Asia Pacific Equity Research 31 August 2014

Asia Banks: Beyond 2Q Results Where to Add Given Supply/Demand-Side Constraints Asia banks are up +14% YTD, with bank stocks lifted by two key factors: Asia Financials abundant global liquidity, which reduced tail-risk in South Asia (+34% YTD); AC Josh Klaczek and policy flexibility, which more recently addressed weakening domestic (852) 2800-8534 demand in North Asia (+6%). Macro has dominated micro: indeed, despite [email protected] the strong year, we've only seen positive EPS revisions >5% in one market Bloomberg JPMA KLACZEK YTD (TW). We attribute this to rising supply-side constraints (weak deposit Joy Wu (852) 2800-8557 growth) as well as the significant build-up in leverage (esp. in consumer), [email protected] which weighs on demand. Where are there opportunities to add? We see the J.P. Morgan Securities (Asia Pacific) Limited greatest potential for volume growth in India (HDFCB, AXSB, LICHF) and the Philippines (BDO); but to this group we’d also add China non-banks, as brokers (Galaxy) saw interest income rise +86% Y/Y, and insurers have seen Sector Performance by Country YTD (US$) ID (+44%) much stronger NBV growth (+16% avg.) & a very profitable P&C market 2.50 PB (x) IN (+43%) 2.30 PE = 10x (P.A./PICC). We’d also be more selective in Thailand, adding only in KTB. 2.10  In China, bank results showed a few key negatives: a surge in Overdue loans (+43% Y/Y) vs. reported NPLs (+24%); continued run-off in NPL coverage (-38% Y/Y); JSBs reaching for yield via high-yield investments (CITIC, MSB, CMB). This drives our pref for state banks, with BOC our key OW. We'd rather deploy fresh capital to Galaxy Secs, as NII grew 51% & is now 35% of revs; or insurance, given stronger NBV growth/low CRs in P&C.

1.90

AU (+13%)

MY (+7%) PH (+21%)

1.70

TH (+44%)

1.50

SG (+7%)

1.30

HK (+7%)

1.10

TW (+8%)

0.90

Asia (+14%) CH (+5%)

KR (+13%)

0.70

ROE (%)

0.50 5.0

7.5

10.0

12.5

15.0

17.5

20.0

25.0

Source: Bloomberg, as of Aug 29, 2014.

 We think +ve EPS revisions continue in Taiwan, as 2Q showed strong loan (+8%) & fee growth (+14%) for the private banks, and the sector has Key Bank Stocks to Add Exposure Stock Upside* P/E P/B significant gearing to rates (we forecast hike in 1Q15). Add to Fubon/CTCB. SFG 24% 11.3 x 1.0 x 22% 19.5 x 3.9 x In Korea, ROE expansion requires a drop in provisions or rising rates, but HDFC Bank 16% 15.3 x 3.6 x the BOK just cut -25bps; the move to 30% payouts is also likely to occur BCA Axis Bank 16% 12.7 x 2.1 x over a several years. We can be more patient here (key OWs SFG/IBK). LIC Housing 16% 11.0 x 2.0 x BOC 14% 4.6 x 0.8 x  In India, focus on accelerating volumes vs. ROE expansion, as we see less Fubon 11% 10.8 x 1.4 x 10% 7.6 x 1.4 x room for NIM expansion or provision leverage (ex-PSUs). Loan growth is CTBC 6% 10.3 x 1.5 x now +12% Y/Y for system, but there are signs domestic demand is KTB BDO 5% 16.3 x 1.9 x improving. We’d add fresh capital to Axis & HDFCB, where we see Source: JP Morgan, *Upside to JP Morgan price target. earnings compounding at 24% the next 3 years, and LICHF in the NBFCs.  In Indonesia, we see a few factors weighing on EPS growth, including a shift from CASA (-3% YTD) to TDs (+15%); rising pressure on asset quality (SMLs +30% YTD); and a sharp slowdown in consumer. Our only OW is BCA, which has capacity to accelerate growth if conditions improve.  In Thailand, we think consumer demand likely remains weaker-for-longer, pushing up system NPLs up across unsecured (+17% Y/Y) & SME (+32%). An added headwind is deposit competition, which has just started to turn as banks compete for funding. The only place where we’d add today is KTB.

22.5

ROE 8.3% 21.7% 25.6% 17.7% 19.3% 17.5% 13.6% 20.0% 14.8% 12.3%

Key Non-Bank Stocks to Add Exposure Stock Upside* Ping An 58% Samsung Life 38% CPIC 27% Galaxy Secs. 25% Samsung Fire 23% F.E. Horizon 22% PICC 17%

P/E 10.4 x 18.1 x 17.0 x 12.2 x 13.5 x 7.1 x 10.0 x

P/B 1.9 x 1.0 x 2.0 x 1.2 x 1.5 x 1.0 x 2.1 x

ROE 18.9% 5.6% 11.9% 10.5% 11.3% 14.7% 22.6%

Source: JP Morgan, *Upside to JP Morgan price target.

