial banks as pure-play Islamic banks are
too lean to absorb all market demand, in our view.
The fact that more than half of such loans are
short-term will make the switch easier. Overall,
these recent changes add some elements of
regulatory risk but we think local commercial
banks still enjoy the sovereign’s backing and will
at least retain their share of business in the
medium term.
Given the recent turmoil in the region it is worth
noting that Qatar has a fairly strong democratic
representative government. The legislative
authority is vested in the Advisory Council (two-
thirds elected by public voting), while the
executive authority is vested in the Emir assisted
by the Council of Ministers as specified by the
constitution. There is an independent judiciary
system and court judgments are pronounced in the
name of the Emir.
Qatar– key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010
GDP growth (% y-o-y) 37.1 -11.2 14.3 Balance sheet ratios: Nominal GDP (USD bn) 110.7 98.3 123.7 Total assets (USDbn) 110 128 156 GDP per capita (USD) 76,435.0 60,251.0 73,773.6 Liquid assets/total assets 33% 36% 39% Total loan growth (%) 51% 11% 16% CPI, average (% y-o-y) 15.2 -4.9 -1.0 Loans/total assets (USDbn) 61% 58% 55% Policy rate, end-year (%) 5.6 5.6 5.6 Retail loans/gross loans 23% 20% 18% Trade balance (USDbn) 29.8 24.0 42.0 Impaired loans/gross loans 1.2% 1.7% 2.00% Current account balance (USDbn) 14.2 8.4 2.6 Reserve coverage of impaired loans 83% 85% 85% Current account balance (% GDP) 14.2 8.5 2.1 Gross loans/customer deposits 114% 109% 102% Total deposit growth (%) 27% 16% 24% Gross external debt (USDbn) 30.5 32.5 28.0 Capital/total assets 11% 12% 11% Private sector external debt (USDbn) na na na Profitability ratios: Central government balance (% GDP) 11.7 10.3 25.4 Cost/income ratio 25.2% 26.5% 24.6% Gross public external debt (% GDP) - - - ROA 2.9% 2.6% 2.6% International reserves (USDbn) - - - Net interest margin 2.5% 2.7% 2.9% Cost of Risk - - - Banking assets/GDP (%) - - - Market share (as % of sector assets): Total loans/GDP (%) - - - Largest 20 banks - - - Retail loans/GDP (%) - - - State-controlled banks - - - Total Deposits/GDP (%) - - - Foreign-owned banks - - -
Source:Qatar Central Bank, estimates HSBC Economics
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Commercial Bank of Qatar Key events and risks to monitor
NIM has increased by 30bps in 2010 compared to 2009. With an increasing share of government loans in the portfolio, this could come under pressure.
Fees income and commissions could also be squeezed when the share of public sector business increases.
Credit profile
Commercial Bank of Qatar (CBQ) could face earnings pressure as its share of business with public sector entities increases. Continued capital injection from the state is credit supportive but was probably not needed. Further injection headroom is narrow (it is the government’s intention to cap its holding at 20%), but rating agencies expect support will probably be forthcoming if it is needed.
CBQ maintained earnings through the last two years underpinned by robust NIM. However, the group witnessed weakness in capitalisation as the bank started provisioning after NPLs increased sharply. This is despite local government buying the bank’s QAR3bn (USD 820m) real estate portfolio in June 2009. The bank’s exposure remains aggressive with a loans-to-deposit ratio significantly higher than at its domestic peer Qatar National Bank.
The group has an aggressive dividend distribution policy; it announced a 97% dividend payout (QAR 7/share, USD1.92) for the year 2010.
We do not have a fundamental credit recommendation.
Analysts Olga Fedotova Aybek Islamov
+44 20 7992 3707 +44 20 7992 3624
[email protected]@hsbcib.com
Qatar Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch StableSenior unsecured A Stable Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured A1 Negative Major shareholders (December 2010) Bank-deposit A1 QIA 16.7%Sub-debt A2 Financial strength C- S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ Financial strength na
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (USDm)
Coupon
COMQAT Float 11 (A/A1/A-) 500 L+40bpsCOMQAT 5 11/18/14 (A/A1/A-) 1000 5%COMQAT 7 1/2 11/19 (NR/A2/BBB+) 600 7.5%
Bank in brief
CBQ is the second-largest bank in Qatar with a market share of 12% in loans and 11% in deposits. The Qatar Investment Authority has injected capital three times since 2008 and now holds a 16.7% stake in the bank.
Commercial Bank of Qatar:Financial summary
Year to December (USDm) 2008 2009 2010 Year to December (%) 2008 2009 2010
Income statement Growth y-o-y Interest income 790 857 821 Loans 35.5 –4.5 5.8Interest expense –435 –400 –333 Assets 35.4 -6.8 9.1Net interest income 355 457 488 Pre-provision profit 44.0 0.0 –12.1Other operating income 259 187 215 Net income 22.4 –10.5 7.3Operating income 761 764 703 Profitability Operating expenses –206 –209 –216 ROA 3.2 2.6 2.7Pre-provision profits 555 555 487 Pre-provision profits/average assets - - -Provisions for loan losses –16 –127 –45 Net interest margins 2.8 3.1 3.4Non-operating profit - - - Cost-income ratio 27.1 27.3 30.7Taxation - - - Asset quality Net income 468 419 449 Gross NPL ratio 1.44 3.56 2.86 Gross NPLs (USDm) 135 319 271 Key balance sheet items Loan Loss Res./NPLs 58.3% 62.2 99.3Loans 9,396 8,975 9,490 Capital structure Deposits 8,847 7,221 9,143 Total CAR 13.6 18.9 18.5Interest bearing assets 14,910 13,965 15,526 Tier-1 ratio 13.1 17.2 16.6Total assets 16,901 15,755 17,185 Funding Loan-to-deposit ratio 106.2 124.3 103.8 Loan/assets 55.1 55.7 53.7
Source: CBQ financial reports, HSBC calculations (ratios). Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Russia’s banking system avoided major
bankruptcies during the crisis and is returning to
“business as usual” at an increasing speed. The
Russian government and the Central Bank of
Russia (the CBR) rushed to the rescue when
things turned really ugly in 2009. This timely state
intervention, along with large volumes of
government emergency money pumped into the
domestic banking sector and capital markets,
helped avert major financial failures.
Russia’s banking system remains highly
concentrated. In a country where over 1,000 banks
compete for market share, the top five creditors, all
directly or indirectly owned by the government,
control close to half of all banking assets. The
government has been saved the trouble of
nationalising the largest domestic financial
institutions in bailouts as it never privatised them.
The state-owned banks have started, with a
minimum of delay, to channel emergency funds into
the economy and also to other financial institutions.
These timely support measures have limited the
damage caused by the crisis to Russia’s economy
and its banking system and contributed to a
relatively early start to the recovery.
Nonetheless, the Russian government intends to
partially or fully privatise some 900 companies,
including banks, in the near future. The state
stakes in VTB, Sberbank and Rosselkhozbank are
to be reduced to 50% plus one share with further
divestments possible. A 10% equity stake in VTB
was sold to private investors in February 2010.
The Russian economy has started to grow again with
GDP projected to add 4.8% in 2011. This positive
macroeconomic story should support the growth
rates of the banking sector. After a very difficult
2009 the total banking assets expanded by 14.9% in
2010 to reach RUB33,804.6bn (USD1,108.8bn) as
of year-end, driven mostly by lending activities with
total loans advancing by 12.6%. If the
macroeconomic environment remains favourable,
which appears the most likely scenario, loan
portfolio growth should range between 15-20%
annually in the near to medium-term.
Russia’s banks managed to keep the quality of
their loan books at manageable levels throughout
the crisis. Overdue loans accounted for some
5.65% of gross loans as of 1 January 2011, down
from 6.24% a year before. Asset quality is on the
climb, with some banks starting to boost their
bottom lines with provision write-backs already
this year. However, the uncertain pattern of
provision releases may cause temporary volatility
in bottom lines.
The Russian banks maintain a high level of capital
surplus, substantially in excess of the CBR’s
minimum capital requirements. The total CBR
capitalisation ratio of the sector reached 18.0% at
the end of 2010 while the regulatory benchmark is
Pavel Simacek, CFA Analyst HSBC Bank plc +44 (0) 207992 3714 [email protected]
Ksenia Mishankina Analyst HSBC Bank plc +44 20 7992 3703 [email protected]
Russian banks
Expected loan growth rates to range from 15% to 20% in 2011
Profitability is improving and likely to continue to do so
The government may decide to sell more stakes in its banks
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10.0%. A higher level of equity may help the
banks weather possible business downturn and is
important in a potentially volatile and commodity
dependent operating environment of Russia.
Capitalisation concerns have encouraged the CBR
to also gradually hike its minimum capital
requirements. Effective from 1 January 2010 the
minimum amount of equity for a bank was
RUB90m (USD2.95m), but from the start of
2012, with this will rise to RUB180m
(USD5.4m). This higher capital hurdle may
represent a real challenge for small institutions,
and with discussions taking place to raise it
further to RUB300m (USD10.5m from 2015),
consolidation in the sector may accelerate.
The aggregate net income for the sector in 2010
was RUB573.38bn (USD18.8bn), up almost
threefold from the previous year’s RUB205.11bn
(USD6.82bn). All the main profitability indicators
also headed higher, with return on equity rising to
12.12% in 2010, up from 4.44% in 2009 and
return on assets advancing to 1.70% from 0.70%.
This recovery in profitability should continue in
2011 as core banking operations keep benefiting
from the reviving economy.
The role of the banking system in the economy has
been gradually increasing, with total banking assets
equivalent to 75.9% of Russia’s GDP by the end of
2010, a slight increase on the 75.27% seen a year
before. This high level of financial intermediation
makes the maintenance of financial system stability
one of the government’s top priorities.
Russia – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) -7.8 4.0 4.8 Balance sheet ratios Nominal GDP (USDbn) 1,290.3 1,459.3 1,670.6 Total assets (USDbn) 953.4 978.8 1,108.8 GDP per capita (USD) 10,494 10,912 11,445 Liquid assets/total assets 25.9% 28.0% 26.6% Total loan growth (%) 33.2 -2.1 6.6 CPI, average (% y-o-y) 11.7 6.9 9.7 Loans/total assets (USDbn) 70.9 67.5 66.9 Policy rate, end-year (%) 8.75 7.75 8.5 Retail loans/gross loans 24.0 22.0 22.0 Trade balance (USDbn) 112.1 151.6 134.1 Impaired loans/gross loans 3.45 6.2 5.7 Current account balance (USDbn) 49 75 49.7 Reserve coverage of impaired
loans 217% 181% 186%
Current account balance (% GDP) 4.0 5.1 2.8 Gross loans/customer deposits 1.32 1.16 1.01 Total deposit growth (%) 19.7 11.8 12.2Gross external debt (USDbn) 471.6 483.0 501.0 Capital/total assets (%) 11.1 12.8 13 Private sector external debt (USDbn) 430.5 442.3 457.3 Profitability ratios Central government balance (% GDP) -6.0 -4.0 -1.6 Cost/income ratio NA NA 42% Gross public external debt (% GDP) 41.0 40.6 43.6 ROA 1.46% 0.70% 1.70% International reserves (USDbn) 439.5 479.4 525.1 Net interest margin 6.2% 5.7% 5.3% Cost of risk NA NA 3.2 Banking assets/GDP (%) 75.9 76.0 na Market share (% of sector
assets)
Total loans/GDP (%) 53.8 49.8 na Largest 20 banks 67.4 68.3 70.0 Retail loans/GDP (%) 9.1 9.1 na State-controlled banks 55.5 53.5 55.6 Total deposits/GDP (%) 33.1 35.6 na Foreign-owned banks NA NA 17.6
Source: Rosstat, CBR, MOF, MOE, Fitch, estimates HSBC Economics. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Alfa BankRussia’s largest privately owned bank Key events and risks to monitor
Alfa bank faces high levels of problematic assets, although these are declining. Significant single client concentrations exist on both sides of its balance sheet. Possible exposure to related parties.
Credit profile outlook (Overweight, upgrade from Neutral)
Alfa Bank is working in a challenging operating environment, but seems well positioned to reap the benefits of the Russian’s continuing economic recovery. We upgrade from Neutral to Overweight on the back of the bank’s improving financial performance, as a result of which we expect it to remain one of Russia’s best-performing financial institutions. Risks to our view include a deterioration in asset quality and negative trend in profitability.
HSBC FI Research view
The bank’s asset mix remained relatively stable during H1 2010 but on the liability side it experienced a significant outflow of deposits, with customer accounts contracting by 5.1% to USD13.0bn. This adverse development in the funding structure was mostly attributable to a 25% drop in the account of one client. Alfa Bank’s top 10 deposits accounted for 27.5% of the total, a big concentration risk.
Loans overdue by more than one day dropped to 12.1% in H1 2010, down from 21.2% at the end of 2009. The bank reported a net income of USD296m in H1 2010, up from USD6m in H1 2009. The main drivers of profit were a higher net interest income (boosted by lower provisions) and gains arising from FX exposure. The total Basel capital adequacy ratio followed the same upward trend as profitability and increased to 22.1%, up from 20.2% at end 2009 with the Tier 1 ratio rising to 14.7% from 13.1%.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BB Stable Moody's Baa1 StableSub-debt BB- S&P BBB StableMoody’s Senior unsecured Ba1 Stable Major shareholders (as of Jan 2011) Bank-deposit Ba1 M. Fridman 36.47%Sub-debt Ba2 G. Khan 23.27%Financial strength D A. Kuzmichev 18.12%S&P P. Aven 13.76%Senior unsecured B+ Bloomberg Sub-debt B- ALFARU
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
ALFARU7 7/8 09/17 (BB/Ba1/B+) USD1,000 7 7/8ALFARU8 03/18/15 (BB/Ba1/B+) USD600 8ALFARU 8.2 06/12 (BB/Ba1/B+) USD500 8.2ALFARU9 ¼ 06/13 (BB/Ba1/B+) USD400 9 1/4
Bank in brief
Founded in 1990, Alfa Bank is Russia’s sixth-largest financial institution, controlling some 2.6% of the country’s banking assets and is also its biggest privately owned bank.
Alfa Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 1,706 2,824 2,519 2,273 Loans 61.7 17.2 -25.2 1.8Interest expense –790 –1,406 –1,403 –1,088 Assets 49.2 19.2 -20.0 4.3Net interest income 916 1,418 1,116 1,185 Pre-provision profit 58.5 146.3 -49.6 23.5Other operating income 373 891 385 544 Net income 33.2 -9.3 -66.5 376.6Operating income 1,289 2,309 1,501 1,729 Profitability Operating expenses –682 –813 –747 –798 ROAA 1.3 0.9 0.3 1.7Pre-provision profits 607 1,496 754 931 Pre-provision profits/average assets 3.2 6.0 3.1 4.2Provisions for loan losses –231 –1,009 –584 –363 Net interest margins 5.6 6.6 5.1 5.8Non-operating profit –47 –86 –46 –40 Cost-income ratio 52.9 35.2 49.8 46.2Pre-tax income 329 401 124 528 Asset quality Taxation –75 –171 –47 –161 Gross NPL ratio 0.4 1.1 18.9 naNet income 253 230 77 367 Gross NPLs (USDm) 62 202 2,824 naKey balance sheet items Loan loss res./NPLs 610.4 589.8 53.3 naDeposits 12,180 12,582 13,686 12,985 Capital structure Loans 15,330 17,970 13,449 13,695 Total CAR 11.8 9.2 20.2 22.1Total assets 22,695 27,052 21,646 22,579 Tier-1 ratio 9.5 8.2 13.1 14.7Total equity 1,855 2,162 2,698 2,883 Funding Summary of FX balance sheet Loan-to-deposit ratio 125.9 142.8 98.3 105.5Loans 8,750 9,871 7,426 7,222 Loan/assets 67.5 66.4 62.1 60.7Deposits 4,946 6,979 6,895 5,923 FX loan-to-deposit ratio 564.7 141.4 107.7 121.9Borrowings 4,809 3,696 1,440 1,857 Bonds 1,336 2,099 1,255 1,516
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bank of MoscowOn its way to join forces with VTB Key events and risks to monitor
The bank is pending acquisition by VTB, Russia’s second largest bank. A large part of the Bank of Moscow (BOM) business franchise depends on good
relationship with Moscow’s government Significant risk concentration in the City of Moscow region
Credit profile outlook (initiate at Overweight)
BOM’s control is being transferred to VTB, and its current credit standing very much depends on this tie. An acquisition by government-owned VTB would strengthen BOM’s credit profile, lifting the bank from sub-Sovereign control to direct Sovereign ownership. This, coupled with an improving performance, drives our Overweight recommendation on the bank. Risks to our view include integration risks following VTB’s acquisition.
HSBC FI Research view
BOM is one of Russia’s five biggest banks with total assets amounting to RUB958.1bn (USD31.4bn) as at 30 September 2010. The balance sheet grew 16.1% during the first nine months of 2010, primarily fuelled by an expansion in lending activities with loans increasing by 14.3%. About 54.3% of BOM’s loan book is concentrated in the City of Moscow region.