 In Malaysia, revenue growth is decelerating as disintermediation weighs on loan growth, which averaged just +9% Y/Y for the sector in 2Q. Increased capital needs will reduce L-T ROEs. We prefer the Philippines, where loan growth hit +25% in 2Q within our coverage, and corporate capex is finally picking up as the export cycle improves. We'd add to BDO as a L-T holding. See page 78 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Focus on Supply-Side Liquidity Constraints For the past year, we’ve been focused on supply-side constraints within Asia’s banking sector. We first noticed the deceleration of deposit growth in early 2013, at a time when loan growth was still robust. By mid-2013, deposit growth trailed loan growth by some 500bps in ASEAN and 800bps in HK & Singapore, leading to a faster rise in LDRs. We attributed this to two factors, namely: (i) narrowing current accounts and/or deficits, which act like a drain on domestic liquidity; and (ii) a surge in offshore loan growth, which is often not recycled back onshore as domestic deposits. Weak deposit growth left the region vulnerable to any exogenous liquidity shock, which ultimately hit in May 2013, when the Fed taper discussion began. That event led to a surge in portfolio outflows, which forced reactive rate hikes in the likes of Indonesia (+175bps) and India (+75bps). As we’ve noted before (the report), these conditions reversed in the first half of 2014, with South Asia in particular seeing a significant improvement in liquidity conditions. Better trade accounts, portfolio inflows and central policies designed to attract USD all played a role. For Indonesia & India, narrowing trade deficits removed a material drag on domestic deposit creation. In Indonesia, the trade balance printed a surplus $3.4 billion over 4Q13-1Q14, after showing a deficit of -$6.4bn for the first 9 months of 2013. In India, the trade deficit is down by a third over 2013, averaging $10.5bn per month through July. More critical has been the reversal in portfolio flows. Indonesia in particular has seen a surge in inflows, which totaled $16.8bn in the first half of 2014, up from $9.8bn for the whole of 2013. We’ve also seen a recent surge of flows into Thailand (+$1.2bn in 2 months), as well as India, where 10Y yields are down -26bps in just one month. The problem is that much of this liquidity improvement has still been driven by external funding conditions and not domestic deposit creation. In effect, liquidity conditions in the first half were overly-dependent on global monetary easing. Consider that since the beginning of the year, 10Y yields have fallen ~70bps in the USA, ~100bps in the “core” Eurozone, and -200bps across Periphery Europe. DM rate compression made higher interest rates in Asia more attractive to foreign investors, which explains why bond inflows into South Asia have totaled $16bn YTD, after outflows of -$4bn for all of last year. These inflows also explain why stock performance YTD has been so strong relative to domestic earnings power. Indeed, bank stocks in ASEAN are up +28% YTD, but we have seen limited or negative earnings revisions for FY14 across Indonesia (+1%), Malaysia (-3%), the Philippines (-5%), and Thailand (-9%). A final driver that illustrates the disconnect between improving global liquidity and still-tight domestic liquidity is the dispersion between loan growth in local banks vs. foreign banks. Indeed, while local banks have pulled back from lending, foreign banks have been more aggressive, particularly in ASEAN. The chart on the right looks at loan growth between domestic vs. foreign banks, and finds that despite fears of capital flight, we’ve seen the exact opposite. Foreign bank lending is up +27% Y/Y in Indonesia, compared growth of +15% at domestic banks. That trend was also seen in Thailand, where foreign banks are growing +12% Y/Y, compared to domestic banks at +6%. 2

Figure 1: Banking Sector Performance by Country YTD (in USD) 2.50

PB (x)

2.30

ID (+44%)

IN (+43%)

PE = 10x

2.10

AU (+13%)

MY (+7%)

1.90 PH (+21%)

1.70

TH (+44%)

1.50

SG (+7%)

1.30

HK (+7%)

1.10

TW (+8%)

0.90

Asia (+14%) CH (+5%)

KR (+13%)

0.70

ROE (%)

0.50 5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

25.0

Source: Company data, Bloomberg, as of Aug 29, 2014.

Figure 2: DM Central Bank Intervention + Weaker Growth = Bond Rally 0.00%

0.00%

-0.20%

-0.50%

-0.40%

-1.00%

-0.60% -1.50%

-0.80%

YTD Compression in 10Y Yields across DM

-1.00%

-2.00%

-1.20%

-2.50%

USA

Core Europe

Japan

Periphery Europe (RHS)

Source: Bloomberg.

Figure 3: Improving Trade Balances Also Helped Liquidity Stress $2.5

Trade Balance in ASEAN + India, US$bn using 3MMA Basis

$2.0

-$6.0 -$8.0 -$10.0

$1.5

-$12.0

$1.0

-$14.0

$0.5

-$16.0

$0.0

-$18.0

-$0.5

-$20.0

ASEAN Trade Balance

India Trade Balance (RHS)

Source: CEIC. As of June 30, 2014.

Figure 4: Foreign Banks Grew More Aggressively Post June 2013 25% 20% 15% 10% Foreign Lending Actually Accelerated Post-June 2013

5% 0% -5% -10% -15%

ASEAN Domestic Lending Growth Y/Y Source: CEIC.

ASEAN Foreign Lending Growth Y/Y

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Deposit Disintermediation & Real Rates While market rates have compressed since the second half of 2013, we worry that domestic deposit growth remains weak. Indeed, local currency deposits remain muted YTD across ASEAN (see chart on right) – and as we discuss below, most of the growth has come from higher-cost time deposits. Our view is that rates are now too low within ASEAN – particularly in real terms – which is leading to deposit disintermediation. Looking across the region, one of the surprising things is that real rates on 1Y time deposits are now negative in most countries, discouraging deposit inflows. In ASEAN, average real rates fell ~130bps the past year, but we’ve also seen real rates compress in the likes of Korea (-75bps), Australia (-115bps), and Taiwan (-90bps). This fall in real rates is leading to deposit disintermediation. In effect, policy is perhaps too loose in Asia, and local savings are shifting to deposit alternatives like bancassurance, MMFs, or FX deposits. At the very least, low real rates are leading to a negative mix shift between CASA and time deposits. The third chart on the right shows how growth in time deposits has outpaced CASA in most markets within the region. Relative growth was perhaps most apparent in Indonesia, reflecting CASA interest rates that are some ~700bps below that of short-term time deposits. At Mandiri, CASA deposits were down -4% in the first half, while time deposits rose +8%; at BBNI, CASA also fell -5% H/H, while time deposits surged +35%. That said, we also saw similar behavior in Hong Kong, where strong loan growth (+8% H/H) was funded almost entirely with time deposits. Consider that at BOCHK, CASA fell 2% H/H, while time, call, and notice deposits surged +22%. Likewise, CASA fell -3% at BEA, and was flat at HSB, yet time deposits jumped +9% and 17%, respectively, to help fund growth. Adding to this pressure on CASA has been deposit alternatives, which offer more attractive rates. China is certainly no stranger to this trend, as capped deposit rates couldn't compete with higheryielding WMPs; but we’ve seen a similar shift elsewhere. As time deposits fell some -61bps over the past year, Thailand has seen a surge in bancassurance products, which are up +42% Y/Y, and offer yields ~200-300bps above that of TDs. Malaysia has also seen funds shift towards investment & takaful products, with AUM as a % of deposits up from 23% to 39% the past 5 years. Lower local rates have also incentivized a liquidity shift into USD deposits, as the spread between local & dollar rates narrows. FX deposits have surged across much of the region this year. In the Philippines, USD deposit growth is +16% YTD, as the spread between PSP & USD savings rates collapsed by ~60bps over the past 1.5 years. Dollar deposits are also up +22% YTD in Malaysia and +8% in Thailand, which has only recently seen spike in deposits. China is perhaps the most telling example, where falling SHIBOR rates and a weaker CNY has led to a surge in USD deposits, which are up some +35% YTD.

Figure 5: Loan vs. Deposit Growth YTD: Constraint on Growth/NIM 9% 8%

8%

9% 7%

Weaker Deposit Growth 7%

7%

6%

6%

6%

6%

5% 6%

5% 4%

4%

3%

3%

4%

4%

4%

4%

3% 2%

2%

1%

1%

1% 0

0% HK

CH

IN

ID

PH

KR

YTD Loan Growth

TH

MY

TW

SG

YTD Growth in LC Deposits

Source: CEIC. As of June 2014.