Net profit in the first nine months of 2010 amounted to RUB8.84bn (USD290.8m), a significant increase from the RUB497.83m (USD16.5m) reported a year previously, largely due to falling interest expenses and provisioning charges. Net interest income after provisions climbed to RUB14.48bn (USD476.3m), up 5.8 times from RUB2.5bn (USD82.7m) in the same period.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB- Watch neg Moody's Baa1 StableSub-debt na S&P BBB StableMoody’s Senior unsecured Baa2 Negative Major shareholders (as of Mar 2011) Bank-deposit Baa2 VTB 46.48%Sub-debt Baa3 Stolichnaya Insurance Group 17.32%Financial strength D A.F. Borodin/L.F. Alaluev 20.4%S&P NR GCM Opportunities Fund 6.41%Senior unsecured Bloomberg Sub-debt BKMOSC
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
BKMOSC 6.699 15 (BBB-/Baa2/NR) USD750 6.699%BKMOSC 7.335 13 (BBB-/Baa2/NR) USD500 7.335%BKMOSC Var 05/17 (BB+/Baa3/NR) USD400 6.807%BKMOSC Var 11/15 (BB+/Baa3/NR) USD300 5.967%
Bank in brief
BOM was established in 1995 and since then has had close ties with the municipality of Moscow until it was sold to VTB, which currently controls 46.48% of the bank. BOM services more than 100,000 corporations and over nine million private individuals in 60 regions of Russia and operates a network of close to 400 outlets.
Bank of Moscow: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sept 2010
Year to December (%) 2007 2008 2009 LTM Sept 2010
Income statement Growth (y-o-y) Interest income 1,546 2,476 2,592 2,637 Loans 37.3 46.9 3.5 14.3Interest expense –800 –1,335 –1,606 -1,311 Assets 38.3 51.7 3.0 16.1Net interest income 746 1,141 985 1,326 Pre-provision profit 55.0 16.5 106.1 20.1Other operating income 229 82 473 447 Net income 73.9 -30.5 -89.7 1163.7Operating income 975 1,223 1,458 1,773 Profitability Operating expenses –435 –575 –413 -447 ROAA 2.2 1.0 0.1 1.0Pre-provision profits 540 647 1,046 1,326 Pre-provision profits/average assets 3.0 2.4 4.1 4.5Provisions for loan losses –96 –380 –1,002 -948 Net interest margins 4.8 4.7 4.1 4.7Non-operating profit 71 64 –5 18 Cost-income ratio 44.6 47.1 28.3 25.2Pre-tax income 516 332 39 396 Asset quality Taxation –123 –51 –17 -94 Gross NPL ratio 0.7 1.3 3.9 4.1Net income 393 280 23 301 Gross NPLs (USDm) 101 157 758 902Key balance sheet items Loan loss res./NPLs 181.5% 278.4 190.3 211.3Deposits 14,254 13,827 14,251 17,832 Capital structure Loans 14,293 17,569 17,796 20,007 Total CAR 14.8 13.9 18.9 20.4Total assets 21,466 27,252 27,473 31,377 Tier-1 ratio 10.4 9.5 8.0 15.2Total equity 1,975 2,301 2,883 3,836 Funding Summary of FX balance sheet Loan-to-deposit ratio 100.3% 127.1 124.9 112.2Loans 4,238 6,152 5,918 na Loan/assets 66.6 64.5 64.8 63.8Deposits 2,421 4,034 4,368 na FX loan-to-deposit ratio 175.0 152.5 135.5 naBorrowings 2,405 4,922 4,390 na Bonds 1,841 2,085 1,834 na
Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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GazprombankUniversal bank grown from gas roots Key events and risks to monitor
The bank’s relationship with Gazprom and the Russian government underpins its credit profile
However, this leaves it vulnerable to political pressure. Profitability rose in H1 2010 despite dwindling pre-provision net interest income.
Credit profile outlook (Initiate with Overweight)
Gazprombank is controlled by Gazprom, the world’s largest gas producer, which directly owns 41.73%, while its pension fund Gazfond owns a 50%+1 share. Hence Gazprombank’s creditworthiness is closely aligned with that of its parent, and also dependent on its close ties with the Russian government. The economic prospects of the gas industry and Russia look positive and support our Overweight view. Risks to our view include: weakening economy and loss of parent support.
HSBC FI Research view
Gazprombank’s balance sheet remained almost flat in H1 2010 at RUB1,747.5bn (USD56bn), with the bank reporting net income of RUB32.68bn (USD1.05bn), up from RUB24.45bn (USD785m) in H1 2009. Overdue loans stood at RUB28.33bn (USD908m) as of 30 June 2010, down 9.6% in absolute terms from RUB31.32bn (USD1.04bn) at the end of 2009. The gas industry accounted for only 12.6% of Gazprombank’s gross loan portfolio, with exposure to Gazprom Group at 7%. These low figures show the progress the bank has made in diversifying away from its parent and the gas industry. Capital adequacy ratios rose in H1 2010, with the total BIS capital ratio and Tier 1 ratio climbing to 16.6% and 10.8%, respectively from 14.8% and 9.7%.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch NR Fitch BBB PositiveSenior unsecured Moody's Baa1 StableSub-debt S&P BBB StableMoody’s Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011) Bank-deposit Baa3 Gazprom 41.73%Sub-debt NR Gazfond 50%+1Financial strength E+ S&P Senior unsecured BB Positive Bloomberg Sub-debt B+ GPBRU
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
GPBRU 6 ¼ 12/14 (NR/Baa3/BB) USD1,000 6 1/4GPBRU 6 ¼ 09/15 (NR/Baa3/BB) USD948 6 1/2GPBRU7.933 06/13 (NR/Baa3/BB) USD443 7.933%GPBRU 7.97 06/11 (NR/Ba1/B+) USD300 7.97%
Bank in brief
Gazprombank was set up in 1990 by the gas industry giant Gazprom, initially to service its parent and other companies in the industry. However, the bank has expanded its customer base to sectors including oil and petrochemicals and metallurgy, servicing some 45,000 corporations and three million private individuals.
Gazprombank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 2,539 3,054 4,464 3,799 Loans 40.8 57.0 18.9 6.9Interest expense –1,601 –1,903 –3,376 -2,860 Assets 21.8 95.3 -6.0 0.4Net interest income 937 1,151 1,088 939 Pre-provision profit –30.3 na na –42.4Other operating income 976 –3,907 2,530 1,830 Net income –15.7 na na 14.0Operating income 1,913 –2,756 3,618 2,769 Profitability Operating expenses –1,239 –1,017 –866 -1,106 ROAA 3.7 –4.9 3.3 3.8Pre-provision profits 674 –3,774 2,751 1,663 Pre-provision profits/average assets 1.9 –6.7 4.9 2.9Provisions for loan losses –71 –1,263 –1,224 -131 Net interest margins 5.0 4.0 3.7 2.7Non-operating profit 1,454 1,981 961 1,512 Cost-income ratio 64.8 –36.9 23.9 39.9Pre-tax income 2,057 –3,056 2,489 3,044 Asset quality Taxation –744 313 –638 -829 Gross NPL ratio 1.0 1.5 3.9 3.3Net income 1,313 –2,743 1,851 2,215 Gross NPLs (USDm) 166 334 1,043 908Key balance sheet items Loan loss res./NPLs 331.6 224.1 176.5 176.3Deposits 15,909 21,854 29,324 31,885 Capital structure Loans 16,309 21,429 24,947 25,666 Total CAR 19.9 9.2 14.8 16.6Total assets 38,557 62,993 57,970 55,994 Tier-1 ratio 22.1 7.8 9.7 10.8Total equity 8,193 4,349 6,526 7,221 Funding Summary of FX balance sheet Loan-to-deposit ratio 102.5 98.1 85.1 80.5Loans 5,062 7,277 11,772 11,512 Loan/assets 42.3 34.0 43.0 45.8Deposits 2,967 9,336 8,889 11,335 FX loan-to-deposit ratio 170.6 77.9 132.4 101.6Borrowings 3,463 5,376 4,939 3,085 Bonds 3,180 2,753 2,586 2,039
Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Russian Agricultural BankFortunes dependent on agribusiness Key events and risks to monitor
The bank’s 100% state ownership makes it susceptible to political pressures. It is operating in the highly volatile agricultural industry. Asset quality may come under pressure given significant sector concentration.
Credit profile outlook (initiate with Neutral)
The state-owned Russian Agricultural Bank (RAB) has a clearly defined role in the implementation of the government’s economic policy, and as such any privatisation looks very unlikely. We see its credit profile as being closely linked to that of the Russian government with a resulting close alignment of spreads. However, the bank is involved in the highly volatile agricultural business, hence we establish a Neutral recommendation. Risks to our view include: any distancing from the owner. The upside risk relates to the upgrade of Russia by rating agencies.
HSBC FI Research view
RAB’s total assets amounted to RUB861.4bn (USD27.6bn) as of 30 June 2010, up from RUB830.66bn (USD27.4bn) as at the end 2009. The bank’s mandate is to work actively with agricultural enterprises, with minimum of 70% exposure to this industry in its loan portfolio. This keeps the loan book largely concentrated in one sector of the economy, with any diversification highly unlikely. RAB’s fortunes will therefore be very much dependent on developments in Russian agribusiness.
The bank reported net income of RUB163m (USD5.2m) for H1 2010, a large drop from RUB336m (USD10.8m) reported in H1 2009. This bottom line contraction was primarily driven by provisions, which more than doubled y-o-y, signaling potential problems. The level of provisions increased to 6.2% of gross loans as of 30 June 2010, up from 4.9% on 31 December 2009.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch Senior unsecured BBB Stable Moody's Sub-debt NR S&P Moody’s Senior unsecured Baa1 Stable Major shareholders (as at Jan 2011) Bank-deposit Baa1 Government through 100%Sub-debt Baa2 The Federal Agency of Financial strength E+ Federal Property Management S&P NR Senior unsecured Bloomberg Sub-debt RSHB Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
RSHB 9 06/11/14 (BBB/Baa1/NR) USD1,000 9%RSHB 7 ¾ 05/18 (BBB/Baa1/NR) USD980 7 ¾%RSHB 7 1/8 01/14 (BBB/Baa1/NR) USD720 7 1/8%RSHB 7.175 05/13 (BBB/Baa1/NR) USD647 7.175%
Bank in brief
RAB is fully owned by the Russian government. It is the fourth largest bank in Russia in terms of total assets and accounts for some 3.3% of the aggregate banking balance sheet of the country. The bank was set up to work with agricultural businesses to which commercial banks are traditionally reluctant to lend.
Russian Agricultural Bank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 1,275 2,254 2,934 3,295 Loans 87.1 55.1 29.2 11.6 Interest expense –609 –1,187 –1,829 -1,861 Assets 93.1 100.1 16.5 3.7 Net interest income 666 1,068 1,105 1,435 Pre-provision profit 135.3 43.5 15.6 43.1 Other operating income 99 103 –6 -12 Net income 410.3 –52.8 –87.8 –68.9Operating income 765 1,171 1,099 1,423 Profitability Operating expenses –414 –654 –630 -719 ROAA 1.6 0.4 0.0 0.0 Pre-provision profits 351 517 469 704 Pre-provision profits/average assets 3.3 2.4 1.9 2.5 Provisions for loan losses –122 –383 –433 -687 Net interest margins 10.7 5.6 5.2 5.7 Non-operating profit 0 0 –9 -0 Cost-income ratio 84.6 79.1 74.4 98.0 Pre-tax income 228 134 26 17 Asset quality Taxation –58 –52 –19 -15 Gross NPL ratio 1.0 2.3 4.3 naNet income 170 83 8 3 Gross NPLs (USDm) 123 369 870 naKey balance sheet items Loan loss res./NPLs 235% 153 114 na Deposits 3,901 5,254 7,597 10,119 Capital structure Loans 11,853 15,383 19,279 20,906 Total CAR 13.6 16.0 20.7 20.3Total assets 14,490 24,253 27,402 27,600 Tier-1 ratio 8.9 10.7 14.6 14.7Total equity 1,375 2,304 3,811 3,726 Funding Summary of FX balance sheet Loan-to-deposit ratio 303.9% 292.8 253.8 206.6Loans na na na na Loan/assets 81.8 63.4 70.4 75.7Deposits na na na na FX loan-to-deposit ratio na na na naBorrowings na na na na Bonds na na na na
Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
124
Global Emerging Markets – Credit Strategy EM Banks March 2011
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Sberbank Unmatched market heavyweight Key events and risks to monitor
Sberbank’s relationship with the government is the key to its creditworthiness. Its NPLs remain relatively high but at >140% are well provisioned. International expansion and investment banking ambitions may be a challenge.
Credit profile outlook (Overweight)
Sberbank can be considered a close proxy for Russian Sovereign risk. The state is a controlling shareholder with a 57.6% stake, while the bank’s systemic importance is enhanced by its unmatched retail franchise with 48% of retail deposits on its books. Therefore we maintain our Overweight recommendation. Risks to our view include: a significant deterioration in market shares and depleting capitalisation.
HSBC FI Research view
Sberbank is well poised to benefit from the gradual recovery in its operating environment. As macroeconomic conditions in Russia improve, profitability is bound to strengthen. In 9M10, the bottom line amounted to RUB109.6bn (USD3.7bn), up 10.6 times on the RUB10.3bn (USD0.3bn) reported in 9M 2009. This significant improvement can be largely attributed to a decline in provisions to RUB150.0bn (USD4.9bn) from RUB301.3bn (USD10bn). Asset quality stabilised with NPLs at 8.6% of gross loans as of 30 September 2010, slightly up from 8.5% at the 2009YE.
Sberbank remains well capitalised with its total capital ratio under Basel at 16.9% as of 30 September 2010. The Tier 1 ratio rose to 11.6% from 11.5% during the same period. The minimum regulatory capital requirements are 11% and 8% for total capital and Tier 1 capital, respectively. The growing investment banking ambitions could translate into an acquisition of an established market player; the target recently most discussed in the press has been Troika Dialog.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NR S&P BBB StableMoody’s Senior unsecured A3 Stable Major shareholders (as of April 2011) Bank-deposit Baa1 Central Bank of Russia 57.58%Sub-debt Baa1 Foreign Legal Entities 32.12%Financial strength D+ S&P NR Senior unsecured Bloomberg Sub-debt SBERRU
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
SBERRU 5.499 15 (BBB/A3/NR) USD1,500 5.499%SBERRU 5.4 03/17 (BBB/A3/NR) USD1,250 5.4%SBERRU5.93 11/11 (BBB/A3/NR) USD750 5.93%SBERRU 6.468 13 (BBB/A3/NR) USD500 6.468%SBERRU6.48 05/13 (BBB/A3/NR) USD500 6.48%
Bank in brief
Sberbank dominates the Russian banking sector, accounting for 27% of total banking assets in the country. The bank boasts a strong franchise supported by a massive branch network spanning nine time zones and consisting of some 19,000 outlets and in total servicing some 300m individual accounts. According to current legislation the government ownership may not fall below 50%.
Sberbank: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sep 2010
Year to December (%) 2007 2008 2009 LTM Sep 2010
Income statement Growth (y-o-y) Interest income 17,230 24,919 25,674 26,422 Loans 54.5 29.5 -4.2 5.8Interest expense -7,070 -9,719 -9,837 -10,199 Assets 42.2 36.7 5.5 13.0Net interest income 10,160 15,200 15,837 16,223 Pre-provision profit 28.1 48.7 88.6 -6.0Other operating income 4,035 3,477 5,292 6,301 Net income 28.6 -8.2 -75.0 407.2Operating income 14,194 18,677 21,129 22,524 Profitability Operating expenses -7,869 -9,269 -7,223 -8,719 ROAA 2.5 1.7 0.4 1.6Pre-provision profits 6,326 9,408 13,906 13,805 Pre-provision profits/average assets 3.7 4.0 6.4 5.5Provisions for loan losses -709 -3,934 -12,328 -8,057 Net interest margins 6.4 7.0 7.7 6.5Non-operating profit 0 -252 -638 -597 Cost-income ratio 55.4 49.6 34.2 38.7Pre-tax income 5,465 5,222 941 5,150 Asset quality Taxation -1,337 -1,293 -172 -1,034 Gross NPL ratio 1.50 1.80 8.50 8.60Net income 4,280 3,929 769 4,116 Gross NPLs (USDm) 2,454 3,221 15,454 16,606Key balance sheet items Loan loss res./NPLs 193.1% 216.5 125.0 141.1Deposits 157,623 163,088 181,084 201,864 Capital structure Loans 159,409 172,701 161,945 168,539 Total CAR 14.50 18.90 18.10 16.90Total assets 200,353 229,111 236,560 262,935 Tier-1 ratio 13.90 12.20 11.50 11.60Total equity 25,902 25,513 25,934 29,972 Funding Summary of FX balance sheet Loan-to-deposit ratio 101.1% 105.9 89.4 83.5Loans 23,908 27,325 28,062 37,097 Loan/assets 79.6 75.4 68.5 64.1Deposits 23,272 36,558 38,236 40,647 FX loan-to-deposit ratio 102.7 74.7 73.4 91.3Borrowings 5,733 7,664 4,789 10,126 Bonds 188 38 239 241
Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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VnesheconombankGovernment agent with a goal Key events and risks to monitor
Relationship with the government is the key credit driver as the government uses VEB as a tool in implementing its economic policies
Participation in long-term potentially risky development projects is a concern.
Credit profile outlook (initiating with Overweight)
VEB is wholly owned by the government, so its creditworthiness is likely to mirror the developments in that of the Sovereign. Owing to extraordinary government support and its crucial role to the Russian economy we establish our Overweight recommendation. Risks to our view include: falling economic importance of the bank and a weakening relationship with the government.
HSBC FI Research view
VEB has been expanding its operations rapidly under the direction of the Russian government, which has been stepping up efforts to restore the economic and financial stability of the country shattered by the recent global financial turmoil. The bank is participating in large, long-term, and potentially risky development projects, resulting in a significant level of concentration in its loan book.
The profitability is not a priority as VEB’s core purpose is non-commercial, to support the development of Russian infrastructure, high technology industries and medium-sized enterprises. Other aims include an increase in the efficiency of exploitation of natural resources, support of exports and services. Its bottom line amounted to RUB14.25bn (USD455.8m) in H1 2010, down from RUB18.20bn (USD584.7m) in H1 2009. Profitability received a boost from provisions falling to RUB13.34bn (USD426.8m) from RUB42.96bn (USD1.38bn) in the same period.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured NA Major shareholders (as at Jan 2011) Bank-deposit Baa1 Stable Government 100%Sub-debt NA Financial strength E+ S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA VEBBNK
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
VEBBNK 6.902 20 (BBB/NR/BBB) USD1,600 6.902%VEBBNK 6.8 11/25 (BBB/NR/BBB) USD1,000 6.8%VEBBNK5.45 11/27 (BBB/Baa1/BBB) USD600 5.45%
Bank in brief
VEB does not have a banking licence and its operations are governed by a special federal law. VEB acts as a government agent in charge of the monitoring and management of the external debt of the state. When needed the bank is empowered to reconcile, settle and also restructure the debt obligations of the Russian Federation.
Vnesheconombank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 920 1,745 4,373 4,827 Loans 32.0 218.2 16.2 3.4Interest expense –633 –846 –2,736 -2,835 Assets 69.5 196.6 17.9 1.9Net interest income 287 898 1,636 1,993 Pre-provision profit –46.3 na na –6.9Other operating income 309 –1,616 3,118 2,755 Net income 15.7 na na –10.3Operating income 596 –718 4,754 4,747 Profitability Operating expenses –372 –408 –709 -794 ROAA 2.1 –7.4 2.1 1.8Pre-provision profits 224 –1,126 4,045 3,954 Pre-provision profits/average assets 1.3 –2.5 7.2 6.1Provisions for loan losses 6 –2,108 –3,660 -2,809 Net interest margins 2.2 2.6 3.2 3.2Non-operating profit 27 5 835 64 Cost-income ratio 62.4 –56.8 14.9 16.7Pre-tax income 256 –3,228 1,220 1,209 Asset quality Taxation 114 –38 –13 -73 Gross NPL ratio 0.1 1.6 7.9 8.2Net income 370 –3,267 1,207 1,136 Gross NPLs (USDm) 231 11,800 76,211 82,098Key balance sheet items Loan loss res./NPLs 1438.1 100.4 159.0 158.8Deposits 1,598 3,787 6,733 7,257 Capital structure Loans 9,269 24,679 28,085 27,942 Total CAR 44.3 14.7 19.1 naTotal assets 22,545 55,938 64,565 63,309 Tier-1 ratio na na na naTotal equity 9,026 7,322 15,157 14,142 Funding Loan-to-deposit ratio 580.1 651.7 417.1 385.0 Loan/assets 41.1 44.1 56.8 44.1 FX loan-to-deposit ratio na na na na Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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VTB High acquisition appetite Key events and risks to monitor
VTB’s majority government ownership makes it susceptible to political pressure. The bank’s aggressive acquisitions policy creates integration risks.
Credit profile outlook (Neutral)
VTB’s credit profile is closely linked to that of the Russian government, owner of 75.5% of its equity. State support has been forthcoming in the past, and remains strong in our opinion. Risks to our view include possible new debt issues in 2011. The proceeds would be used for funding the aggressive expansion/acquisition plans, which include the acquisition of Transcredit bank and a likely purchase of Bank of Moscow. Also any problems with integrating the acquisitions could exert negative pressure on the bank and our view. The upside risks include a significant improvement in credit metrics on the back of expansion in market shares.
HSBC FI Research view
While the Russian government has recently sold a 10% stake of its holding in the bank, it remains majority owner, and so the sale is unlikely to have a material impact on the credit profile of VTB.
An improving operating environment has contributed to a strong jump in profitability. VTB reported a net profit of RUB38.8bn (USD1.3bn) for the first nine months of 2010, a major turnaround when compared with a loss of RUB45.5bn (USD1.5bn) reported for the corresponding period of 2009.
VTB has been heavily reliant on its core banking operations with a net loan portfolio accounting for 67.4% of total assets as of 30 September 2010. However, the profitability of the loan book came under pressure when interest rates fell in the credit market, prompting VTB to review its funding strategy and adjust it accordingly. As a result NIM improved to 5.2% in the first nine months of 2010.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Russia Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Baa1 Stable Major shareholders (as at March 2011) Bank-deposit Baa1 Russian Federation 75.50%Sub-debt Baa2 GDRs 17.26%Financial strength D- Ordinary shares 7.24%S&P Senior unsecured BBB Watch
Negative Bloomberg
Sub-debt NA VTB Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m) Coupon
VTB6 7/8 05/29/18 (BBB/Baa1/BBB) USD1,706 6 7/8%VTB 6.465 03/15 (BBB/Baa1/BBB) USD1,250 6.465%VTB 6.609 10/12 (BBB/Baa1/BBB) USD1,054 6.609%VTB 6.551 10/20 (BBB/Baa1/BBB) USD1,000 6.551%VTB6 6.315 02/18 (BBB/Baa1/BBB) USD750 6.315%
Bank in brief
VTB is Russia’s second-largest bank and is primarily focused on corporate business although it is growing its high margin retail and investment banking arms. It accounted for 12% of Russia’s banking assets as of 30 September 2010 and has the third-largest branch network (after Sberbank and Russian Agricultural Bank) with 653 outlets in Russia alone and 282 in Europe and the CIS. The bank’s Supervisory Council chairman is Mr. A Kudrin, Russia’s Minister of Finance.
VTB: financial summary
Year to December (USDm) 2007 2008 2009 LTM Sept 2010
Year to December (%) 2007 2008 2009 LTM Sept 2010
Income statement Growth (y-o-y) Interest income 5,387 9,856 11,773 11,419 Loans 100.1 48.5 -9.6 9.5Interest expense -2,831 -5,290 -6,978 -5,621 Assets 76.7 35.8 -2.3 3.9Net interest income 2,556 4,566 4,795 5,797 Pre-provision profit 29.7 43.5 11.4 24.5Other operating income 1685 1,403 441 1,028 Net income 29.2 -87.8 na naOperating income 4,241 5,969 5,236 6,825 Profitability Operating expenses -2,011 -2,769 -2,442 -3,153 ROAA 2.1 0.2 -1.5 0.7Pre-provision profits 2,230 3,199 2,794 3,672 Pre-provision profits/average assets 3.1 2.9 2.4 3.0Provisions for loan losses -524 -2,609 -5,044 -2,521 Net interest margins 4.4 4.8 4.6 5.3Non-operating profit 113 137 98 130 Cost-income ratio 47.4 46.4 46.6 46.2Pre-tax income 1,819 728 -2,152 1,281 Asset quality Taxation -305 -543 274 -459 Gross NPL ratio 1.2 1.9 9.8 9.5Net income 1,514 185 -1,878 822 Gross NPLs (USDm) 698 1,629 6,556 8,374Key balance sheet items Loan loss res./NPLs 210.9% 197.7 119.3 105.0Deposits 37,098 37,476 52,232 60,236 Capital structure Loans 58,549 86,917 76,907 82,797 Total CAR 16.3 17.3 20.7 18.8Total assets 92,609 125,750 120,220 122,918 Tier-1 ratio 15.0 10.5 14.8 13.9Total equity 16,207 13,336 16,810 17,861 Funding Summary of FX balance sheet Loan-to-deposit ratio 157.8% 231.9 147.2 137.5Loans na na na na Loan/sssets 63.2 69.1 64.0 67.4Deposits na na na na FX loan-to-deposit ratio na na na naBorrowings na na na na Bonds 12,220 12,996 10,006 11,386
Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Stability paves way for growth The first half of 2010 was tough for Saudi banks,
which faced declining loan portfolios and
shrinking net interest margins. The trend changed
for the better in the second half and revenues
stabilised. Private sector was still slow on
recovery and the banks remained cautious, but
there was loan growth of 3% compared to a 1%
contraction in 2009. Two years of a near-stagnant
market and rising oil prices suggest, to us, strong
loan growth in 2011.
The Saudi government’s five-year capital
investment plan (SAR1.4trn, USD364bn) is now
in its third year. The banks’ relatively weak
capital position has limited their participation in
this scheme. Further, despite having most of the
structural catalysts in place Saudi economy has
failed to take off in the past two years perhaps due
to a low level of government intervention. We,
however, expect a gain in the growth momentum
and investments to be increasingly channelled
through banks which should improve loan growth.
The Saudi GDP real growth rate declined to
nearly zero in 2009 amid the credit crisis but
HSBC’s economist expects it to recover to 3.8%
in 2011. However, growth will be driven mainly
by increased government spending while private
consumption is not likely to change significantly.
Inflation is still a concern, with CPI inflation
averaging more than 5% over the past three years,
but according to HSBC’s economist that should
not limit the government’s expansionary fiscal
and monetary policy. Further, the latest PMI
numbers indicate that Saudi firms are able to pass
through increased costs, and so they should be
able to maintain their profitability.
Saudi banks are well regulated. For commercial
banks the loan-to-deposit ratio is capped at 85%.
The actual ratio fell to 78% in 2009 from 88% in
2008 due to the decline in loan portfolios, but
improved modestly to 80% in 2010. However the
regulation limits the potential for credit growth.
During 2010, bank credit to the private sector
increased 4.5% to SAR735bn (USD196bn) while
credit to public sector enterprise increased by 8%
but was still low at SAR32.3bn (USD8.6bn). Risk
aversion was apparent from the 45% surge in
banks’ investments in low risk T-Bills to
SAR120.1bn (USD 32bn). Banks, therefore, have
Saudi banks
HSBC FI Research is positive on the prospects for Saudi banks,
and expects that the net interest margin has bottomed out
We believe strong loan growth is likely after two years of subdued
performance
Banks accelerated provisioning in H2 2010 and are in a better
position to look forward
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Aybek Islamov* Analyst (Equity Research0 HSBC Bank plc + 44 20 7992 3624 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
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the potential to redirect investments to higher
yielding assets as risk appetite increases.
HSBC’s estimates point to 11% growth in private
consumption in 2011 which supports our case that
credit growth is likely to be driven by private
lending. Further, after high loan disbursements by
government agencies in the recent past, the loans-to-
equity ratio went up to 120% in 2009 from 91% in
2007. These agencies do not collect deposits, and so
their lending capacity will depend on equity
infusions and as a result we believe will be limited.
The constraints on the agencies lending capacity will
also support loan growth at banks.
Public sector deposits are still a small proportion
of the overall deposit level in Saudi banks. At the
end of November 2010 they made up only 6.9%
of total deposits, significantly below the
percentage in other GCC countries. Higher oil
prices have improved the country’s financial
flexibility and hence we expect public sector
deposit support if need be.
Saudi banks accelerated provisioning in Q3 2010
and our equity team expects the provisioning
cycle to reach its peak in H1 2011. Further, bank
management teams indicate the loan loss reserves
to gross loans ratio for our covered banks increase
to 3.7% in 2011 from 2.5% in 2008. This is quite
comfortable in our view considering Saudi banks’
limited exposure to private real estate and
construction sectors.
Saudi Arabia – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) 4.4 0.1 3.8 Balance sheet ratios: Nominal GDP (USDbn) 487.6 376.3 449.9 Total Assets (USDbn) 357 375 384 GDP per capita (USD) 18337.6 13791.4 16089.6 Liquid assets/total assets 66% 63% 63% Total Loan growth (%) 25% -1% 3% CPI, average (% y-o-y) 9.9 5.1 5.4 Loans/Total assets (USDbn) 57% 54% 55% Policy rate, end-year (%) 2.5 2.0 2.0 Retail loans/gross loans 29% 29% 31% Trade balance (USDbn) 146.2 41.3 84.8 Impaired loans/gross loans 1.2% 2.6% N.A Current account balance (USDbn) 132.3 22.8 69.8 Reserve coverage of Impaired
loans 194% 92% N.A
Current account balance (% GDP) 27.1 6.1 15.5 Gross Loans/Customer deposits 88% 78% 80% Total Deposit growth (%) 18% 11% 4% Gross external debt (USDbn) 96.7 90.3 89.6 Capital/total assets 12% 14% 15% Private sector external debt (USDbn) NA NA NA Profitability ratios: Central government balance (% GDP) 31.8 -6.1 6.4 Cost/income ratio 33.7% 31.4% 32% Gross public external debt (% GDP) 20.0 15.0 17.0 ROA 2.6% 2.5% 2.20% International reserves (USDbn) 442.5 410.0 441.2 Net interest margin 4.1% 3.8% 3.43% Cost of Risk 0.4% 0.8% 1.45% Banking assets/GDP (%) Market share (as % of sector
assets):
Total loans/GDP (%) Largest 20 banks Retail loans/GDP (%) State-controlled banks Total Deposits/GDP (%) Foreign-owned banks
Source: SAMA, estimates HSBC Economics
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Rationalisation required Local banks in the UAE have invested heavily in
real-estate-related activities, with direct lending to
construction sector accounting for 13% of their
books. Total exposure to real estate sector has
remained stable after growing until 2009 while
growth in loan books came from small business
loans. Such substantial exposure to the
construction sector is concerning given recent
restructurings and bailouts. The restructuring of
Dubai’s master developer Nakheel, for example,
involved extension on USD12bn of bank loans.
Abu Dhabi’s master developer Aldar, also only
recently avoided a liquidity squeeze though a
state-backed financial revamping. Even now, the
Dubai government is in active discussion with
regional and international lenders to restructure
debt at other state-owned/related entities including
Dubai Holdings and Dubai Group. While the
scope of these ongoing negotiations has not yet
been disclosed, they are likely to be smaller scale
than for Nakheel. Nonetheless, given the financial
sector’s exposure, they remain a concern.
Real estate exposures will likely continue to grow,
considering the large supply pipeline, particularly
in commercial real estate (CRE). HSBC’s equity
team expects commercial real estate supply in the
UAE to increase by more than 50% in the medium
term. Most of these projects will probably have
committed loan facilities with disbursals linked to
the stage of completion. Banks’ exposure to CRE
projects is therefore likely to increase.
Delinquency levels have steadily increased in the
country since the end of 2008 and most of the
banks reported NPL ratios between 3% and 5% at
the end of Q3 2010. Loan growth beyond the
1.7% rate achieved in 9M 2010 will be tough,
therefore, factoring in the increased provisioning
requirement. Abu Dhabi’s supportive stance
towards its controlled banks is a strong credit
positive, however. The emirate injected
USD4.4bn of Tier 1 capital into five of its banks
early 2009. Dubai’s government, meanwhile, has
been fairly quiet on that front.
UAE banks
High exposure to the commercial real-estate and construction
sectors
Exposure to the latter is likely to grow further given the strong
supply pipeline
Banks with more focus on retail loans, and less concentrated
exposure, offer a stronger investment proposition
Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Aybek Islamov* Analyst (Equity Research) HSBC Bank plc + 44 20 7992 3624 [email protected]
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.
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Increasing government involvement in domestic
activities in the wake of the Dubai World crisis is
reflected in the balance sheets of the region’s banks.
Lending to government and public sector entities has
increased by 37% since end of 2008 to USD53bn
while lending to private sector has declined by 8% to
USD158bn. Exposure to the private sector continued
to decline in 2010, indicating ongoing caution on the
part of the banks.
UAE – key data on the banking sector
Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) 7.0 -2.9 1.7 Balance sheet ratios Nominal GDP (USDbn) 254.3 230.1 251.9 Total assets (USDbn) 397 417 446 GDP per capita (USD) 44,074.0 40,705.7 43,594.6 Liquid assets/total assets 25% 26% 28% Total loan growth (%) 48% 4% 1% CPI, average (% y-o-y) 12.0 1.3 0.7 Loans/total assets 64% 63% 60% Policy rate, end-year (%) 1.8 1.0 1.0 Retail loans/gross loans 25% 25% 25% Trade balance (USDbn) 62.9 42.1 57.5 Impaired loans/gross loans 1.1% 2.9% N.A Current account balance (USDbn) 22.3 7.8 25.2 Reserve coverage of impaired
loans 121% 94% N.A
Current account balance (% GDP) 8.8 3.4 10.0 Gross loans/customer deposits 101% 98% 93% Total deposit growth 27% 8% 7% Gross external debt (USDbn) 151.0 153.3 169.5 Capital/total assets 12% 11% 11% Private sector external debt (USDbn) NA NA NA Profitability ratios Central government balance (% GDP) 21.0 -12.4 1.8 Cost/income ratio 28.7% 27.5% 27% Gross public external debt (% GDP) 58.6 70.5 69.8 ROA 2.1% 1.3% 1.80% International reserves (USDbn) 31.6 38.7 34.8 Net interest margin 2.6% 2.8% 2.85% Cost of risk 0.5% 1.1% 1.30% Banking assets/GDP (%) - - - Market share (% of sector
assets)
Total loans/GDP (%) - - - Largest 20 banks - - - Retail loans/GDP (%) - - - State-controlled banks - - - Total deposits/GDP (%) - - - Foreign-owned banks - - -
Source: UAE Central Bank, estimates HSBC Economics
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Abu Dhabi Commercial Bank Key events and risks to monitor
NPLs for this bank had climbed to 11% of outstanding loans at the end of end 2010, one of the poorest among large MENA banks. However, S&P believes that ADCB’s creditworthiness should remain sufficiently resilient to the difficult economic environment.
Capitalisation, however, is still decent with Tier 1 ratio at 12% at end 2010.
Credit profile
Abu Dhabi Commercial Bank (ADCB) plans to consolidate its balance sheet and focus on improving its credit strength this year. The group’s operating performance will likely remain subdued meanwhile. Its credit profile, however, is bolstered by the implied backing of the Emirate of Abu Dhabi.
ADCB has a strong franchise in the local market but its asset exposure is quite concentrated within the UAE. Its NPL level jumped sharply in 2010 to AED18.2bn (USD3.9bn) from AED6.2bn (USD1.7bn) a year ago, highlighting the risk of focus on this region. The increase was exacerbated by renegotiations and extensions on loans to Dubai sovereign-related entity Dubai World. ADCB took a further AED2bn (USD550m) of impairment in 2010. ADCB has been proactive in disclosing risky exposures and cautious thereafter.