Figure 6: Disintermediation Driven by Falling Real Rates on Time Deposits 2.00%

Fall in Real Deposit Rates, Then and Now

1.7% 1.5%

1.50%

1.5%

1.4%

1.0%

1.00% 0.50%

0.9%

0.9% 0.7%

0.6%

0.6%

0.5%

0.3%

0.00% -0.1% -0.3%

-0.50%

-0.2% -0.5% -2.1% -1.0%

-1.00% KR

AU

MY

ID

CH

TW

Real Deposit Rate, One Year Ago

TH

PH

IN

Real Deposit Rate

Source: CEIC. As of June 2014.

Figure 7: Growth in Time vs. CASA Deposits in Indonesia & Hong Kong Hong Kong

Indonesia +35%

12%

+17%

+22% +11%

10%

9%

+8%

8%

+5%

6% 4%

+1%

2% 0%

0%

-2% -4% -6%

-3%

-4%

-2%

-5% BMRI BNI BRI CASA Growth YTD

BCA

-3%

BOCHK HSB Time Deposit Growth YTD

BEA

Source: CEIC. As of June 2014.

Figure 8: Disintermediation Also Occurring via Growth in FX Deposits 40%

35%

Growth in FX Deposits YTD

35% 30% 25%

22%

20%

16%

15%

13% 8%

10%

7%

6%

5% 3%

5%

0%

0% CH

MY

PH

KR

TH

TW

SG

IN

HK

ID

YTD Growth in FX Deposits (USD basis) Source: CEIC. As of June 2014.

3

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Supply Side Constraints & Asset Sensitivity Tighter liquidity and a shift towards time deposits is likely to weigh on margins in Asia going forward. Thailand is on the cusp of this transition. In the sector quarter, the large-cap banks benefitted from NIM expansion of +11-15bps Q/Q, as funding costs plummeted -47bps at SCB, -36bps at KBANK, and -27bps on average for the sector. Even BBL saw margins expand +15bps Q/Q, despite having the most asset sensitive balance sheet. That said, on our recent visit to see the banks, almost every one noted that deposit competition has started to pick up. Indeed, 1Y time deposit rates averaged ~1.70% in June; but most banks are now offering campaign rates above 2.70% for 6-12 months. Likewise, after the recent policy rate hike in Malaysia, Maybank raised deposit rates by just +10bps, but most banks moved +25bps or more to compete for funding. Even in Indonesia, where there are signs that deposit rates are peaking out (and BCA cutting TD rates twice in two months), we still see the shift in depositor preferences impacting NIMs, which fell -22bps on average in the quarter. This potential squeeze on margins is exacerbated by the fact that leverage has increased so much in the past few years. Relative to last cycle, this means Asia banks are less likely to be as “asset sensitive” as they were in the mid-2000s, the last time the Fed raised rates. Indeed, LDRs are now some +12% higher than they were 10 years ago in ASEAN, and significantly higher in the likes of Indonesia (+35%), Thailand (+26%), Singapore (+25%), Hong Kong (+18%), and India (+15%). The vast majority of this leverage came after the end of 2008, when easy monetary policy, private investment, and fiscal stimulus all helped boost credit. Indeed, EM Asia LDRs have increased some +11% since the end of 2008 (to 85%), while private credit/GDP is up +19% (to 109%). This is not unique to Asia, as QE had a vast impact on global rebalancing, allowing demand expansion & re-leveraging in EMs to offset demand compression & deleveraging in DMs. Local monetary policy is likely to reinforce the outlook for tight liquidity, despite the return of inflows. While inflation has been subdued in the region, negative real rates & increased leverage point to a more hawkish policy stance. In Malaysia, we’ve seen one rate hike and expect another in 1Q15. The economy is still getting a significant boost from fiscal stimulus, with 2Q GDP up +6.4% Y/Y; but deposit growth is still weak, and the economy ran a ~$5.5bn BoP deficit in the first half, on the back of $15bn of capital account outflows. In the Philippines, the central bank has raised RRRs twice, by +200bps in total (in March/May); raised SDA rates by +25bps (in June); and recently raised policy rates by +25bps (July). We pencil in another rate hike for 1Q15, but could see another hike as early as September. Rate hikes partly reflect a shift to a lower target range for inflation next year (from 4%±1% to 3%±1%); but they also reflect a more pre-emptive approach to today’s easy credit conditions, with loan growth +21% Y/Y, the fastest in the region. In India, we still expect another rate hike this year, amid rising inflation (July: +8.0% Y/Y) and input price pressures.

Figure 9: Thailand & Philippines Have Seen Deposit Costs Plummet 4.00%

Blended Deposit Cost, Thailand & the Philippines

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00%

Philippines Blended Deposit Rate

Figure 10: Korea Benefits from Issuance of LT Paper at Low Rates 6.0

CumulativeIncrease Since Jan 2002 in KRW Trillion

7.5% 7.0%

5.0

6.5% 6.0%

4.0

5.5%

3.0

5.0% 4.5%

2.0

4.0% 3.5%

1.0

3.0%

0.0

2.5%

> 3 Years Deposits

4-5 Year Deposit Rate (RHS)

Source: CEIC.

Figure 11: LDRs in Asia Much Higher Today vs. Previous Hike Cycle 120%

Loan/Deposit Ratio: Now & Then

112%

110% 100%

94% 87%

90%

85%

80%

75%

74%

70%

59%

60%

60%

59%

56%

50% SG

ID

TH

Today

IN

HK

2004

Source: CEIC.

Figure 12: Loan/Assets Much Higher Today vs. Previous Hike Cycle Loan/Assets Ratio: Now & Then 80%

74%

60%

69%

67%

70%

66%

59% 50%

50%

45%

48%

41% 40% 30% SG

ID Today

Source: CEIC.

4

Thailand Blended Deposit Rate

Source: CEIC.

TH

IN 2004

HK

44%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Demand Side is the Next Focus for Us

Figure 13: Loan/GDP Multiplier Far Higher Today vs. Previous Cycle Greater Dependence on Credit this Cycle

3.0 x

Markets are now well aware of the supply-side constraints affecting Asia; but the question going forward is whether demand will also be constrained. In North Asia, we’ve seen policy try to address this. In Korea, the new Finance Minister has pushed for a series of measures aimed at the transfer of corporate savings to investment, and corporate wealth to consumers. That includes reducing the withholding rate to incentivize higher dividends; taxes on retained earnings to boost capex; and tax credits on wage growth to boost employment. In China, we saw a surge in fiscal spending to support 2Q GDP, and a number of targeted monetary policies to boost liquidity. That included two RRR cuts in April & June (~RMB200bn); liberalizing LDRs in late June, which allowed banks to fund credit via financial bonds with a duration over 1 year (~1.6trn); and a PSL of RMB1 trillion, which accelerated lending towards affordable housing, and gave CDB access to cheaper funding.