Profitability before impairments was sound through Q3 2010, but large impairments resulted in losses at the group level. Increasing provisions keep pressure on capitalisation. However, Moody’s expects ADBC’s profitability to stabilise in 2011. ADCB reported Tier 1 ratio of 11.5% at the end of Q3 2010 compared to 12.34% at the end of 2009.
S&P believes that an upgrade appears remote in the foreseeable future remote in the foreseeable future because it would hinge on a major improvement in the bank's operating environment.
We do not have a fundamental credit recommendation.
Analysts
Olga Fedotova Aybek Islamov
+44 20 7992 3707 +44 20 7992 3624
[email protected]@hsbcib.com
United Arab Emirates Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured na na Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured A1 Negative Major shareholders (December 2010) Bank-deposit A1 ADIC 65%Sub-debt A2 Financial strength D+ S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ ADCB UH Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (USDm)
Coupon
ADCB Float 05/16 (NR/A2/BBB+) 361 L+60bpsADCB 4 3/4 10/14 (NR/A1/A-) 1,000 4.75%
Bank in brief
ADCB is the third-largest bank in the UAE, with a market share of 12% in loans and 9% in deposits. The Government of Abu Dhabi holds a 65% stake through ADIB. The bank’s strategy is to expand its footprint in markets similar to UAE by leveraging its core assets.
ADCB: financial summary
Year to December (USDm) 2008 2009 2010 Year to December (%) 2008 2009 2010
Income statement Growth (y-o-y) Interest income 1,620 1,880 1,949 Loans 44.6 8.8 6.8Interest expense 944 987 955 Assets 39.7 7.9 11.2Net interest income 676 893 1,002 Pre-provision profit 2.6 13.2 13.5Other operating income 268 269 260 Net income –37.8 –154.9 157.3Operating income 1,196 1,303 1,453 Profitability Operating expenses –416 –419 –448 ROA 1.0 –0.4 0.2Pre-provision profits 781 884 1,004 Pre-provision profits/average assets 2.3 2.1 2.2Provisions for loan losses –207 –809 –779 Net interest margins 2.1 2.4 2.4Non-operating profit –202 –214 –117 Cost-income ratio 34.7 32.2 30.8Taxation –2 –1 -3 Asset quality Net income 337 –185 106 Gross NPL ratio 1.13 5.17 11.06 Gross NPLs (USDm) 343 1,701 3,890 Key balance sheet items Loan Loss Res./NPLs (%) 123.5 60.9 44.1Loans 30,265 32,927 35,168 Capital structure Deposits 22,987 23,515 28,895 Total CAR 11.4 17.4 16.7Interest bearing assets 36,497 39,117 42,140 Tier-1 ratio 11.4 12.4 12.0Total assets 40,444 43,654 48,535 Funding Loan-to-deposit ratio (%) 131.7 140.0 121.7 Loan/assets 73.5 72.8 72.5
Source: ADCB financial reports, HSBC calculations (ratios). . Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Emirates NBD Key events and risks to monitor
Has seen a sharp rise in NPL ratio The loans-to-deposit ratio improved to 101% at the end of Q3 2010 from 118% at
end 2009 but still lags that of regional peers significantly.
Credit profile
Emirates NBD (ENBD) continues to face margin pressures due to relatively higher cost of funding. Fitch highlights the bank’s high level of exposure to Dubai property market and government-related entities. The rating agency believes that lending growth and improvements in profitability will be difficult to achieve in 2010 and 2011.
ENBD is one of the primary bankers of the government of Dubai and therefore experienced rapid loan growth (CAGR of 38%) between 2001 and 2008. Over that period, however, it lacked focus on developing a matching funding profile. Despite a 10% reduction in loans in the first nine months of 2010 and a 6% increase in deposits during the same period, the loans-to-deposit ratio stood at 101%, which limits loan growth capabilities. According to the bank’s management ENBD will focus on the balance sheet rationalisation in 2011. Capitalisation at end Q3 2010 was adequate but weaker than regional peers with a Tier 1 ratio of 12.8%.
Fitch’s view is that given ENBD’s size, its significant domestic franchise, majority ownership by the government of Dubai and the long history of support in the UAE, Fitch considers there to be an extremely high probability of support for the bank if ever required.
We do not have a fundamental credit recommendation.
Analysts Olga Fedotova Aybek Islamov
+44 20 7992 3707 +44 20 7992 3624
[email protected] [email protected]
United Arab Emirates Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch Senior unsecured A+ Stable Moody's Sub-debt A S&P Moody’s Senior unsecured A3 Stable Major shareholders (December 2010) Bank-deposit na Investment Corporation of
Dubai 55.65%
Sub-debt Baa1 Financial strength D+ S&P Senior unsecured NR Bloomberg Sub-debt ENBD UH Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (USDm)
Coupon
EBIUH Float 01/12 (NR/A3/NR) 500 L+27bpEBIUH Float 04/12 (NR/A3/NR) 141 L+450bpEBIUH Float 10/16 (NR/A3/NR) 363 L+70bpEBIUH Float 12/16 (NR/A3/NR) 444 L+60bp
Bank in brief
ENBD, the largest bank in the UAE by asset size, with a market share of about 19% of loans and deposits, was formed in 2007 by the merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD). It is 55.6% owned by the Dubai government through its investment arm Investment Corporation of Dubai (ICD).
Emirates NBD: financial summary
Year to December (USDm) 2008 2009 2010 Year to December (%) 2008 2009 2010
Income statement Growth (y-o-y) Interest income 3,040 3,262 3,075 Loans 23.7 2.7 –8.2Interest expense –1,566 –1,418 –1,341 Assets 11.3 –0.3 1.6Net interest income 1,474 1,844 1,734 Pre-provision profit 67.9 42.1 –7.9Other operating income 828 1,112 914 Net income 32.8 –9.1 –30.1Operating income 2,302 2,956 2,648 Profitability Operating expenses –1,365 –1,958 -1,799 ROA 1.3 1.2 0.8Pre-provision profits 1,387 1,971 1,816 Pre-provision profits/average assets 1.8 2.6 2.3 Provisions for loan losses –450 –990 -967 Net interest margins 2.1 2.8 2.5Non-operating profit 66 –70 -205 Cost-income ratio 38.5 32.9 31.4Taxation - -2.6 -5.7 Asset quality Net income 1,003 911 637 Gross NPL ratio 1.6 2.6 10.0 Gross NPLs (USDm) 897 1,588 5,602 Key balance sheet items Loan Loss Res./NPLs 101% 102 40 Loans 56,928 58,477 53,704 Capital structure Deposits 44,227 49,362 54,488 Total CAR 20.8 18.7 20.1 Interest bearing assets 69,047 71,366 71,852 Tier-1 ratio 13.3 11.9 12.8Total assets 76,952 76,724 77,987 Funding Loan-to-deposit ratio (%) 128.7 118.4 98.6 Loan/Assets 74.0 76.2 68.9 -
Source: ENBD financial reports, HSBC estimates. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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National Bank of Abu Dhabi Key events and risks to monitor
NPLs have been on the rise through 2010. Deposits base needs to improve given increasing growth-related lending
mandate from the state.
Credit profile
National Bank of Abu Dhabi (NBAD) continues to enjoy strong support from Abu Dhabi. The group will likely focus on lending growth this year after a modest 3.9% loan growth in 2010.
NBAD managed its funding profile on a tight leash in 2010 as loan growth was largely funded by increasing depositor base. Access to quality wholesale funding was very limited in the region as a whole and hence loan growth was constrained. This situation moderated in Q2 and reversed in Q3 with noticeable improvement in deposits. The loans-to-deposit ratio at the end of 2010 was almost 3pp better y-o-y but still quite aggressive at 114%. The funding risk, however, is overshadowed by Abu Dhabi’s strategic stake in the bank and rating agencies’ expectations of strong and timely state backing in the time of need.
Moody’s expects NBAD’s asset quality to weaken further by the end 2010 but anticipates more stability during 2011 and gradual improvement. The rating agency estimates NBAD’s problem loans will pick up by YE2010 around 2.0-2.5% while normalize in 2011 and possibly trend below 2.0% by 2011.
Despite increased dependence on wholesale finding over the last two years, NBAD managed to keep NIM steady at around 250bps. Benchmark issues at decent cost in 2010 also suggest continued support for the bank in capital markets.
We do not have a fundamental credit recommendation.
Analysts Olga Fedotova Aybek Islamov
+44 20 7992 3707 +44 20 7992 3624
[email protected]@hsbcib.com
United Arab Emirates Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured AA- Stable Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured Aa3 Stable Major shareholders (December 2010) Bank-deposit Aa3 ADIC 70.5%Sub-debt na Financial strength C S&P Senior unsecured A+ Stable Bloomberg Sub-debt na NBAD UH Financial strength na
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (USDm)
Coupon
NBADUH 4 1/4 03/15 (AA-/Aa3/A+) 750 4.25%NBADUH 4 1/2 09/14 (AA-/Aa3/A+) 850 4.5%
Bank in brief
NBAD is the second-largest bank in the UAE, with a market share of 18% in loans and 11.4% in deposits. Abu Dhabi’s sovereign investment arm Abu Dhabi Investment Authority holds a 70% stake in the bank. Government deposits constitute 54% of its deposits, and government and public sector loans amount to 39% of the total loan book.
National Bank of Abu Dhabi: financial summary
Year to December (USDm) 2008 2009 2010 Year to December (%) 2008 2009 2010
Income statement Growth y-o-y Interest income 2,012 1,874 1,947 Loans 39.6 17.7 3.9Interest expense 1,029 628 580 Assets 18.1 19.6 7.4Net interest income 983 1,246 1,367 Pre-provision profit 45.8 18.2 10.9Other operating income 308 309 348 Net income 20.5 –3.9 18.7Operating income 1,444 1,744 1,898 Profitability Operating expenses –407 –517 –569 ROA 2.0 1.6 1.7Pre-provision profits 1,038 1,226 1,329 Pre-provision profits/average assets 2.5 2.5 2.4Provisions for loan losses –195 –384 –383 Net interest margins 2.5 2.6 2.7Non-operating profit - - - Cost-income ratio 28.2 29.7 30.5Taxation –20 –20 –24 Asset quality Net income 823 790 856 Gross NPL ratio 0.93 1.24 2.31 Gross NPLs (USDm) 292 460 890 Key balance sheet items Loan Loss Res./NPLs 144.6 157.6 112.8Loans 31,397 36,941 38,940 Capital structure Deposits 28,196 31,498 32,816 Total CAR 13.7 21.8 23.1Interest bearing assets 42,954 51,778 55,768 Tier-1 ratio 11.8 16.0 17.5Total assets 44,865 53,636 58,172 Funding Loan-to-deposit ratio 111.3 117.3 114.4 Loan/assets 67.9 68.9 66.6
Source: NABD financial reports, HSBC calculations (ratios). Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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We expect growth rates in the Ukrainian banking
system to remain subdued in the coming two years.
If the economic story becomes more favourable,
lending growth is likely to turn slightly positive in
2011 and surpass the GDP growth rate a year later.
The main risk to this scenario lies in a fragile
economic environment, as any disruption would
limit the banks’ recovery prospects.
The Ukrainian banking system is struggling to
overcome the devastating impact of the global
financial crisis. A steep decline in economic
activity coupled with the devaluation of the local
currency exacerbated the stress in the corporate
sector and radically worsened the repayment
ability of a large pool of borrowers. This made it
difficult for Ukrainian banks to defend their
franchise and contain mounting losses from
lending operations.
After slumping in 2009, aggregate banking assets
expanded 7.0% in 2010, closing the year at
UAH942.1bn (USD117bn). However, with loan
arrears standing at 11.2% as at 1 January 2011, up
from 9.4% a year earlier, the recovery seems to be
a long way off. According to our estimates
impaired loans combined with restructured
exposures could total up to 40% of gross loans.
Despite the worsening trend in 2010 we expect
the level of problem assets to stabilise in H1 2011
and slowly start improving. The task of restoring
the quality of assets in the absence of any clearly
defined mechanisms for their disposal may prove
difficult and prolonged.
Asset quality worsened in 2010 despite slow loan
growth and sluggish demand for credit. This
seems to have been caused by a depressed
economic environment and lagging improvements
in loan underwriting standards. The aggregate
loan portfolio increased by mere 1% during 2010,
reaching UAH755.03bn (USD96.1bn) as at 1
January 2011. This growth was driven by
corporate lending, which rose 7%, whereas retail
loans contracted by 16.2%. The expansion rate in
lending operations is unlikely to pick up in the
near future in our view: the already highly
leveraged balance sheets of Ukrainian
corporations cannot support additional debt while
retail has insufficient purchasing power.
The first line of defence against worsening asset
quality has been the formation of provision
buffers. According to data from the Central Bank
of Ukraine, provisions stood at 15% of gross loans
while the level of provision coverage was 133%
as at 1 January 2011. The existing provisions
appear sufficient to absorb expected losses.
Banks’ regulatory capital stood at UAH160.9bn
(USD20.5bn) as at 1 January 2011. Regulatory
Pavel Simacek, CFA Analyst HSBC Bank Plc +44 20 7992 3714 [email protected]
Ksenia Mishankina Analyst HSBC Bank plc +44 20 7992 3703 [email protected]
Ukrainian banks
High level of non-performing assets persists
Banking system continues to generate losses
Funding structure fragile and prospects of near-term growth
remain very limited
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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capital funded 17.08% of total assets, up from
15.43% a year earlier. However, this capitalisation
improvement was to a large degree attributable to
emergency equity injections from existing mostly
foreign shareholders and the government. Capital
formation related to retained earnings has yet to
be restored.
The Ukrainian banks generated an aggregate loss
of UAH13.03bn (USD1.7bn) in 2010. Although
this was not an encouraging result it was still an
improvement over the loss of UAH38.5bn
(USD4.8bn) reported in 2009.
The high level of impaired loans is the main drag
on the bottom-line performance of Ukrainian
banks. Until this issue is resolved we do not
envisage much potential for increasing the
profitability of the banking system.
Total deposits stood at UAH414.77bn
(USD52.8bn) as at 1 January 2011, up 27.5%
from UAH325.21bn (USD40.9bn) a year earlier.
Retail deposits accounted for some 65.2% of the
total – and such resources should, in theory,
enhance the stability of the funding base.
However, lessons learned from the recent crisis
suggest that Ukrainian retail depositors tend to be
a nervous crowd who are prepared to pull their
funds out of the banking sector at the first sign of
trouble. Bank deposits shrank by some 20% as
depositors withdrew their money during the peak
of the crisis in late 2008 and early 2009. This
sudden outflow of funds prompted the National
Bank of Ukraine to introduce a temporary
moratorium on early withdrawals of deposits.
The diversification of their funding base is one of
the important tasks facing Ukrainian banks, and
they are increasingly turning to local and
international capital markets. However, the
universe of Ukrainian banks issuing Eurobonds is
likely to expand at a slow pace as very few can
meet the criteria necessary for tapping
international bond markets. Furthermore
Ukrainian demand for loans denominated in
foreign currency is very weak and this further
constrains the international borrowing appetite of
domestic banks.
Ukraine – key data on the banking sector
Macro framework 2009 2010 2011e Key Banking Industry indicators 2008 2009 2010 LTM
GDP growth (% y-o-y) -14.8 4.2 4.0 Balance sheet ratios: Nominal GDP (USDbn) 113.7 137.5 155.0 Total assets (USDbn) 115 109 117 GDP per capita (USD) 3,947 4,771 5,499 Liquid assets/total assets (%) 9 11 9* Total loan growth (%) 63.2 -5.7 1.0 CPI, average (% y-o-y) 15.9 10.8 10.2 Loans/total assets (%) 85.5 84.9 80.1 Policy rate, end-year (%) 15.5 9.25 9.5 Retail loans/gross loans 33.9 29.8 24.7 Trade balance (USDbn) -5.0 -8.8 -18.1 Impaired loans/gross loans 2.3 9.4 11.2 Current account balance (USDbn) -2.1 -3.6 -11.9 Reserve coverage of Impaired
loans 247.0 141.9 133.1
Current account balance (% GDP) -1.8 -2.6 -7.8 Gross loans/customer deposits 2.21 2.3 1.82 Total deposit growth (%) 29.6 -8.9 27.5Gross external debt (USDbn) 105.9 112.9 119.9 Capital/total assets 13.3 15.4 17.1 Private sector external debt (USDbn) 72.2 64.8 66.6 Profitability ratios: Central government balance (% GDP) -6.6 -5.8 -3.6 Cost/income ratio na na 54.2% ** Gross public external debt (% GDP) 23.9 25 31.7 ROA 1.0% -4.4% -1.5% International reserves (USDbn) 25.6 32.3 34.8 Net interest margin 5.30 6.21 5.79 Cost of risk na na 6.4%** Banking assets/GDP (%) 95.8 85.0 na Market share (as % of sector
assets):
Total loans/GDP (%) 81.6 69.1 na Largest 20 banks na na 55% Retail loans/GDP (%) na na na State-controlled banks na na 17.3 (1) Total deposits/GDP (%) 35.8 38.0 na Foreign-owned banks na na 43.2 (1)
2010 LTM as of year end, * as of 9M 2010, ** as of 6M 2010 Source: National Bank of Ukraine, Fitch, estimates HSBC Economics
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Alfa Bank Ukraine Alfa Group Consortium’s Ukraine arm Key events and risks to monitor
Profitability is poor due to substantial loan loss provisions, though these are declining. Recent data point to a continuing deterioration of asset quality. The bank’s high dependence on wholesale funding creates a refinancing risk.