2.5 x

2.2 x

2.0 x

2.0 x 1.5 x

1.8 x

Credit Multiplier Today vs. '04-07' Average

1.9 x

1.8 x

1.6 x

1.2 x

1.8 x 1.5 x 1.5 x

0.9 x

1.0 x

1.6 x 1.3 x

0.8 x

0.7 x

0.5 x -0.4x

0.0 x

PH

ID MY TH Loan/GDP Growth Today

IN KR CH Average over 2004-2007

TW

Source: CEIC.

Figure 14: Increase in Private Credit / Nominal GDP since 2008 40

73

69

35

That said, we also think credit growth will be more muted in Asia going forward, precisely because leverage has increased so much the past 5 years. Indeed, we can see the dependence on credit leverage this cycle by looking at credit multipliers today vs. the previous cycle of 2004-2007 (first chart on the right). In Korea, household debt is elevated, and mortgage growth is likely to remain lackluster, at just +5% Y/Y. A significant amount of household lending has been refinancing, with borrowers switching into lower rate, longer-tenor loans. In China, there are a number of signs domestic demand remains weak. The trade data mentioned above showed imports fell -1.6% Y/Y in July, testament to weak domestic demand. Likewise, the weakness in real estate is likely to weigh on overall domestic sentiment. Indeed, the 70-city house price data shows 64 cities are now showing price declines. This weakness is reflected in a slowdown in fixed asset investment, with capex related to manufacturing up just +13.7% Y/Y, and capex related to real estate up just +11.7% in July, the slowest pace since July 2009.

27

30

Chg since 2008 (%)

There’s also improving DM demand, which should help the export cycle in Asia. In China, DM demand is helping boost exports, which rose +14.5% Y/Y, leading to a record $47.3bn trade surplus in July. In Taiwan, export orders have been particularly strong, with sequential 3M growth at 9.3% 3M/3M in June, up from a decline of -14.7% in March. That growth was driven by US demand in particular (orders: +28.2%). Historically, domestic consumption in North Asia has been linked to domestic consumption & capex, and indeed, there are signs of a pickup in credit demand in areas like Korea SMEs, where growth is +6% Y/Y.

26

25

24

20 15

11

10

6

5

5 1

0 HK

CH

TH

SG

MY

ID

PH

AU

JP

-2 IN

-2 KR

-3 US

260

186

127

138

135

41

35

132

177

59

185

192

-5 4Q13 Source: CEIC.

Figure 15: Loan Growth Remains Muted Across Korea & Taiwan 20% 15% 10% 5% 0% -5%

Korea

Taiwan

Source: CEIC.

Figure 16: China: Overcapacity Weighs on Demand – Rolling 12 Months 45%

Rolling 12M Y/Y

40% 35% 30% 25% 20% 15%

Manufacturing

Real Estate

Source: CEIC.

5

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Figure 18: Increase in Wages and Unit Labor Costs Since 2010

Demand Side is the Next Focus for Us

60%

More broadly, we think the consumer segment will be challenged for growth going forward, particularly if slowing wage growth & falling subsidies coincides with a rise in borrowing rates. This can be seen most clearly by looking at consumer loan growth in Thailand (+9% Y/Y) and Indonesia (+12% Y/Y), both of which have slumped over the past 12 months. In Thailand, the hire purchase segment continues to struggle, and loans are now -1% Y/Y. Moreover, as we discuss later on page 37, vehicle loan NPLs are still rising at a pace of +28% Y/Y, and banks are reluctant to lend to the used car segment. Likewise, we discuss how consumer loan growth has slowed materially in Indonesia, on page 42. BBCA is a key example; after growing total loans at a CAGR of 27% the past 3 years, the bank slowed to just +14% in the second quarter. The biggest slowdown at BCA was in mortgages, which are now flat over the past 3 quarters, after growing at a CAGR of +46% the previous 3 years. This slowdown was echoed at Mandiri, where mortgages grew just +1% Y/Y, after growing at a CAGR of +31% between 2Q09 and 2Q13. Central banks across the region are reinforcing this slowdown in mortgage lending, by imposing macro-prudential measures. Indonesia raised LTVs on second & third-homes last September, and restricted the supply of credit for new developments based on the level of completion. We’ve seen the same thing in Malaysia (with 70% limits) as well as recent stress tests in the Philippines. Perhaps the most well-known measures were in HK and Singapore, where loan growth has slowed to just +4% & +7% Y/Y.

$14

Transaction Value US$ bn

Mortgage Growth Y/Y

25% 20%

$12 15%

$10 $8

10%

$6

5%

$4 0%

$2 $0

-5%

HK Property Transaction Value HK Mortgage Growth Source: CEIC.

6

39%

40% 33%

30%

24% 21%

20%

19%

19%

17%

13% 8%

10%

9%

9%

7% 1%

0% China

Indonesia

Thailand

Malaysia

Singapore

ULC

Korea

Taiwan

Wages

Source: CEIC.

Figure 19: Increase Consumer Credit / Nominal GDP since 2008 22

19

18

18

14

14

12

12 10

10

5

6

1

2

-1

-2

-5

-2 -6 Mar-14

MY

SG

AU

HK

CH

TH

ID

PH

IN

KR

TW

87

60

85

64

23

78

17

6

10

33

48

Source: CEIC.

Figure 20: Consumer Lending in Indonesia & Thailand 35%

Indonesia HH Credit Growth Y/Y

Thailand HH Credit Growth Y/Y

25%

30%

20%

25%

15%

20%

10%

15%

5%

10%

0%

Indonesia

Thailand (RHS)

Source: CEIC.

Figure 21: Mortgage Growth at BBCA and Mandiri Comes to a Halt

Figure 17: Mortgage Growth Has Slumped in HK/SG As Well $16

3Yr Growth

57%

50%

Chg since 2008 (%)

ASEAN also shows that economic growth has become more dependent on domestic credit post-08, making the region more vulnerable to tighter liquidity and/or higher lending rates going forward. The household sector in particular could be affected by tighter credit supply. Since 2010, we’ve seen a significant rise in wages across the region, underpinning an acceleration in household credit. Over the past 3 years, wages are up +57% in China, +39% in Indonesia, and +24% in Thailand. Rising productivity has helped offset the increase in overall unit labor costs, which is one reason we’ve had very low unemployment alongside low inflation in Asia. This goldilocks scenario has led to rising overall household debt/GDP, as well as private credit/GDP, both of which are shown on the right. Thailand is a better known example, where wage hikes & auto subsidies helped spur an increase in leverage; but it’s been Malaysia with the largest increase in consumer leverage.

SG Property Transaction Value SG Mortgage Growth

85 75

80%

Mortgage Loans in IDR trillions vs. Growth Y/Y on Right Axis

70%

65

60%

55

50%

45

40%

35

30%

25

20%

15

10%

5

0%

Mandiri Mortgage Loans Mandiri Mortgage Growth

Source: Company reports.

BCA Mortgage Loans BCA Mortgage Growth

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Keep an Eye on the Capex Cycle

Figure 22: North Asia: LDRs Decrease Alongside Fixed Investment 100%

Apart from consumer credit, we also think the fixed investment cycle faces headwinds across the region. In ASEAN, there was a sharp deceleration in capex after the Fed's taper scare in mid2013; but since then, fixed asset investment has bounced back to new highs – much like the bank stocks. FAI/GDP is now at the highest level since the Asia Crisis, at 31% of GDP in Indonesia, 26% in Thailand, 26% in Malaysia, and 22% in the Philippines. In the case of Malaysia, fixed investment remains strong, up +9% Y/Y, due to ongoing fiscal stimulus around the ETP. In the case of the Philippines, capex is also being driven by domestic stimulus; but we’d note that accelerating exports are also having a meaningful impact. Indeed, recent export data shows exports growing +7.2% Y/Y against a regional average of +3.4%. We think this reflects a meaningful shift in the production base, with a fall in lower-end electronics being replaced by other manufacturing & machinery & transport. This shift has coincided with an uptick in fixed capital formation excluding construction, which recently reached 13.5% of GDP, the highest level in two years.

North Asia LDR

26%

90% 85%

24%

80% 22%

75% 70%

20%

65% 60%

18%

North Asia LDR

North Asia FAI / GDP

Source: CEIC. FAI based on rolling 12-month forward average for Korea, Taiwan, and Japan.

Figure 23: ASEAN: LDRs Increase Alongside Fixed Investment 85%

25.5%

FAI / GDP

ASEAN LDR

25.0% 80%

24.5% 24.0%

75%

North Asia has more flexibility to boost capex, which fell by ~2200bps over the past 5 years. Recent policy measures in Korea are trying to address domestic capex, although we’re a more cautious on the long-term opportunity here, given the amount of production that has been moved offshore, along with alreadyelevated levels of household leverage. Taiwan faces similar issues, but here we’re a bit more sanguine on overall loan growth, given the lift from the overseas lending (which is still predominantly Taiwan corporate). Indeed, second quarter results show loans grew +11% Y/Y at Fubon, and +12% at Chinatrust. Perhaps India has the biggest opportunity to increase fixed investment, which has languished due to bottlenecks. Recent measures like allowing banks to fund infrastructure credit that is not subject to SLR, CRR, or PSL requirements could help on the funding side. On the fiscal side, we still see issues with local approval over land use & mineral rights, but there is considerable opportunity to boost infrastructure as the government introduces a investment allowance of 15% on qualified manufacturing companies, and several measures to enhance domestic coal production to be in place soon. Policy measures also support the power and utilities sector, and propose new urban construction projects, with highway construction in the pipeline. On August 10, the securities regulator finally approved the setup of REITs and IIT after years of delays, which is believed to further boost the real estate and infrastructure sector by providing a new funding source for developers.

23.5% 70%

23.0% 22.5%

65%

22.0% 60%

21.5%

ASEAN LDR

ASEAN FAI / GDP

Source: CEIC. FAI based on rolling 12-month forward average for Indonesia, Malaysia, and Thailand.

Figure 24: LDR Since 2008: Leverage Higher Today Across Asia 24

33 19

20

16

16

Chg since 2008 (%)

The problem is that fixed investment credit-intensive, and much of the surge in investment post-2008 was accomplished by tapping cheap, excess savings. Over the past 5 years, LDRs have increased materially, rising +16% in Indonesia, +9% in Thailand, and +7% in Malaysia. Indeed, only the Philippines has significant excess liquidity to fuel further growth in FAI, with LDRs exreserve requirements at 77%. This increase in leverage can be explained via the current account, as rising fixed investment has traditionally coincided with rising imports of capital goods. The payment for these imports effectively exports domestic liquidity, leading to a rise in overall leverage.

28%

FAI / GDP

95%

12

9

8

7

4

4

3

3

0

-6

-9

-12

-25 -25

-31

-4 -8 -12 Jun-14

SG

HK

ID

TH

MY

PH

CH

IN

TW

JP

AU

KR

US

EU

112

74

94

92

81

57

68

75

77

69

133

102

76

115

Source: CEIC.

Figure 25: EPS Gearing to a 10bps Rise in Net Interest Margins 10.0 9.0

% Impact to EPS 8.6

8.4 7.6

8.0

7.5

7.0

5.9

6.0

5.9

5.9

5.5

5.0

4.1

4.0

3.0

3.0 2.0 1.0 0.0 TW

HK

SG

KO

CH

PH

MY

TH

IN

ID

Source: J.P. Morgan estimates.

7

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Figure 27: Net Interbank Assets Were Stabilizing Before June Spike

China Banks & Elevated Risk Premium

20

We upgraded China banks back in late May (the report), on the premise that high real lending rates, disinflation, and the threat of asset deflation would spur more policy easing by the PBOC. Since then, we’ve seen consistent, targeted attempts to address liquidity stress, particularly into the large rollover period for WMPs in June. The PBOC used two RRR cuts in April & June to release ~RMB200bn of liquidity, with a focus on city/rural banks & lending directed towards agri & SME borrowers. The central bank then liberalized loan/deposit restrictions in late June, allowing banks to fund credit via financial bonds with a duration over 1 year, freeing up another ~RMB1.6trn of lending capacity. Finally, the recently announced PSL of RMB1trn helped accelerate progress in affordable housing development, while also giving CDB access to lower-cost funding to directly boost lending. Together these measures released ~RMB2.6trn of liquidity capacity, or the equivalent of 250bps of RRR cuts. Moreover, apart from these measures the PBOC has injected some RMB554bn via open market operations since 1Q14, although much of this likely relates to capital outflows of $51.3bn seen in 2Q14. Easing liquidity helped push down SHIBOR by 80bps since early May; yes, deposit rates remain elevated, and banks still face higher funding costs – but easing market rates helps reduce systemic risk all the same, particularly for non-bank financials. Falling market rates also have an impacted deposit alternatives (e.g. internet MMFs, WMPs), as lower market rates reduce the yield advantage relative to traditional deposits. Recent regulations reinforce this trend (Document 127, 104, and Circular 99). In fact, after 3 years of unimpeded growth in shadow banking, there’s evidence that rates & regulation are both weighing on growth in shadow banking. Today, WMP issuance is still roughly flat with the level of Dec13, and trust loans grew 7% Q/Q the past 2 quarters, down from an average pace of 16% in the 6 quarters before that. We’re seeing a similar trend in the interbank market, where credit was subdued for much of the first half up until June, after growing 3-fold over the previous 3 years. Ultimately we realize China’s growth is slowing, but the key here is that the quality of leverage is improving. Banks have more tools to adjust interest rates and duration when credit is on-balance sheet, whereas one of the biggest issues facing the sector has been the shorter durations and higher interest rates of off-balance sheet WMPs and trust loans. We still see attractive entry points for state banks in particular, which have eschewed higher-risk WMP and interbank exposures. Figure 26: PBOC Injected 554bn after 553bn of Withdrawals in 1Q14 -400