Credit profile outlook (Initiate with Neutral)
We establish a Neutral recommendation on Alfa Bank Ukraine (ABU). Its operating environment continues to be weak and asset quality remains under pressure, but ABU’s shareholder, AGC, has provided continuous support to the bank during the crisis including the latest capital injection of USD116.4m in February ‘11. Risks to our view include a radical improvement in asset quality or explicit support/guarantees from the owner.
HSBC FI Research view
ABU’s sizeable loan loss provisions of USD161m in H1 2010, combined with narrowing net interested margins (5.5%, LTM2010), led to the bank’s negative bottom line result for the reporting period.
Additionally, NPLs reached 22% at the end of 2009 driven by high exposure to economic sectors that suffered heavily during the crisis. Loans to the real estate and financial services companies represented 9% and 30% respectively of the total portfolio at the end of 2009.
The bank successfully repaid the first USD105m tranche of its 2012 Eurobond in October 2010 and should have no problems meeting 2011 repayments. A cash cushion of USD440m as of H1 2010 comfortably covers USD315m in sinkable fund payments of the 2012 Eurobond and a USD25m local bond, both due in 2011.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Ukraine Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch NR Fitch B StableSenior unsecured Moody's B2 StableSub-debt S&P B+ StableMoody’s NR Senior unsecured Major shareholders (as at Jan 2011) Bank-deposit AHB Ukraine Ltt, Cyprus 80.1%Sub-debt OJSC ‘Alfa-Bank’, Russia 19.9%Financial strength Ultimately owned by 3 private S&P individuals named in “Bank in
brief” below Senior unsecured CCC+ Positive Bloomberg Sub-debt na ALFAUA
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
ALFAUA 13 07/12 (NR/NR/CCC+) (sinkable) USD630 13%
Bank in brief
ABU is Ukraine’s No.10 bank with total assets of USD3bn as of H1 2010. It is owned by privately held Alfa Group Consortium (AGC), one of the largest banking groups in Russia controlled by leading businessmen Mikhail Fridman, German Khan and Alexei Kuzmichev. ABU is focussed on corporate banking with corporate loans amounting to more than half of total assets as of 1 October 2010.
Alfa Bank Ukraine: financial summary
Year to December (USDm) 2007 2008 2009 LTM 2010 Year to December (%) 2007 2008 2009 LTM 2010
Income statement Growth (y-o-y) Interest income 241 637 617 517 Loans 137.5 38.6 -23.2 -6.1Interest expense -126 -300 -363 -346 Assets 110.0 44.9 -18.9 -3.0Net interest income 116 337 254 171 Pre-provision profit 111.0 539.0 -31.2 -49.3Other operating income 27 152 80 51 Net income 647.9 200.2 na naOperating income 142 489 334 222 Profitability Operating expenses -92 -169 -114 -111 ROAA 0.6 1.1 -6.6 -8.1Pre-provision profits 50 320 220 112 Pre-provision profits/average assets 2.6 10.1 6.5 3.7Provisions for loan losses -33 -278 -527 -433 Net interest margins 6.9 11.5 7.7 5.5Non-operating profit 0 0 0 0 Cost-income ratio 64.8 34.6 34.1 49.8Pre-tax income 17 42 -306 -322 Asset quality Taxation -5 -7 81 78 Gross NPL ratio 0.5 3.4 22.3 naNet income 12 36 -226 -244 Gross NPLs (USDm) 12 116 681 naKey balance sheet items Loan loss res./NPLs 33.9% 48.1 105.3 naDeposits 843 1,429 976 1,125 Capital structure Loans 2,261 3,133 2,406 2,259 Total CAR 16.1 16.5 12.1 10.3Total assets 2,598 3,765 3,053 2,962 Tier-1 ratio NA NA NA NATotal equity 313 447 215 198 Funding Loan-to-deposit ratio 268.3 219.2 246.6 200.7 Loan/assets 87.0 83.2 78.8 76.3 FX loan-to-deposit ratio na na na na LTM 2010 numbers as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financials.
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Privatbank Benefiting from its leading position Key events and risks to monitor
Privatbank provides a relatively limited level of public disclosure. Moreover, it is operating in the fragile economic environment of Ukraine. However, recent data show an improving trend in the bank’s bottom line.
Credit profile outlook (Initiate with Neutral)
Privatbank’s credit profile benefits from a strong domestic franchise and solid financial performance. A strong market share of the retail sector boosts its systemic importance. However, weak operating environment constrains further upside in Privatbank’s performance. As a result we establish our Neutral recommendation. Risks to our view include material changes in macroeconomic conditions.
HSBC FI Research view
Privatbank’s total assets amounted to UAH104bn (USD13.2bn) at the end of H1 2010, up 16.4% on 2009. An expansion in lending operations was the main growth driver, with loans and advances to customers increasing by 11.0% to UAH73.93bn (USD9.3bn) in H1 2010. Net loans to total assets receded to 70.8% from 74.2%, while profit amounted to UAH643m (USD82.5m), up from UAH621m (USD82.0m) in the same period in 2009. The falling provision charge represents a positive sign suggesting that the asset quality problems may be abating.
The funding mix is heavily skewed towards deposits. Customer accounts supported 68.6% of the balance sheet at the end of H1 2010, down from 73.5% a year before. Even though the proportion of customer deposits declined, in absolute terms they increased by 25.4% in H1 2010. The bank experienced an outflow of deposits during the crisis but this negative trend seems to have now reversed.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Ukraine Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch B StableSenior unsecured B Stable Moody's B2 StableSub-debt NA S&P B+ StableMoody’s Senior unsecured B1 Stable Major shareholders (as at Jan 2011) Bank-deposit B3 G. Bogolyubov 49.027%Sub-debt B1 I Kolomoyskiy 49.154%Financial strength D- S&P NR Senior unsecured Bloomberg Sub-debt PRBANK Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
PRBANK8 02/06/12 (B/B1/NR) USD500 8%PRBANK9 09/15 (B/B1/NR) USD200 9 3/8%PRBANK 02/16 (NR/B1/NR) USD150 5.799%
Bank in brief
Privatbank is owned by businessmen individuals Gennady Bogolyubov and Igor Kolomoyskiy with 49.027% and 49.154% stakes, respectively. It is the largest bank in Ukraine with a 10.5% share of total assets, 17.0% of retail deposits and more than 3,200 braches and outlets and around 7,000 ATMs.
Privatbank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 1,398 2,206 1,804 1,996 Loans 60 58 –2 11 Interest expense –600 –986 –904 –1,101 Assets 65 56 2 16 Net interest income 797 1,221 899 895 Pre-provision profit 56 231 7 –2Other operating income 269 1,073 647 631 Net income 82 77 –33 2 Operating income 1,067 2,294 1,547 1,526 Profitability Operating expenses –643 –953 –610 –603 ROAA 2 3 1 1 Pre-provision profits 424 1,341 937 922 Pre-provision profits/average assets 5 10 9 8 Provisions for loan losses –123 –858 –683 –675 Net interest margins 10 10 9 8 Non-operating profit - - - - Cost-income ratio 60 42 39 40 Pre-tax income 301 482 253 247 Asset quality Taxation –78 –105 –89 –79 Gross NPL ratio 3 5 12 11 Net income 223 378 165 168 Gross NPLs (USDm) 308 449 1,144 991Key balance sheet items Loan loss res./NPLs 181% 225 137 160 Deposits 7,134 7,077 7,100 9,061 Capital structure Loans 8,535 8,456 8,276 9,348 Total CAR 14 14 18 na Total assets 11,150 10,872 11,146 13,205 Tier-1 ratio 10 11 15 na Total equity 1,071 1,221 1,497 1,609 Funding Loan-to-deposit ratio 120% 119 117 103 Loan/assets 77 78 74 71 FX loan-to-deposit ratio na na na na 2010 LTM as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financial reports.
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Ukreximbank A good proxy for Sovereign risk Key events and risks to monitor
Ukreximbank’s quasi-Sovereign status supports its credit standing. NPLs are still growing , although more slowly than at the height of the crisis. Substantial funding reliance on NBU and interbank sources.
Credit profile outlook (initiate with Neutral)
We establish a Neutral recommendation since Ukreximbank enjoys support from its owner, the Ukrainian government, which injected USD800m in fresh equity in H1 2010, but government finances remain fragile. Additionally, the bank’s liquidity appears adequate and sufficient to cover liabilities maturing in 2011. Risks to our view include any changes in the relationship with the state, swings in asset quality and profitability.
HSBC FI Research view
Earnings picked up in H1 2010, but the bank’s asset quality is likely to remain under pressure in the near term. The core business remains fairly stable with profitability receiving a boost from falling mark-to-market losses and provision releases in H1 2010.
Continuous government injections helped the bank bring its Tier 1 capital ratio to 28.5% at the end of H1 2010, well above Basel requirements. However Ukreximbank’s asset quality significantly deteriorated in this time, with NPLs advancing to 8.6% in H1 2010 from 6.1% at the end of 2009, while restructured loans climbed substantially to 37% of gross loans (end of H1 2010) on the back of the weak economic environment in Ukraine.
Analysts Pavel Simacek, CFA Ksenia Mishankina
[email protected] [email protected]
+44 20 7992 3714+44 20 7992 3703
Ukraine Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch B StableSenior unsecured B Stable Moody's B2 StableSub-debt CCC S&P B+ StableMoody’s Senior unsecured B1 Stable Major shareholders (as of Jan 2011) Bank-deposit B3 Government 100%Sub-debt B1 Financial strength D- S&P NR Senior unsecured Bloomberg Sub-debt EXIMUK Financial strength
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
EXIMUK8 3/8 04/15 (B/B1/NR) USD750 8 3/8%EXIMUK7.65 09/11 (B/B1/NR) USD500 7.65%EXIMUK 6.8 10/12 (B/B1/NR) USD250 6.8%
Bank in brief
Ukreximbank is the second-largest bank in the Ukraine with assets totalling USD8.2bn as of the end of H1 2010. The state-owned bank is strategically important since it supports Ukrainian exports and services foreign credit lines provided under Sovereign guarantees. As of year-end 2009, it had 29 branches and 93 operating outlets in the Ukraine and offices in London and New York.
Ukreximbank: financial summary
Year to December (USDm) 2007 2008 2009 LTM June 2010
Year to December (%) 2007 2008 2009 LTM June 2010
Income statement Growth (y-o-y) Interest income 507 770 816 828 Loans 61.8 68.1 17.5 -3.4Interest expense -297 -460 -393 -428 Assets 54.8 66.6 18.0 15.9Net interest income 209 310 423 400 Pre-provision profit 57.2 73.6 96.4 -2.6Other operating income 91 151 71 87 Net income 65.1 -77.9 -80.8 53.8Operating income 300 460 494 487 Profitability Operating expenses -120 -160 -110 -112 ROAA 2.4 0.3 0.0 0.1Pre-provision profits 181 300 384 375 Pre-provision profits/average assets 3.9 4.1 6.0 5.0Provisions for loan losses -31 -266 -379 -367 Net interest margins 8.6 5.0 7.4 6.1Non-operating profit 0 0 0 0 Cost-income ratio 39.8 34.8 22.3 23.0Pre-tax income 150 34 6 8 Asset quality Taxation -40 -11 -3 -3 Gross NPL ratio 1.4 0.8 6.1 8.6Net income 110 23 3 4 Gross NPLs (USDm) 306 310 2,930 4,117Key balance sheet items Loan loss res./NPLs 239% 709 171 153Deposits 2,099 2,062 2,480 2,785 Capital structure Loans 4,316 4,548 5,344 5,255 Total CAR 13.0 11.0 25.5 35.1Total assets 5,661 5,912 6,979 8,227 Tier-1 ratio 8.5 7.9 18.3 28.5Total equity 493 489 1,282 2,131 Funding Loan-to-deposit ratio 205.6% 220.5 215.5 188.7 Loan/assets 76.3 76.9 76.6 63.9 FX loan-to-deposit ratio
LTM 2010 as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financials
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LatAm banks
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2011: a year with caveats Review and outlook
The Brazilian economy remains buoyant,
particularly on the demand side, due to significant
growth in income, higher employment and the
ready availability of credit.
The ratio of debt to disposable income continues to
grow, and with the emerging middle class, this trend
has potential to continue. According to data from
Bradesco, class C – the middle income category in
Brazil – accounted for 53.4% of the population in
July 2010, as against 38.7% in January 2004.
This growth in the middle income group is a result
of lower income consumer groups becoming
wealthier, such as classes D and E, which together
accounted for 36.2% of the Brazilian population
in July 2010, down from 53.8% in January 2004.
The growth in demand for credit can be attributed
to the health of the Brazilian economy, which
posted both a rise in consumer confidence and a
significant fall in unemployment in 2010, the
latter dropping to 5.3% in December 2010 versus
6.8% a year before.
Moreover, the growth in household debt has not
significantly changed the proportion of monthly
income that goes towards amortisations and interest
payments, thanks to the simultaneous rise in
incomes, the extension of payment terms and the
decline in interest rates. Consequently, despite the
fast growth in credit, default rates have remained
relatively steady. At the end of January 2011, default
rates reached 3.6% for corporates and 5.7% for
individuals, the lowest rates in eight years.
All that said, Brazil’s strong economic
fundaments, solid domestic demand and healthy
financial system should continue to bolster credit
growth in 2011. We expect loan growth for the
banking system of 15% in 2011, driven by SMEs
and consumer credit expansion, in line with the
view of the Central Bank, Banco Central do Brasil
(BCB). This is likely to be accompanied by some
pressures on spreads from changing loan mix and
competition. In terms of asset quality, in the near
term the fast loan growth should gradually
increase the NPL ratio, but lower provisions and
healthy coverage should help to limit any major
compression of bank earnings.
Political and regulatory environment
The major near-term concern is accelerating
inflation in Brazil. BCB has recently taken
measures to halt the rise of inflation including
raising reserve requirements and capital ratios and
increasing borrowing costs.
Brazilian banks
Loan growth should continue into 2011 although at a slower pace
Further government macro-prudential measures could impact loan
growth in 2011
Healthy NPL coverage should limit any major margin erosion
Olga Fedotova Credit Analyst HSBC Bank plc +44 20 7992 3707 [email protected]
Victor Galliano Analyst (Equities) HSBC Securities (USA), Inc. +1 212 525 5253 [email protected]
Mariel Santiago Analyst (Equities) HSBC Securities (USA), Inc. +1 212 525 5418 [email protected]
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In December 2010, the Central Bank announced
an increase in reserve requirements on term
deposits to 20% from 15% and on cash deposits to
12% from 8%. The bank also raised capital
requirements on long-term loans to individual
consumers to 150% from 100%. Its objective is to
tighten liquidity conditions and slow the pace of
consumer credit growth. The BCB says these two
measures should drain BRL61bn (USD36bn) of
liquidity from the sector, equivalent to around 5%
of the total stock of the Brazilian banking system,
and add 20% to reserve requirements.
There is nonetheless one positive development in
the form of the total removal of the 15% reserve
requirement on Letras Financieras, the domestic
bonds that can be issued by banks with a
minimum tenor of two years. Furthermore, the
BCB announced the phasing out of the DPGE, a
form of government-guaranteed funding for mid-
caps, beginning January 2012 and due to be
wound up by January 2016.
These measures should weigh on overall credit
growth in 2011, led by more conservative credit
expansion in the financial sector. In addition, the
increase in interest rates could also be a challenge
in maintaining retail credit demand and lower
consumer delinquencies. HSBC economists
forecast that the BCB will raise benchmark rates
by further 75bps in 2011 from the current Selic
rate of 11.75% to 12.50%, combined with further
potential macro-prudential measures.
Further measures to curb the real’s appreciation
are widely believed to be under consideration,
such as taxing foreign investments in domestic
securities more heavily via an increase in the IOF
tax, in an effort to cool demand for the currency.
Government support
BNDES, the state development bank, continues to
play an active role in Brazilian banking with a
21% share of total system credit at the end of
January 2011.
Looking into 2011 and beyond, BNDES will
probably make infrastructure lending its core
priority, reducing its emphasis on corporate credit,
where it currently provides cheap credit for large-
and medium-sized companies. As BNDES shifts
its focus to infrastructure credit, this should
reduce the ‘crowding out’ in the corporate market
on the commercial banks, especially in working
capital and acquisition of capital goods credit.
Industry main trends Brazil’s credit growth has been recovering strongly
0%
10%
20%
30%
40%
50%
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
YoY C hange indiv iduals YoY C hange c orporatesTotal lending
Source: BCB
Brazil’s private credit growth has been recovering
strongly since February 2010, accelerating to 20%
y-o-y at the end of 2010 after dipping to 10% at
2009-end. According to data published by the
BCB on 24 February 2011, total system credit
registered healthy growth of 20.3% y-o-y in
January 2011 and credit as a percentage of GPD
reached to 46.5%. On a m-o-m basis, total lending
declined by 0.9% driven by a decrease in
consumer loans due to the effects of macro-
prudential measures.
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Foreign and private domestic banks drove loan
growth during 2010. In December 2010, credit for
private domestic banks (eg Bradesco, Itaú Unibanco)
grew 22% y-o-y, up from 8.5% at 2009-end and for
private foreign banks (eg Santander Brasil) grew
15% y-o-y vs. 0.2% at 2009-end. In contrast, public
sector banks like Banco do Brasil grew their
portfolios by 17% y-o-y in December 2010, down
from 29% in 2009. In January 2011, private
domestic banks accelerated slightly by 22.3% y-o-y,
foreign banks recorded a slowdown in credit growth
of 14.3% y-o-y and public sector banks, continued to
expand by 17.8%.
BNDES credit growth has continued to slow,
falling to 24.6% in January 2011 from 26.4% in
December 2010. The bank’s loan growth has been
decelerating in previous months and its share of
credit ex-infrastructure is likely to continue to
decline as the government tightens its funding
sources and BNDES focuses more on
infrastructure credit.