RMB bn

Liquidity Injection

-300 -200 -100

6.0%

14

5.0%

12 10

4.0%

8 6

3.0%

4

2.0%

2 -

1.0%

Net Interbank Assets

Figure 28: China Money Market Funds Decelerated with SHIBOR 2,000 1,800

Net Value of Money Market Funds, RMB bn

40%

1,400

20%

1,200 1,000

0%

800

-20%

600 400

-40%

200 0

-60%

Net Value of Money Market Funds

Figure 29: Trust Issuance Has Slowed to ~7% Q/Q the Past 6 Months 5,500 5,000

Trust Loans, RMB Billions

90% 80%

4,500

70%

4,000

60%

3,500

50% Growth Rate, 6M Annualized

3,000 2,500

400

Liquidity Withdrawal

20% 10%

1,000

0%

Trust Loan Outstanding

New Trust Loans as % of Total (6MMA)

Source: CEIC.

Figure 30: WMP Issuance Beginning to Decelerate 5,500

4,000

5,175 5,033 4,837 4,908 4,9204,824

# of Product Issuance

4,403 4,064

4,055 3,891 3,783

4,725 4,051

3,500

Via Maturity

5.5% 5.3% 5.0%

4.5%

2,000

4.3%

1,500

4.0%

2000

Cum. Net Drain (+) / Injection (-) (RHS)

5.8%

4.8%

3,000

# of Product Issuance Via Issuance

30%

1,500

-3000

1000

40%

2,000

2,500

300

8

Growth M/M (RHS)

Source: CEIC.

4,500

0

200

Source: CEIC.

60%

1,600

-4000

-1000

3M SHIBOR (RHS)

Source: CEIC.

5,000

0

7.0%

3M SHIBOR

16

-5000

-2000

100

Net Interbank Assets, RMB tr

18

Source: Wind.

Average WMP Yield (RHS)

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Falling Rates & Decelerating Shadow Credit Apart from the slowdown in shadow banking credit, we have see signs of re-intermediation in China’s monthly credit figures. In July, we saw non-loan credit shrink RMB134bn, with a large contraction in Undiscounted Bills (-416bn), and continued weakness in Trust Loans, where new credit is down -67% over last year. Entrusted loans also halved from the average pace of the first 6 months (RMB225bn), to just 122bn in June. To be sure, traditional lending was also weak last month; but we’d note that the mix of medium- and long-term lending was still strong at RMB389bn. Overall, we think the monthly data points to continued signs of re-intermediation, with traditional RMB bank loans at 57% of TSF in the first 7 months of the year, up from 53% in 2013. Our view is that slower growth in shadow banking & interbank credit would go a long way to reducing system risks that have weighed on the sector the past few years, as it brings total credit growth more in-line with nominal GDP. We concede that credit/GDP is still rising in China (and is set to increase +12% in 2014, based on our estimates). However, the quality of incremental leverage is improving, as banks reintermediate the credit market. As we wrote on the previous page, the shift towards traditional lending is critical because banks have far more flexibility to adjust the rate/duration of loans held on-balance sheet than that of traded securities. In fact, a few weeks ago the CBRC encouraged more flexible loan durations to SMEs. Policymakers have also given banks the capacity to absorb additional lending, by easing LDR restrictions & encouraging pref issuance, which should raise 52-88bps of capital at the big 4. Moreover, unlike traditional banking cycles, China banks have already de-rated throughout the re-leveraging process, which makes us more optimistic that the scepter of de-leveraging will not be the same kind of overhang as has been seen in other markets (see chart on the right). The key with China is whether policy can remain accommodative as credit demand slows, and the banks recognize NPLs. As we’ve noted before, we think policy is still not accommodative enough, with real lending rates at 7.40%, the highest in Asia. This is particularly true in mortgages, where lending rates are up +71bps since the end of 2012, and the proportion of loans above benchmark rates has increased from 60% to 69% over the same period. In short, we think the biggest threat in China remains deflation. Indeed, PPI has now been negative for 29 months, after coming in at -0.9% in July. This has improved in recent months alongside stronger exports; but recent data – from the July TSF, to the most recent flash PMI – shows that we’re hardly out of the woods, and domestic demand remains vulnerable. Moreover, second quarter results at the banks shows that NPLs continue to rise in areas like Manufacturing and Trade, which reflects the persistent problem of overcapacity. Despite questions around the strength of domestic demand, we still see upside in the China state banks. To quote our global strategist, “we like superior risk premia on EM assets in a world that has so little left.” That said, as mentioned earlier, we think the better way to play accelerating volume is in areas like brokers (Galaxy) and insurance (CPIC, PICC P&C, Ping An) which have shown much better balance sheet or NBV growth in first half numbers.

Figure 31: TSF Shows Re-intermediation via Traditional Bank Loans RMB bn

2012

2013

RMB Loans

8,200

8,893

Mar-14 Apr-14 May-14 Jun-14 Jul-14 1,050

775

871

1,081

Y/Y

385

6%

FX Loans

916

585

136

19

(16)

36

(17)

-4%

Entrusted

1,280

2,550

241

158

206

271

122

13%

Trust Loans

1,290

1,840

100

42

12

121

(16)

-67%

Undisc. Bills

1,050

775

211

79

(10)

144

(416)

6%

Corp Bonds

2,250

1,800

246

366

280

267

143

13%

Corp equity

251

222

35

75

14

16

33

70%

TOTAL SF

15,760

17,290

2,070

1,550

1,400

1,970

273

-1%

Non-Loans

6,121

7,187

833

719

502

819

(134)

-11%

Source: PBOC.

Figure 32: Credit / GDP vs Stock Performance in Previous Cycles Increase in Private Credit to GDP

60%

Stock 140% Performance 120%

125% 110%

50%

100%

40% 30%

69%

60%

51%

20%

80% 51%

60% 40%

24%

10%

20%

-17%

0%

0% Philippines Malaysia '95-'97

'95-'97

Spain

Indonesia Greece

'04-'07

'95-'97

'04-'07

Private Credit / GDP

China

Ireland

US

'09-'13

'04-'07

'01-'07

Stock Performance (RHS)

Source: CEIC.

Figure 33: Real Lending Rates Deflated for WPI: China Tightest in Asia 8.00%

7.40%

7.00% 5.46%

6.00%

4.82%

5.00%

4.49% 3.55%

4.00%

3.25%

3.00%

2.07%

2.00%

1.40%

1.00%

0.87%

0.41% 0.29%

0.00% CH

TH

IN

KR

SG

AU

TW

HK

MY

ID

PH

Lending Rate adj WPI Source: CEIC, Bloomberg.

Figure 34: China Loan Pricing & Mortgage Rate – Rising Rates 75 70

% of China Lending Above Benchmark Rates

Mortgage Rate

8.0% 7.5%

65

7.0%

60

6.5%

55

6.0%

50

5.5%

45 40

5.0%

35

4.5%

30

4.0%

Above Benchmark

Mortgage Rate (RHS)

Source: CEIC.

9

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

China’s Influence on Credit in Asia

Figure 35: Interbank Yields Rise at BOCHK and More Recently, DBS Interbank Rates at HSBC and DBS

3.50%

China’s credit market has had an enormous impact on offshore lending. This is particularly the case with trade finance, which has been driven by cross-border carry trades and the pursuit of higher asset yields. Indeed, one thing we’ve seen across results in HK and Singapore is the rise in interbank returns, which reflects CNH created during trade settlement being recycled back onshore. This channel helped boost interbank yields at BOCHK by +130bps over the past 2.5 years, and +31bps in the first half of 2014 alone. DBS also saw a spike in interbank rates in the first quarter (+35bps), although returns fell by 17bps in the second quarter, reflecting the decline in SHIBOR. We’d argue that much of the increase in trade finance has been related to over-invoicing in China, despite reassurances from banks that this is "genuine trade". Our view is partly supported by the recent slump in trade finance, which coincided with increased scrutiny on over-invoicing, as well as a narrowing in the trade gap between Hong Kong & China. Indeed, the gap between HK/CH trade narrowed from an average of $15bn per month in the first half of 2013, to $7 billion in the first half of 2014. This narrowing gap paralleled with a sharp deceleration in trade finance across the region. At HSBC, international trade loans related to Asia actually shrunk $337mm in the first quarter, to $79.0bn, after rising +18% over the course of 2013. Mgmt cited decreased demand from usance DCs in particular, which are used to borrow offshore in USD against deposits onshore in RMB – a typical channel for the RMB carry-trade. Likewise, StanChart has mentioned that growth slowed significantly from the pace of last year (+21% Y/Y growth of average assets), in part because of a more disciplined approach to pricing, after the significant margin compression seen in 2013 (down -21bps Y/Y). DBS gave a slightly different explanation for why their trade balances have been flat the past 3 quarters at $63.0bn, after rising +21% Y/Y in 2013. In their case, the bank is stepping back from volume growth to ensure the asset quality of the portfolio, despite assurances that the asset quality is pristine. Whatever the reason, trade finance may not turn out to be the structural growth industry that was promised. Yes, RMB will become an increasingly important currency for trade settlement, rising from close to zero in 2009 to just over 16% of China’s trade today, or $731bn. Indeed, StanChart's own international payment flows in RMB were up 84% in 2013, and RMB trade settlement rose +78% Y/Y on a system basis in HK. But that is more of shift from one currency (USD) to another (RMB), not a creation of new trade and/or financing growth. Should RMB show less appreciation, and interest rates come down (or US rates go up), we could see a significant slowdown in trade finance from previous years, and it may not turn out to be the “structural growth opportunity” so billed by several of the banks in the region. One final area of credit impacted by China has been USD bond issuance in the region, which has been increasingly used by developers. In fact, over 48% of all high-yield issuance in Asia last year was from China corporates, with property developers accounting for nearly 80% of issuance. Today, the average property developer in China has nearly 45% of its total debt financing in non-RMB, demonstrating that China too has been a significant beneficiary of QE. 10

RMB in billions

700

3.00%

600

2.50%

500

2.00%

400

1.50%

300

1.00%

200

0.50%

100

0.00%

0

RMB Trade Settlement

BOCHK

DBS

3M HIBOR

Source: Company data, CEIC.

Figure 36: Growth in Trade Balances Across the Region HSBC Trade Finance, $bn

$200

$70 $65

$190

$60 $55

$180

$50

$170

$45 $40

$160

$35 $30

DBS & ANZ Trade Finance, $bn

$150

$25

$140

$20

HSBC

DBS

ANZ

Source: Company reports.

Figure 37: Other Factors May Have Influenced Trade Finance $45

USD bn

$40 $35 $30 $25 $20 $15 $10

China Exports to HK

HK Imports from China

Source: CEIC.

Figure 38: China Funding High Yield Credit through USD Bond Issuance China Corporates High Yield Inv.Grade Total Issuance 20

USD Bond Issuance 2011 2012 2013 $7.9 $10.4 $18.1 10.9 21.0 37.1 18.8 31.4 55.2

2010 $9.1 3.0 12.1

70%

US$ bn 58.2%

18 48.1%

16

32.7%

10

40%

14.40

30%

8

18.8%

6

0

39.6%

37.3%

12

2

60% 50%

14

4

YTD $10.1 37.3 47.4

12.8% 0.68 0.20 2005

6.42 7.3%

5.5% 0.65 0.0% 1.60 1.38 0.33 0.00 2006 2007 2008 China Industrials

Source: Bloomberg, J.P. Morgan, as of July 18.