A positive offset to the implementation of macro-
prudential measures in January 2011 was the
210bps increase in spreads to 25.6% from 23.5%
in December. The increase in spreads was driven
mostly by lending rates in the consumer segment
rising 320bps m-o-m. Corporate lending rates also
increased January leading to an expansion of
110bps in corporate spreads.
Credit to individuals and corporates vs NPLs
-
200
400
600
800
1,000
1,200
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
0%
2%
4%
6%
8%
10%
Individuals Corporates Total Ind+CorpNPL Corp + Ind NPL Corporates (RHS)NPL Individuals
Thou
sand
s
-
200
400
600
800
1,000
1,200
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
0%
2%
4%
6%
8%
10%
IndividualsIndividuals CorporatesCorporates Total Ind+CorpTotal Ind+CorpNPL Corp + IndNPL Corp + Ind NPL Corporates (RHS)NPL Corporates (RHS)NPL IndividualsNPL Individuals
Thou
sand
s
Source: BCB
Looking at asset quality, the NPL ratio for the
overall system (those more than 90 days overdue)
rose to 3.2% in January 2011 from 4.3% a year ago.
In January, NPL for individuals remained steady m-
o-m at 5.7%. Similarly, the NPL ratio for corporate
credit was unchanged from December at 3.6%. In
terms of arrears, individual saw a sharp increase to
5.9% from 5.3% in December and corporates
remained steady at 1.9% from December. Given the
rapid increase in consumer loans, we think this ratio
could lead to a higher NPL ratio later in the year,
even though we believe the solid economic
fundamentals in Brazil should mitigate the increase
in delinquencies. In January the unemployment rate
was 6.1%, down from 7.2% a year ago.
The NPL ratio for foreign banks increased 20bps
m-o-m to 4.3% from 4.1% in January. Similarly
the NPL ratio for public-domestic banks increased
Public and private sector banks credit, y-o-y
-10%
0%
10%
20%
30%
40%
50%
Private domestic banks Public banks -BNDESForeign banks Total loans
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11-10%
0%
10%
20%
30%
40%
50%
Private domestic banksPrivate domestic banks Public banks -BNDESPublic banks -BNDESForeign banksForeign banks Total loansTotal loans
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11-10%
0%
10%
20%
30%
40%
50%
Private domestic banks Public banks -BNDESForeign banks Total loans
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11-10%
0%
10%
20%
30%
40%
50%
Private domestic banksPrivate domestic banks Public banks -BNDESPublic banks -BNDESForeign banksForeign banks Total loansTotal loans
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
Source: BCB
Public and private sector banks default rates
-1.02.03.04.05.06.07.08.0
Jan -
02M
ay-0
2Se
p-02
Jan -
03M
ay-0
3Se
p-03
Jan-
04M
ay-0
4Se
p-04
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11
Public Default Private Domestic DefaultForeign Default
-1.02.03.04.05.06.07.08.0
Jan -
02M
ay-0
2Se
p-02
Jan -
03M
ay-0
3Se
p-03
Jan-
04M
ay-0
4Se
p-04
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11
Public DefaultPublic Default Private Domestic DefaultPrivate Domestic DefaultForeign DefaultForeign Default
-1.02.03.04.05.06.07.08.0
Jan -
02M
ay-0
2Se
p-02
Jan -
03M
ay-0
3Se
p-03
Jan-
04M
ay-0
4Se
p-04
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11
Public Default Private Domestic DefaultForeign Default
-1.02.03.04.05.06.07.08.0
Jan -
02M
ay-0
2Se
p-02
Jan -
03M
ay-0
3Se
p-03
Jan-
04M
ay-0
4Se
p-04
Jan-
05M
ay-0
5Se
p-05
Jan-
06M
ay-0
6Se
p-06
Jan-
07M
ay-0
7Se
p-07
Jan-
08M
ay-0
8Se
p-08
Jan-
09M
ay-0
9Se
p-09
Jan-
10M
ay-1
0Se
p-10
Jan-
11
Public DefaultPublic Default Private Domestic DefaultPrivate Domestic DefaultForeign DefaultForeign Default
Source: BCB
145
Global Emerging Markets – Credit Strategy EM Banks March 2011
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to 2.1% from 2.0% in December. We believe this
is a result of a change in mix with greater
concentration in SME and consumer lending. For
private domestic banks, the NPL ratio remained
steady m-o-m in January at 4%. This ratio is
slightly below the pre-crisis average for the
domestic sector.
Challenges and opportunities
Challenges
Higher reserve and capital requirements could
weight on margins and slow down credit
growth.
Increasing interest rates could add pressure to
credit expansion and asset quality.
Increasing competition should increase pressure
on margins, although this could be partly offset
by the medium-term repricing of assets.
The faster loan growth in SME and consumer
could result in more delinquencies and thus
higher provisioning needs.
Opportunities
Healthy NPL coverage and relatively lower
provisions should help limit any major
contraction of margins.
Strong economic fundamentals and low
unemployment should continue to support
credit growth and maintain consumer
delinquencies at historically low levels.
Brazil – key data on the banking sector
Macro framework 2009 2010 2011e Key banking industry indicators 2008 2009 2010
GDP growth (% y-o-y) -0.6 7.8 5.1 Balance sheet ratios Nominal GDP (USDbn) 1,625 2,077 2,440 Total assets (USDbn) 1,234 1,760 2,115GDP per capita (USD) 8.487 10.745 12,521 Liquid assets/total assets n/a n/a n/a Total loan growth (%) 27.1 15.3 27.1CPI, average (% y-o-y) 4.9 4.9 6.0 Loans/total assets (USDbn) (%) 32.4 35.1 35.9Policy rate, end-year (%) 8.75 10.75 12.50 Retail loans/gross loans (%) 42.3 43.7 42.4Trade balance (USDbn) 25.3 15.2 -6.2 Impaired loans/gross loans (%) 7.8 8.9 7.3Current account balance (USDbn) -24.3 -50.6 -81.1 Reserve coverage of impaired
loans (%) 68.5 77.3 76.8
Current account balance (% GDP) -1.5 -2.4 -3.3 Gross loans/customer deposits (%) 77.8 86.0 102.7 Total deposit growth (%) 38.8 4.2 6.4Gross external debt (USDbn) 198 260 310 Capital/total assets (%) 15.7 18.4 18.4Private sector external debt (USDbn) 121 170 220 Profitability ratios (%) Central government balance (% GDP) -3.5 -1.5 -1.4 Cost/income ratio 64.6 62.5 61.4Gross public external debt (% GDP) 3.5 3 2.6 ROA 1.9 1.6 1.1International reserves (USDbn) 239 290 313 Net interest margin 5.7 6.6 4.3 Cost of risk 7.7 10.7 8.0Banking assets/GDP (%) 108.3 101.8 n/a Market share (% of sector
assets) Total loans/GDP (%) 44.4 46.6 n/a Largest 20 banks 93.8 95.7 93.9Retail loans/GDP (%) 15.3 14.0 n/a State-controlled banks 29.7 28.7 32.6Total deposits/GDP (%) 44.2 38.0 n/a Foreign-owned banks 47.6 21.8 24.0
Source: BCB, estimates HSBC Economics
146
Global Emerging Markets – Credit Strategy EM Banks March 2011
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Banco do Brasil Key events and risks to monitor
Higher compulsory deposits requirements could weigh on loan growth. With the lowest BIS ratio of the big-cap peers, the bank has a high reliance on
time and demand deposits for funding. Overseas expansion is part of Banco do Brasil’s (BB’s) strategy for 2011.
Credit profile
BB is one of the strongest banks in the EM universe, benefitting from hefty liquidity on the back of a vast deposit base, healthy margins and a healthy capital base. The bank has low dependence on external funding and we believe has a high likelihood of government support.
BB reported net income of BRL3, 704m in Q4 2010, beating consensus estimates by 35.5% mainly due to higher-than-expected non-interest income that included the reassessment of PREVI pension assets and liabilities. Excluding one-offs, net income was up 21% y-o-y.
Net loans grew at 6% q-o-q and 20.8% y-o-y, led by an increase in consumer credit, which grew by 5.3% q-o-q and 23.2% y-o-y, while loans to businesses grew by 6.6% q-o-q and 19.5% y-o-y.
NIM came under pressure contracting 15bps q-o-q to 6.5%. Part of this can be explained by the consolidation of Banco Votorantim, which operates in the lower-risk, lower-spread segment. Net interest income stood at BRL9,523m.
Provision for loan losses fell 27.5% q-on-q.
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova Victor Galliano Mariel Santiago
[email protected] [email protected] [email protected]
+44 20 7992 3707+1 212 525 5253+1 212 525 5418
Brazil Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB+ Positive Moody's Baa3 PositiveSub-debt NA S&P BBB+ StableMoody’s Senior unsecured Baa2 Positive Major shareholders (December 2010) Bank-deposit Baa3 Federal government 53.2%Sub-debt Baa2 Positive Previ 10.4%Financial strength C+ Free float 30.4%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt NA BANBRA
Key international bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
BANBRA 8 ½ 09/14 (subordinated) USD300 8.5%
BANBRA 4 ½ 01/15 USD950 4.5%BANBRA 4 ½ 01/16 (callable) EUR750 4.5%BANBRA 6 01/20 USD500 6%BANBRA 5 3/8 01/21 USD660 5 3/8%
Bank in brief
BB is the largest public financial institution in Brazil, majority owned by the federal government. The bank serves nearly 25 million clients through 5,058 branches in Brazil and 47 abroad. As of September 2010, BB had a market share of 26% of total loans and 28% of deposits in Brazil. The bank had total assets of BRL811bn (USD490) at the end of Q4 2010 and has a high exposure to the agribusiness segment which accounted for 21% of its loan portfolio in Q4 2010.
Banco do Brasil: financial summary
Year to December (USDm) 2009 2010 2011e 2012e Year to December (%) 2009 2010 2011e 2012e
Income statement Growth (y-o-y)
Interest income 32,663 44,987 52,924 51,925 Loans 33.76 19.69 20.40 16.98Interest expense 16,168 23,421 26,616 25,887 Deposits 23.11 14.63 7.61 7.63Net interest income 16,495 21,566 26,308 26,038 Pre-provision profit 49.36 49.67 50.53 52.71Other operating income 5,702 8,132 9,430 9,684 Net Income 22.91 19.97 18.04 18.23Operating income 22,197 29,698 35,738 35,722 Profitability Operating expenses 10,740 14,338 17,197 16,451 ROAA 1.58 1.37 1.22 1.26Pre-provision profits 10,958 14,749 18,058 18,829 Pre-provision profits/average assets 3.41 3.41 3.80 4.33Provisions for loan losses 5,827 6,332 8,838 9,345 Net interest margins 6.92 6.24 6.09 6.58Provision for taxes 1,994 3,335 3,175 3,354 Cost-income ratio 48.4 48.3 48.1 46.1Net income 5,085 5,929 6,446 6,511 Asset quality Balance sheet summary Gross NPL ratio 3.7 2.7 2.8 3.0Customer deposits 186,842 213,668 234,059 232,775 Gross NPLs (USDm) 5,449 7,241 9,254 9,918Loans 161,772 209,626 254,163 271,837 Loan loss res./NPLs 157.64 164.20 152.09 144.44Total assets 406,162 504,077 546,274 537,578 Capital structure Total CAR 13.70 15.30 15.05 14.78 Equity/Assets 5.10 6.15 6.41 6.66 Funding Loan-to-deposit ratio 86.6 98.1 108.6 116.8 Loan/assets 39.83 41.59 46.53 50.57
Source: Banco do Brasil, HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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BNDES Key events and risks to monitor
Capital base includes a significant component of hybrid debt/capital issues High disbursements should continue in 2011 after record year in 2010 due to
increased demand in the infrastructure (energy and transportation) segment The concentration of lending to the 10 largest borrowers remains high and is
growing, having risen to 36.2% at H1 from 34% at the end of 2008
Credit profile
BNDES disbursements reached BRL168.4bn (USD102bn) in 2010, a 23% increase on 2009. Industry accounted for 47% of total disbursements, followed by infrastructure, with a 31% share, and trade and services at 16%. In addition, the bank ended 2010 with a record volume in credit operations mainly lending to micro-, small- and medium-sized companies, as well as individuals, revealing greater access and a wider reach. BNDES recorded net profit of BRL3.6bn (USD2.05bn) in H1 2010, equivalent to an increase of 408.6% on a y-o-y basis. The main contributing factor to this strong performance was a BRL2bn (USD1.14bn) increase in credit recoveries. In H1 2010 the bank’s credit portfolio reached around BRL317bn (USD181bn), equal to 20.5% of total credit in Brazil in June 2010. The default ratio, which is historically low, remained stable at 0.20% at the end of H1 2010. The international financial crisis did not affect the quality of the bank’s portfolio, in which 97.9% of the total granted credits were graded at risk levels AA-C. The BIS ratio was 17.1% in H1 2010, well above the 11% requirement. BNDES is likely to continue to provide credit to foster infrastructure investment and economic development, and to continue to rely on the Brazilian Treasury and, increasingly, the capital markets, for its funding.
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova Victor Galliano Mariel Santiago
[email protected] [email protected] [email protected]
+44 20 7992 3707+1 212 525 5253+1 212 525 5418
Brazil Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (December 2010) Bank-deposit Baa3 Federal Government 100%Sub-debt Financial strength na S&P Senior unsecured BBB- Stable Bloomberg Sub-debt NA BNDES
Key international bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
BNDES 9 5/8 12/11 (NR/A3/NR) USD300 9 5/8%BNDES 4 1/8 09/17 (NR/Baa2/BBB-) EUR750 4 1/8%BNDES 6.369 06/18 (NR/Baa2/BBB-) USD1,000 6.369%BNDES 6 1/2 06/19 (BBB-/Baa2/BBB-) USD1,000 6 1/2%BNDES 5 1/2 07/20 (WD/Baa2/BBB-) USD1,000 5 1/2%
Bank in brief
BNDES is the federal-government-owned development bank of Brazil and the main vehicle for financing long-term investments in the Brazilian economy. Since its foundation in 1952, the bank has supported infrastructure, commerce, agriculture and other sectors, offering special terms to small and medium sized enterprises. It is the third largest bank in terms of assets (USD253bn) and the fifth in terms of equity (USD17bn). The bank plays a fundamental role in executing the Brazilian government’s development policies.
BNDES: financial summary
Year to December 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009
Income statement (USDm) Growth (y-o-y) Interest income 6,204 5,226 16,044 5,236 Loans n/a 12.12 31.16 31.34Interest expense 3,978 2,759 13,938 2,320 Deposits n/a 8.63 37.32 37.93Net interest income 2,227 2,467 2,106 2,917 Pre-provision profit n/a 20.23 –23.17 31.30Other operating income 1,457 2,271 2,668 1,814 Net Income n/a 15.52 –27.36 26.77Operating income 3,886 5,280 3,966 4,495 Profitability Operating expenses 593 734 1,053 622 ROAA n/a 3.86 2.27 2.09Pre-provision profits 3,403 4,570 3,723 4,498 Pre-provision profits/average assets n/a 4.69 2.92 2.78Provisions for loan losses –484 –710 –242 3 Net interest margins n/a 3.86 2.27 2.09Provision for taxes 972 1,368 1,072 1,121 Cost-income ratio 15.26 13.90 26.57 13.84Net income 2,910 3,755 2,893 3,375 Asset quality Balance sheet summary Gross NPL ratio 4.38 3.50 1.81 2.33Deposits 12,262 14,950 11,170 13,168 Gross NPLs (USDm) 3,098 3,323 1,723 3,857Loans 68,751 92,518 93,320 162,609 Loan loss Res./NPLs 65.58 71.81 114.31 69.13Total assets 85,064 110,909 117,126 214,332 Capital structure Total CAR 26.70 17.80 17.60 17.12 Equity/assets 12.30 9.11 7.15 6.47 Funding Loan-to-deposit ratio 560.66 618.84 835.43 1234.90 Loan/assets 80.82 83.42 79.68 75.87
Source: BNDES, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Bradesco Key events and risks to monitor
Heavy investment in IT and branch expansion. In the midst of a tightening cycle, Brazil could be vulnerable to a credit slowdown NPLs increased in late 2010 and remain a concern
Credit profile
As one of the two largest private banks in Brazil and Latin America, Bradesco’s credit profile benefits from a high level of state support and good access to local deposits due to its vast branch network and strong brand recognition.
Bradesco booked net income of BRL10bn (USD5.5bn) in 2010, an increase of 25% y-o-y. The insurance business played an important role, growing 18% y-o-y and accounting for 30% of earnings. Net interest income excluding trading gains was BRL31.5bn (USD19.6bn), 11% higher y-o-y and mainly driven by the growth in loan volumes in SMEs and consumer. Interest income from insurance was strong in 2010 mainly as a result of volume growth and slightly higher spreads on assets. Net loans had a strong year growing 26% y-o-y. The main drivers were SME and consumer credit. Provisions for loan losses were down significantly in 2010, by 24% y-o-y, resulting from higher recoveries and decline in delinquencies. The bank is investing heavily in infrastructure and technology resulting in an increase in operating expenditures of 22% y-o-y. The delinquency ratio (+60 days overdue loans) has been improving across the board since the end of 2009, reaching 3.6% in Q4 2010. Although the NPL ratio is improving, there was also a slight uptick in NPL formation in Q4 2010.
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova Victor Galliano Mariel Santiago
[email protected] [email protected] [email protected]
+44 20 7992 3707+1 212 525 5253+1 212 525 5418
Brazil Credit profile
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Positive Moody's Baa3 PositiveSub-debt BBB- S&P BBB- StableMoody’s Senior unsecured Baa2 (P) Stable Major shareholders (December 2010) Bank-deposit Baa3 Fundacao Bradesco 48.4%Sub-debt Baa2 Espirito Santo of Portugal 7.9%Financial strength B- UFJ Bank of Japan 2.9%S&P Free float 21.7%Senior unsecured BBB Stable Bloomberg Sub-debt N/R BRADES Financial strength N/R
Key US dollar denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
BRADES 5.9 01/21 (BBB-/Baa2/NR) USD1,100 5.9%BRADES6 ¾ 09/19 (BBB-/Baa2/NR) USD750 6 3/4%BRADES 5.9 01/21 (BBB-/NR/NR) USD500 5.9%
Bank in brief
Bradesco, founded in 1943 is one of the largest private banks in Brazil with more than 71,000 points of sale. The group’s insurance and private pension activities are an important part of the business contributing c30% of earnings in 2010. As of December 2009, Bradesco had a market share of 24% of insurance premiums and 36% of private pension investment portfolios. The bank is the third-largest investment fund manager in Brazil with a market share of 17%. It has a 13% share of total credit in Brazil and a 20% share of credit cards market in terms of invoiced revenue.
Bradesco: financial summary
Year to December (USDm) 2009a 2010a 2011e 2012e Year to December (%) 2009a 2010a 2011e 2012e
Income statement Growth (y-o-y)
Interest income 25,281 32,998 40,252 40,283 Loans 4.59 21.48 18.11 14.75Interest expense 12,251 15,696 18,308 19,077 Deposits 11.40 23.01 7.63 6.24Net interest income 13,029 17,302 21,944 21,206 Pre-provision profit 82.42 4.58 17.78 9.77Other operating income 5,734 6,456 7,673 7,606 Net Income 5.14 20.05 16.99 6.78Operating income 19,993 25,321 31,498 30,722 Profitability Operating expenses 9,410 12,666 15,233 14,494 ROAA 1.67 1.70 1.74 1.74Pre-provision profits 10,045 11,915 15,432 15,489 Pre-provision profits/average assets 4.17 3.71 3.81 3.91Provisions for loan losses 6,486 5,168 6,401 6,866 Net interest margins 7.59 7.81 7.86 7.80Provision for taxes 2,066 2,900 3,908 3,648 Cost-income ratio 46.9 49.5 47.8 46.4Net income 4,014 5,467 7,033 6,866 Asset quality Balance sheet summary Gross NPL ratio 7.05 5.45 5.50 5.90Customer deposits 97,633 117,585 128,176 124,381 Gross NPLs (USDm) 7,050 7,039 8,418 9,463Loans 90,260 118,710 141,204 148,146 Loan loss res./NPLs 137.21 148.43 140.62 129.37Total assets 290,182 386,456 418,894 406,899 Capital structure Total CAR 17.90 15.55 13.17 13.09 Equity/assets 8.25 7.63 8.01 8.47 Funding Loan-to-deposit ratio 92.4 101.0 110.2 119.1 Loan/assets 31.10 30.72 33.71 36.41
Source: Bradesco financial reports, HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.
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Global Emerging Markets – Credit Strategy EM Banks March 2011
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Itaú Unibanco Key events and risks to monitor
The bank’s overseas presence generates international liquidity, but its broad deposit base could well put pressure on funding costs.
Asset quality could improve further, but needs to remain a focus of attention due to strong expansion in SMEs and consumer credit.
Slower loan growth and margin compression in 2011 could weigh on earnings.
Credit profile
Constrained by the sovereign ceiling, the bank is one of the highest rated credits in the country. It stands to benefit from the improvement of the overall operating environment through its exposure to commercial lending and consumer credit.
At the end of 2010, Itaú Unibanco reported net income of BRL13.3bn (USD8.3bn), showing 25.3% y-o-y growth and strong ROE of 23.0%. The expansion in net interest income was mainly due to strong consumer and SME credit. Itaú Unibanco’s total loan book was BRL335bn (USD208bn) at the end of Q4 2010, a y-o-y rise of 20%. The majority of loan growth during 2010 came from the retail sector, particularly in mortgages (53% y-o-y) and credit cards (19% y-o-y). Annualised NIM excluding insurance was 12.3% at Q4 2010, nearly 50bps higher than Q4 2009.This increase was a result of increased volumes more than a change in interest rates. Delinquency ratios showed a significant drop to 5.1% at end of Q4 2010 from 6.6% in Q4 2009. The bank’s capital ratio was 15.4% in Q4 2010, 120bps lower than Q4 2009.
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova Victor Galliano Mariel Santiago
[email protected] [email protected] [email protected]
+44 20 7992 3707+1 212 525 5253+1 212 525 5418
Brazil Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders ( December 2010) Bank-deposit Baa3 Itaú, SA 20.0%Sub-debt Itaú Unibanco Particaoes 26.0%Financial strength B- Free float 54.0%S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA ITAU
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)
Coupon
ITAU 5 ¾ 01/21 (BBB-/Baa2/NR) USD1,000 5 3/4%ITAU6.2 04/15/20 (BBB-/Baa2/NR USD1,000 6.2%ITAU8.7 07/49-11 (NR/Baa2/NR), perpetual USD500 8.7%
Bank in brief
Itaú Unibanco is Brazil’s largest private banking institution. It came into existence through the merger of Banco Itaú and Unibanco in 2008 and operates overseas in Chile, Argentina and Uruguay, as well as the US, Europe, Japan and China. As of September 2010, the bank had an extensive network of 3,929 branches and 30,000 ATMs in Brazil. In Brazil, it controls 11% of the retail banking market, and at the end of Q3 2010 had an 18% share of total loans and 16% of deposits.
Itaú Unibanco: financial summary
Year to December 2009a 2010e 2011e 2012e Year to December (%) 2009a 2010e 2011e 2012e
Income statement (USDm) Growth (y-o-y)
Interest income 31,709 39,966 47,891 50,901 Loans 0.37 22.17 14.75 14.20Interest expense 13,322 17,272 20,234 23,594 Deposits -3.87 15.45 9.61 9.62Net interest income 18,387 22,693 27,657 27,307 Pre-provision profit -4.48 0.14 22.04 14.31Other operating income 5,618 8,141 10,406 10,571 Net Income -0.75 25.27 20.54 12.32Operating income 27,053 33,487 41,118 40,761 Profitability Operating expenses 6,106 7,489 8,890 8,306 ROAA 1.69 2.01 2.15 2.21Pre-provision profits 13,860 15,743 21,128 22,082 Pre-provision profits/average assets 13.90 13.92 16.98 19.42Provisions for loan losses 7,097 6,812 8,564 8,985 Net interest margins 8.60 9.76 9.32 9.25Provision for taxes 2,045 2,740 4,077 4,386 Cost-income ratio 46.70 50.50 46.40 43.70Net income 5,257 7,470 9,901 10,167 Asset quality Balance sheet summary (USDm) Gross NPL ratio 6.62 5.05 5.10 5.20Customer deposits 108,183 123,621 139,102 142,101 Gross NPLs (USD m) 9,342 9,229 10,735 11,434Loans 127,199 168,247 194,428 203,002 Loan Loss Res./NPLs 149.04 156.28 148.90 147.02Total assets 348,680 435,839 481,091 482,178 Capital structure Total CAR 16.68 15.52 14.43 14.92 Equity/assets 8.33 8.49 9.07 9.63 Funding Loan-to-deposit ratio 117.60 136.10 139.80 142.90 Loan/assets 36.48 38.60 40.41 42.10
Source: Itaú Unibanco (actual figures). HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.
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Votorantim Key events and risks to monitor
A high concentration in auto loans could affect asset quality and earnings, while the bank’s capital ratios have steadily lagged those of larger peers.
The higher interest rates scenario could help margin expansion, although a slowdown in auto loan growth should partly offset any recovery in margins.
The Banco do Brasil partnership should generate opportunities for revenue synergy.
Credit profile
The bank benefits from access to cheaper and longer-term funding from Banco do Brasil and a sizable market share in retail lending.
First-half net profit in 2010 was 18% higher y-o-y, mainly as a result of increased loan origination in consumer banking (+35% y-o-y) and strong fee income during the period. This growth was supported by higher operating expenses that raised the cost-to-income ratio to 41% from historical levels of 35%. The improvement in credit quality in Brazil resulting from strong economic fundamentals is reducing credit cost pressures at Votorantim. The NPL ratio trended down in H1 2010, reaching 3.9%, while the capital ratio remained comfortable at 13.7%, supportive of further portfolio growth. Having been historically weaker than its peers, this ratio been fortified by issuance of Tier 2 capital contributions made by Banco do Brasil and the bank expects to have closed 2010 with a BIS of 14% after expansion during the year.
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova Victor Galliano
[email protected] [email protected]
+44 20 7992 3707+1 212 525 5253
Brazil Credit profile (continued)
Rating Outlook Rating Outlook
Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (December 2010) Bank-deposit Baa3 Banco do Brasil 50.0%Sub-debt Baa2 VF and Emirio Moraes 50.0%Financial strength C- S&P Senior unsecured BB+ Stable Bloomberg Sub-debt NA BANVOR
Key dollar-denominated bonds
Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
BANVOR7 3/8 01/20 (NR/Baa2/BB+) USD1,150 7 3/8%BANVOR5 1/4 06/16 (NR/Baa2/BB+) USD750 5 1/4%BANVOR4 1/4 02/13 (NR/Baa2/BB+) USD500 4 1/4%
Bank in brief
Votorantim was founded in 1987 and is focused on consumer finance, mainly vehicle credit. On December 2009, the bank approved a tie-up with Banco do Brasil which holds 49% of Votorantim’s capital. With the partnership, the bank has solidified its overall support especially in auto financing. As of September 2010, the bank had a 3.9% market share of loans and a 1.9% share of total deposits with a total asset base of BRL102bn (USD60bn).
Votorantim: financial summary
Year to December (USDm) 2007 2008 2009 Sept 2010 Year to December (%) 2007 2008 2009 Sept 2010a
Income statement Growth (y-o-y)
Interest income 4,521 5,348 5,500 2,062 Loans 59.85 8.1 49.2 25.8Interest expense 2,837 3,718 2,615 1,205 Deposits –22 –21.3 106.9 7.9Net interest income 1,684 1,630 2,886 857 Pre-provision profit 8.81 –30.7 119.3 –56.9Other operating income 391 295 470 57 Net Income 14.57 –41.4 19.4 –66.4Operating income 700 372 674 914 Profitability Operating expenses 818 785 1,245 277 ROAA 1.80 1.30 1.02 1.2Pre-provision profits 973 674 1,478 637 ROAE 21.1 14.6 11.9 12.7Provisions for loan losses 273 301 804 231 Net interest margins n/a 5.5 6.8 6.6Provision for taxes 221 –38 163 98 Cost-income ratio 31.0 34.3 34.1 35.6Net income 659 386 461 155 Asset quality
Balance sheet summary Gross NPL ratio 2.93 2.88 4.51 2.70
Customer deposits 8,022 6,314 13,064 14,091 Gross NPLs (USDm) 440 475 1,098 843Loans 15,113 16,344 24,388 30,670 Loan loss res./NPLs 111 113 101 106Total assets 37,494 30,952 48,725 65,192 Capital structure Total CAR 15.20 13.50 13.0 13.5 Equity/assets 9.09 8.85 8.43 7.4 Funding Loan-to-deposit ratio 184.4 253.6 180.7 217.7 Loan/assets 39.46 51.74 48.45 47.05
Source: Votorantim, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.
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Appendix
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Selected Eurobond and private placement deals, 2011 maturities APPENDIX
Issuer Coupon Maturity Date First Put/Call date Currency Outstanding (M)
Asia
China CHINA DEV BANK 1.05481 12/12/2011 USD 600 HANG SENG BANK 0.59063 06/07/2016 06/07/2011 USD 450 FUBON BANK HK 6.125 26/04/2016 26/04/2011 USD 200 DAH SING BANK 1.05344 03/06/2016 03/06/2011 USD 150 CHONG HING BANK 1.22188 16/12/2016 16/12/2011 USD 125 Hong Kong Hong Kong Mortgage Corp 3-mth Libor +45bp 14/03/2011 USD 90 Hong Kong Mortgage Corp 4.25 06/06/2011 USD 70 China Development Bank (HK) 0.66 28/02/2011 USD 60 India ICICI BANK LTD/S 5.875 20/10/2011 USD 500 STATE BK INDIA 0.79219 15/12/2011 USD 500 Korea WOORI BANK 6.125 03/05/2016 03/05/2011 USD 1,000 EXP-IMP BK KOREA 0.5 04/10/2011 USD 500 INDUST BK KOREA 0.56 27/04/2011 USD 500 KOOKMIN BANK 0.54188 28/11/2011 USD 500 WOORI BANK 0.65219 14/09/2011 USD 500 HANA BANK 5.88 14/09/2016 14/09/2011 USD 400 KOREA DEV BANK 0.5 12/09/2011 USD 300 SHINHAN BANK 5.75 28/02/2016 28/02/2011 USD 300 Singapore OVERSEA-CHINESE 7.750 06/09/2011 USD 1,250 DBS BANK LTD/SP 7.125 15/05/2011 USD 850 DBS CAP FUND COR 7.657 15/11/2019 15/03/2011 USD 725 Thailand Export-Import Bank of Thailand 6-mth Libor +10bp 04/04/2011 USD 120 Russia and CIS: Kazakhstan Kazkommertsbank 5.125 23/03/2011 EUR 238 Kazkommertsbank 12 30/05/2011 USD 230 Russia VTB Bank 8.25 30/06/2011 EUR 1,000 VTB Bank 7.5 10/08/2011 CHF 750 VTB Bank 7.50 12/09/2011 USD 450 TransCreditBank 9 25/06/2011 USD 350 Russian Standard Bank 8.625 05/05/2011 USD 350 Ak Bars Bank 9.25 20/06/2011 USD 300 Gazprombank 7.97 15/06/2011 USD 300 Bank of Moscow 6.253 04/03/2011 CHF 250 Ukraine Ukreximbank 7.65 07/09/2011 USD 500 UkrSibbank AKIB 7.75 21/12/2011 USD 500 UkrSibbank AKIB 9.25 04/08/2011 USD 250 LatAm and ME: Brazil Banco BMG SA 7.25 23/05/2011 USD 200 HSBC Bank Brasil - Banco Multiplo 1.05 18/08/2011 USD 200 Qatar Commercial Bank of Qatar QSC 3-mth Libor +40bp 12/10/2011 USD 500 Saudi Arabia Riyad Bank Ltd 3-mth Libor +30bp 26/04/2011 USD 500 Samba Financial Group 3-mth Libor +30bp 31/05/2011 USD 500 Saudi British Bank 3-mth Euribor +30bp 13/04/2011 EUR 325 UAE Abu Dhabi Commercial Bank 5.625 16/11/2011 GBP 500 Emirates Bank International 3-mth Euribor +30bp 15/06/2011 EUR 500 Abu Dhabi Commercial Bank 2.75 19/04/2011 CHF 300 Mashreqbank 3-mth Libor +38bp 06/04/2011 USD 300 SIB Sukuk Co 3-mth Libor +65bp 12/10/2011 USD 225
Source: Bloomberg, Dealogic
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Selected Eurobond and private placement deals, 2012 maturities
Issuer Coupon Maturity Date First Put/Call date Currency Outstanding (M)
Asia
China CHINA DEV BANK 0.75875 30/05/2012 USD 700 EXP-IMP BK CHINA 1.03719 12/01/2012 USD 700 HANG SENG BANK 0.54063 05/07/2017 06/07/2012 USD 300 CITIC BANK INTL 2.05219 12/12/2017 12/12/2012 USD 250 CKWH-UT2 9.125 Perpetual 31/05/2012 USD 250 DAH SING BANK 5.451 18/08/2017 18/08/2012 USD 150 HK HANG SENG BANK 0.54063 05/07/2017 06/07/2012 USD 300 DAH SING BANK 5.451 18/08/2017 18/08/2012 USD 150 India ICICI Bank 6.625, callable (make
whole) 03/10/2012 USD 1,795
ICICI Bank 5.75 12/01/2012 USD 730 State Bank of India 3-mth Libor +38bp 15/02/2012 USD 300 Export-Import Bank of India 3-mth Libor +50bp 07/06/2012 JPY 24,000 ICICI Bank 1.86 13/02/2012 JPY 3,000 Korea EXP-IMP BK KOREA 5.5 17/10/2012 USD 1500 HANA BANK 6.5 09/04/2012 USD 1000 KOREA DEV BANK 5.5 13/11/2012 USD 600 EXP-IMP BK KOREA 1.35219 13/03/2012 USD 500 SHINHAN BANK 6 29/06/2012 USD 500 KOREA DEV BANK 0.56438 22/11/2012 USD 500 HANA BANK 5.375 12/04/2017 12/04/2012 USD 500 KOOKMIN BANK 0.51813 31/01/2012 USD 400 KOREA DEV BANK 0.8125 04/10/2012 USD 300 KOOKMIN BANK 5.875 11/06/2012 USD 300 KOREA EXCH BANK 0.61906 20/07/2012 USD 300 Singapore DBS BANK /SP 6 20/09/2012 AUD 50 Russia and CIS Kazakhstan ATF Bank 9.25 12/04/2012 USD 200 Kazkommertsbank 7.625 13/02/2012 GBP 174 Kazkommertsbank 12.85 18/12/2012 USD 125 Russia VTB Bank 6.609 31/10/2012 USD 1,054 Alfa Bank 8.2 25/06/2012 USD 500 VTB Bank 4.2 11/08/2012 SGD 400 Ak Bars Bank 10.25 03/12/2012 USD 280 Tatfondbank 12 02/02/2012 USD 225 Ukraine Alfa Bank Ukraine 13 30/07/2012 USD 631 PrivatBank 8 06/02/2012 USD 500 Ukreximbank 6.8 04/10/2012 USD 250 LatAm and ME
Brazil Banco Panamericano 7 26/10/2012 USD 200 Banco Cruzeiro do Sul 8 17/09/2012 USD 175 BES Investimento do Brasil 6 18/05/2012 USD 150 Parana Banco 7.375 21/12/2012 USD 100 Banco Mercantil do Brasil 7.75, sinkable 08/05/2012 USD 67 Banco Bradesco 4.05 17/04/2012 JPY 17,500 UAE Dubai Sukuk Centre 3-mth Libor +37.5bp 13/06/2012 USD 1,250 First Gulf Bank PJSC 4 26/11/2012 USD 470 National Bank of Abu Dhabi 5.875 27/02/2012 GBP 350 National Bank of Abu Dhabi 3-mth Euribor +5bp 23/07/2012 07/04/2011 EUR 117 Emirates Bank International 3-mth Libor +450bp 30/04/2012 USD 104
Source: Bloomberg, Dealogic
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Key forecasts
__________________ GDP_________________ _______________ Inflation ________________ 2009 2010f 2011f 2012f 2009 2010f 2011f 2012f
World (nominal GDP weights) -2.4 3.8 3.3 3.5 1.0 2.4 2.7 2.3 World (PPP weights) -0.6 5.0 4.3 4.3 1.9 3.3 3.3 2.8 Developed -3.7 2.6 2.3 2.5 0.0 1.4 1.7 1.2 Emerging 1.9 7.4 6.4 6.2 4.8 5.7 6.0 5.5
North America -2.6 2.9 3.3 3.4 -0.3 1.7 1.8 1.2 US -2.6 2.9 3.4 3.4 -0.3 1.6 1.8 1.2 Canada -2.5 3.0 2.6 2.9 0.3 1.8 1.9 2.0
Latin America -3.4 6.6 4.8 4.4 6.3 7.2 8.2 7.7 Mexico -6.1 5.1 4.1 4.1 5.3 4.1 4.1 3.5 Brazil -0.6 7.8 5.1 4.5 4.9 4.9 5.4 4.6 Argentina -2.9 9.0 5.8 5.0 15.9 23.2 25.5 22.5 Chile -1.5 5.3 6.0 5.0 0.3 1.4 2.5 2.9
Western Europe -4.1 1.8 1.5 1.7 0.6 1.8 2.3 1.7 Eurozone -4.0 1.7 1.5 1.6 0.3 1.6 2.2 1.7
Germany -4.7 3.5 2.1 2.0 0.2 1.1 1.5 1.6 France -2.5 1.6 1.5 1.8 0.1 1.7 1.7 1.8 Italy -5.1 1.0 0.8 1.0 0.8 1.6 1.5 1.7 Spain -3.7 -0.2 0.7 1.2 -0.2 1.7 1.5 1.6
Other Western Europe -4.4 2.0 1.8 1.8 1.5 2.5 2.7 1.8 UK -5.0 1.7 1.7 1.8 2.2 3.3 3.6 1.9 Norway -1.3 -0.1 1.1 2.0 2.2 2.3 1.6 2.3 Sweden -5.3 5.1 3.4 2.5 -0.3 1.1 1.9 2.3 Switzerland -1.9 2.7 2.1 2.0 -0.5 0.7 0.9 1.5
EMEA -3.4 3.9 4.1 3.9 7.7 5.9 6.7 6.5 Czech Republic -4.1 2.1 2.0 2.3 1.0 1.4 2.2 2.4 Hungary -6.5 1.0 2.5 3.1 4.2 4.9 3.2 3.4 Poland 1.7 3.8 3.9 3.4 3.5 2.6 2.9 2.8 Russia -7.9 3.2 4.8 3.5 11.7 6.9 9.5 8.5 Turkey -4.7 7.7 4.2 4.3 6.3 8.7 7.1 6.4 Ukraine -15.1 5.5 4.0 5.1 16.0 9.5 8.7 8.0 Romania -6.9 -2.0 1.5 3.5 5.6 6.1 5.5 4.6 Egypt* 4.7 5.1 6.0 6.1 15.5 11.7 11.9 11.1 Israel 0.8 4.0 3.4 3.6 3.9 2.7 3.3 3.1 Saudi Arabia 0.1 3.6 4.4 4.8 5.1 5.4 6.5 7.0 UAE -2.9 1.7 3.3 4.1 1.3 0.7 2.1 3.3 South Africa -1.8 2.6 3.5 3.1 7.2 4.3 3.9 5.5
Asia-Pacific 0.3 6.7 4.8 5.2 0.8 2.2 2.3 2.1 Japan -6.3 4.3 1.1 2.0 -1.3 -1.1 -0.7 -0.5 Australia 1.3 2.7 3.6 4.1 1.9 2.9 3.1 3.1 New Zealand -1.7 1.6 2.8 3.5 2.1 2.3 4.0 2.3
Asia ex Japan 5.7 8.9 7.6 7.5 2.6 5.0 4.8 4.0 China 9.1 10.0 8.9 8.6 -0.7 3.3 3.9 2.9
Asia ex Japan and China 2.4 7.8 6.2 6.3 5.1 6.2 5.4 4.8 Hong Kong -2.8 7.0 5.2 4.6 0.5 2.3 4.4 4.2 India 6.8 9.2 8.0 8.2 10.9 11.8 7.1 6.1 Indonesia 4.5 6.0 6.4 6.3 4.8 5.1 6.3 5.2 Malaysia -1.7 7.1 5.1 4.9 0.6 1.8 3.0 2.2 Philippines 1.1 6.8 5.0 5.8 3.3 4.0 4.5 4.8 Singapore -1.3 14.8 5.2 5.8 0.6 2.8 3.2 2.9 South Korea 0.2 6.1 4.9 4.8 2.8 3.0 3.8 3.3 Taiwan -1.9 9.6 4.7 4.5 -0.9 1.0 2.3 2.0 Thailand -2.3 7.9 5.3 4.3 -0.8 3.3 3.8 3.1 Vietnam 5.3 6.7 7.5 7.8 7.1 9.0 9.9 9.4
Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights Source: HSBC Economics
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Notes
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Notes
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Disclosure appendix Analyst Certification Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein.
Basis for financial analysis This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.
HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.
Definitions for fundamental credit recommendations Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months
Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months
Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months
Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.
Rating changes for long-term investment opportunities Recommendation History of OCBC
From To Date
Not Rated Neutral 2009-12-17Source: HSBC
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Recommendation History of AXIS BANK LTD
From To Date
Not Rated Neutral 2008-07-15Source: HSBC
Recommendation History of BANK OF BARODA
From To Date
Not Rated Neutral 2010-10-29Source: HSBC
Recommendation History of STATE BANK OF INDIA
From To Date
Overweight Neutral 2007-02-05Not Rated Overweight 2006-12-18
Source: HSBC
Recommendation History of BOC HONG KONG HOLDINGS
From To Date
Not Rated Neutral 2010-03-24Source: HSBC
Recommendation History of DAH SING BANKING GROUP
From To Date
Underweight Neutral 2010-03-25Not Rated Underweight 2009-08-13
Source: HSBC
Recommendation History of ALLIANCE BANK (KAZAKHSTAN)
From To Date
Underweight Neutral 2008-10-30Not Rated Underweight 2008-03-18
Source: HSBC
Recommendation History of ALFA BANK
From To Date
Overweight Neutral 2008-09-25Not Rated Overweight 2006-08-08
Source: HSBC
Recommendation History of EXPORT-IMPORT BANK OF CHINA
From To Date
Not Rated Neutral 2004-07-09Source: HSBC
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Recommendation History of WOORI FHC
From To Date
Underweight Neutral 2009-10-30Neutral Underweight 2008-10-22Overweight Neutral 2007-04-03Not Rated Overweight 2006-12-18
Source: HSBC
Recommendation History of BANK OF EAST ASIA
From To Date
Not Rated Underweight 2009-12-17Source: HSBC
Recommendation History of UOB
From To Date
Overweight Neutral 2008-11-07Not Rated Overweight 2005-12-16
Source: HSBC
Recommendation History of ICICI BANK
From To Date
Overweight Neutral 2008-06-02Neutral Overweight 2008-03-31Underweight Neutral 2008-03-04Overweight Underweight 2007-03-05Not Rated Overweight 2006-12-18
Source: HSBC
Recommendation History of CITIC BANK INTERNATIONAL LIMIT
From To Date
Not Rated Neutral 2010-12-20Source: HSBC
Recommendation History of SBERBANK RF
From To Date
Not Rated Overweight 2009-01-27Not Rated Not Rated 2008-09-05
Source: HSBC
Recommendation History of BANGKOK BANK
From To Date
Overweight Neutral 2008-11-07Not Rated Overweight 2007-05-07
Source: HSBC
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Recommendation History of KOREA EXCHANGE BANK
From To Date
Underweight Neutral 2009-12-17Neutral Underweight 2008-10-22Overweight Neutral 2006-09-07Not Rated Overweight 2005-12-16
Source: HSBC
Recommendation History of DEVELOPMENT BANK OF KAZAKHSTAN
From To Date
Not Rated Neutral 2008-03-18Source: HSBC
Recommendation History of BANK OF INDIA
From To Date
Overweight Neutral 2007-03-05Not Rated Overweight 2006-11-06
Source: HSBC
Recommendation History of ATF BANK
From To Date
Not Rated Neutral 2008-03-18Source: HSBC
Recommendation History of KAZKOMMERTSBANK
From To Date
Neutral Overweight 2009-10-16Underweight Neutral 2008-06-20Not Rated Underweight 2008-03-18
Source: HSBC
Recommendation History of EURASIAN DEVELOPMENT BANK
From To Date
Not Rated Overweight 2010-01-19Source: HSBC
Recommendation History of KOREA DEVELOPMENT BANK
From To Date
Underweight Neutral 2009-03-09Neutral Underweight 2008-12-17Not Rated Neutral 2008-05-28
Source: HSBC
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Recommendation History of SHINHAN
From To Date
Underweight Neutral 2009-11-04Neutral Underweight 2008-10-22Overweight Neutral 2008-10-20Not Rated Overweight 2005-12-16
Source: HSBC
Recommendation History of HANA FGL
From To Date
Underweight Neutral 2009-12-17Neutral Underweight 2008-10-22Not Rated Neutral 2008-06-06
Source: HSBC
Recommendation History of BANK VTB OAO
From To Date
Not Rated Neutral 2009-01-26Source: HSBC
Recommendation History of HALYK BANK
From To Date
Neutral Overweight 2009-03-25Underweight Neutral 2008-10-30Neutral Underweight 2008-05-06Not Rated Neutral 2008-03-18
Source: HSBC
Recommendation History of EXPORT-IMPORT BANK OF KOR
From To Date
Not Rated Neutral 2004-12-01Source: HSBC
Recommendation History of CHINA DEVELOPMENT BANK
From To Date
Not Rated Neutral 2005-12-02Source: HSBC
Recommendation History of INDUSTRIAL BANK OF KOREA
From To Date
Not Rated Neutral 2009-12-17Source: HSBC
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Distribution of fundamental credit opinions As of 10 March 2011, the distribution of all credit opinions published is as follows:
___All Covered Companies___ Companies where HSBC has provided Investment Banking in the past 12 months
Count Percentage Count Percentage
Overweight 123 21 43 35Neutral 339 58 113 33Underweight 124 21 47 38
Source: HSBC
HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
ABU DHABI COMM BANK ADCB.AD 2.28 11-Mar-2011 6, 7, 11ALFA BANK - - - 1, 2, 5, 6, 7, 11ALLIANCE BANK (KAZAKHSTAN) - - - 11ATF BANK - - - 11AXIS BANK LTD AXBK.BO 1285.05 11-Mar-2011 1, 2, 4, 5, 7, 11BANCO BRADESCO BBDC4.SA 30.22 11-Mar-2011 1, 2, 4, 5, 7, 11BANCO DO BRASIL BBAS3.SA 28.01 11-Mar-2011 1, 2, 5, 6, 7, 11BANGKOK BANK BBL.BK 158.50 11-Mar-2011 6, 7, 11BANK OF BARODA BOB.NS 909.35 11-Mar-2011 1, 5, 6, 7, 11BANK OF EAST ASIA 0023.HK 33.95 11-Mar-2011 1, 2, 5, 6, 7, 11BANK OF INDIA BOI.NS 466.30 11-Mar-2011 1, 4, 5, 6, 7, 11BANK OF MOSCOW - - - 6, 7BANK VTB OAO VTBRq.L 6.58 11-Mar-2011 1, 2, 5, 7, 11BOC HONG KONG HOLDINGS 2388.HK 24.85 11-Mar-2011 4, 11CHINA DEVELOPMENT BANK - - - 1, 2, 5, 6, 7, 11CITIC BANK INTERNATIONAL LIMIT - - - 1, 5, 6, 7DBS GROUP DBSM.SI 14.36 11-Mar-2011 1, 5, 6, 11DEVELOPMENT BANK OF KAZAK - - - 6, 7, 11EURASIAN DEVELOPMENT BANK - - - 1, 5, 11EXPORT-IMPORT BANK OF CHI - - - 1, 2, 5, 7, 11EXPORT-IMPORT BANK OF KOR - - - 1, 2, 5, 6, 7, 11GAZPROM BANK - - - 6, 7HALYK BANK HSBKq.L 10.49 11-Mar-2011 2, 7, 11HANA FGL 086790.KS 46150.00 11-Mar-2011 2, 7, 11ICBC - - - 1, 5, 7, 11ICICI BANK ICBK.NS 1014.55 11-Mar-2011 1, 2, 4, 5, 6, 7, 11INDUSTRIAL BANK OF KOREA - - - 1, 2, 5, 7, 11ITAUSA - - - 4KAZKOMMERTSBANK KKGByq.L 7.70 11-Mar-2011 2, 6, 7, 11KOREA DEVELOPMENT BANK - - - 1, 5, 7, 11KOREA EXCHANGE BANK 004940.KS 9100.00 11-Mar-2011 1, 2, 5, 6, 7, 11OCBC OCBC.SI 9.27 11-Mar-2011 1, 5, 6RUSSIAN AGRICULTURAL BANK - - - 5, 7SBERBANK RF SBER03.MM 3.48 11-Mar-2011 2, 7, 11SHINHAN - - - 6, 7, 11STATE BANK OF INDIA SBI.NS 2589.75 11-Mar-2011 1, 2, 4, 5, 6, 7, 11UOB UOBH.SI 18.74 11-Mar-2011 5, 6, 7, 11WOORI FHC 053000.KS 14600.00 11-Mar-2011 1, 2, 5, 6, 7, 11
Source: HSBC
1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 28 February 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
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6 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
7 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures 1 This report is dated as at 13 March 2011. 2 All market data included in this report are dated as at close 08 March 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
4 As of 28 February 2011, HSBC beneficially owned 5% or more of a class of common equity securities of the following company(ies): AXIS BANK LTD
5 As of 28 February 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more of the total capital of the subject companies securities in the market for the following Company(ies): AXIS BANK LTD, STATE BANK OF INDIA, BOC HONG KONG HOLDINGS, BANCO BRADESCO, ICICI BANK, ITAUSA
6 As of 25 February 2011, HSBC owned a significant interest in the debt securities of the following company(ies) : ALLIANCE BANK (KAZAKHSTAN, EXPORT-IMPORT BANK OF CHI, WOORI FHC, BANK OF EAST ASIA, DBS GROUP, BTA BANK, ICBC, EURASIAN DEVELOPMENT BANK, KOREA DEVELOPMENT BANK, HANA FGL, BANK VTB OAO, EXPORT-IMPORT BANK OF KOREA, CHINA DEVELOPMENT BANK, INDUSTRIAL BANK OF KOREA.
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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.
Issuer of report HSBC Bank plc 8 Canada Square
London, E14 5HQ, United Kingdom
Telephone: +44 20 7991 8888 Fax: +44 20 7992 4880
Website: www.research.hsbc.com
In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the researchreport, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. © Copyright. HSBC Bank plc 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 142/06/2010 and MICA (P) 193/04/2010
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EM
Ban
ks
By Olga Fedotova and Keerthi Angammana
Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns
Fundamentals are improving, supported by a traditional banking business model, fast economic
growth and favourable demographics
We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.
Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks
to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are
attractively priced but wait for better entry point
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Glo
bal E
merg
ing
Mark
ets
– C
red
it Stra
teg
y
Olga FedotovaAnalystHSBC Bank plc+44 20 7992 [email protected]
Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible forresearch on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst coveringRussian, Kazakh and Ukrainian credits.
March
2011
EM BanksLights back on … but not for all
Global Emerging Markets – Credit Strategy
March 2011Keerthi Angammana, CFA
Analyst
HSBC Bank plc
+44 20 7991 5431
Keerthi Angammana is Head of Fixed Income Quantitative Research, based in London. Keerthi has worked at HSBC for three years, initially as a strategist
in Central and Eastern Europe rates and credit markets. Keerthi is a CFA charterholder.
Yi HuAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2996 [email protected]
Yi joined the Asia credit research team in February 2009, focusing on financial institutions. Yi came to HSBC in September 2007 after completing a Masters degree at the London School of Economics. At HSBC, she has worked in both equity research in Asia and with the credit research team in Europe.
Devendran Mahendran, CFAAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2822 [email protected]
Devendran joined HSBC in 2000 and has worked as a credit analyst since 1994. He started his career in 1991 at the Malaysian central bank where he spentthree years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.
Ksenia MishankinaAnalystHSBC Bank plc+44 20 7992 [email protected]
Ksenia joined HSBC EMEA credit team in June 2009. Prior to that, she has had one year of experience at a leading investment bank having joined on agraduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.
Pavel Simacek, CFAAnalystHSBC Bank plc+44 20 7992 [email protected]
Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerableexperience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analystdesignation and a member of the CFA Institute.
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