3.45

3.35 0.60 2.05 0.46 2009 2010 2011 China Properties

8.07

6.91

2.30

3.83

20% 10%

2.05

2012 2013 YTD % of Asia HY issuance

0%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Comp Sheet for Asia-ex Bank Stocks 29-Aug-14

Bbg code

Australia Commonwealth (A$) CBA AU Westpac (A$) WBC AU ANZ Banking (A$) ANZ AU Nat'l Aust. Bank (A$) NAB AU Average China ICBC-H 1398 HK ICBC-A 601398 CH China Construction Bank - H (HK$) 939 HK Agricultural Bank of China- H 1288 HK Bank of China - H (HK$) 3988 HK Bank of China-A 601988 CH Bank of Communications - H (HK$) 3328 HK China Merchant Bank-H 3968 HK China Merchants Bank (Rmb) 600036 CH China Minsheng Banking (HK$) 1988 HK China Minsheng Banking (Rmb) 600016 CH China CITIC Bank-H 998 HK Chongqing Rural Commercial Bank 3618 HK Average Hong Kong Bank of China-HK (HK$) 2388 HK Hang Seng (HK$) 11 HK Bank of East Asia (HK$) 23 HK Dah Sing Banking Group (HK$) 2356 HK Dah Sing Financial (HK$) 440 HK Average India HDFC Bank (Rs) HDFCB IN SBI (Rs) SBIN IN ICICI Bank (Rs) ICICIBC IN HDFC (Rs) HDFC IN Axis Bank (Rs) AXSB IN Kotak Mahindra Bank (Rs) KMB IN Bank of Baroda (Rs) BOB IN Punjab National Bank (Rs) PNB IN IndusInd Bank (Rs) IIB IN Yes Bank (Rs) YES IN Infrastructure Development Finance Co. (Rs) IDFC IN Bank of India (Rs) BOI IN Average Indonesia BCA (Rp) BBCA IJ Bank Rakyat Indonesia (Rp) BBRI IJ Bank Mandiri (Rp) BMRI IJ Bank Negara Indonesia (Rp) BBNI IJ Danamon (Rp) BDMN IJ Average

Price (LC)

Rating

Dec 14 PT (LC)

% to PT

Mkt Cap USD mn

P/E FY14E FY15E

P/BV FY13 FY14E

Div Yield FY13 FY14E

81.32 35.04 33.43 35.20

N OW UW UW

78.32 35.38 34.70 35.22

-4% 1% 4% 0%

123,434 101,991 86,274 77,964

15.1 14.7 12.9 14.6 14.3

5.14 3.46 5.76 3.58 3.60 2.68 5.66 14.82 10.56 7.28 6.26 4.89 3.85

OW OW OW N OW OW UW N N UW UW N UW

6.20 5.00 6.80 3.90 4.10 3.30 4.60 15.40 12.35 6.70 5.40 4.20 3.40

21% 45% 18% 9% 14% 23% -19% 4% 17% -8% -14% -14% -12%

206,578 206,577 184,961 130,499 124,225 124,225 52,337 44,235 44,234 34,131 34,130 31,616 4,620

26.05 130.90 33.00 13.92 45.50

OW OW N N OW

30.00 146.00 33.00 13.80 50.00

15% 12% 0% -1% 10%

843.55 2,460.70 1,556.80 1,074.50 397.25 1,037.55 871.50 948.15 585.45 572.05 144.25 277.45

OW N OW OW OW OW OW UW UW UW OW UW

1,025.00 2,500.00 1,650.00 1,100.00 460.00 1,150.00 1,000.00 820.00 490.00 475.00 180.00 270.00

11,825 11,100 10,500 5,475 3,780

OW OW N UW UW

13,000 12,000 9,500 4,400 3,000

ROE % YTD FY14E FY15E USD

14.7 13.7 12.2 12.4 13.2

2.91 2.29 1.99 1.78 2.25

2.70 2.23 1.88 1.72 2.13

4.5% 5.5% 4.9% 5.4% 5.1%

4.9% 5.2% 5.3% 5.7% 5.3%

18.8% 16.0% 15.5% 13.3% 15.9%

18.2% 16.2% 15.5% 13.8% 15.9%

12.4% 16.6% 11.6% 9.2% 12.5%

5.0 4.2 4.8 4.9 4.6 4.4 5.0 5.2 4.6 5.1 4.4 4.2 4.2 4.8

4.5 3.9 4.4 4.4 4.2 4.0 4.8 4.7 4.2 4.8 4.2 3.9 3.8 4.4

1.12 0.95 1.07 1.09 0.86 0.81 0.79 1.12 1.00 1.04 0.90 0.80 0.78 0.97

0.97 0.83 0.93 0.95 0.77 0.72 0.71 0.96 0.87 1.02 0.88 0.71 0.69 0.86

6.4% 7.6% 6.6% 6.2% 6.9% 7.3% 5.8% 5.3% 5.9% 3.5% 4.1% 6.5% 6.2% 5.9%

7.0% 8.3% 7.3% 7.1% 7.5% 8.0% 4.0% 5.8% 6.5% 3.9% 4.6% 6.0% 7.1% 6.2%

21.0% 21.0% 20.8% 20.6% 17.5% 17.5% 15.0% 20.1% 20.1% 21.1% 21.1% 17.9% 17.3% 19.0%

20.0% 20.0% 19.7% 20.1% 17.1% 17.1% 14.2% 19.3% 19.3% 19.5% 19.5% 17.1% 17.0% 18.2%

4.6% 2.5% 5.2% -1.4% 8.0% 8.5% 10.0% -5.6% 1.7% 1.5% -2.8% 24.3% 9.4% 6.2%

35,538 32,292 9,917 2,517 1,967

11.4 13.8 11.6 10.0 8.8 11.1

10.2 12.6 10.8 9.3 8.2 10.2

1.73 2.42 1.19 1.02 0.81 1.43

1.57 2.23 1.12 0.98 0.80 1.34

3.9% 4.2% 3.3% 2.4% 2.7% 3.3%

4.2% 4.0% 3.4% 2.5% 2.8% 3.4%

14.5% 16.8% 9.9% 10.5% 9.7% 12.3%

14.8% 16.9% 10.2% 10.1% 9.4% 12.3%

7.0% 7.0% 2.7% 8.0% 9.2% 6.8%

22% 2% 6% 2% 16% 11% 15% -14% -16% -17% 25% -3%

33,564 30,296 29,699 27,784 15,449 13,189 6,172 5,661 5,096 3,917 3,609 2,939

19.5 10.6 15.8 26.4 12.7 25.1 6.5 9.1 17.8 12.5 12.9 6.3 14.6

15.5 8.1 12.9 22.2 10.6 19.9 5.5 8.2 14.4 10.1 12.0 5.7 12.1

4.65 1.25 2.46 6.00 2.44 4.34 1.07 1.00 3.56 2.90 1.45 0.67 2.65

3.93 1.15 2.23 5.67 2.11 3.79 0.95 0.93 3.04 2.06 1.46 0.62 2.33

0.8% 1.8% 1.5% 1.3% 5.0% 0.1% 2.5% 3.2% 0.6% 1.4% 1.8% 1.8% 1.8%

1.0% 2.2% 1.9% 1.5% 6.0% 0.1% 3.2% 3.5% 0.7% 1.6% 2.2% 2.2% 2.2%

21.7% 9.7% 13.8% 21.1% 17.7% 15.3% 15.6% 9.6% 18.1% 20.3% 11.5% 11.0% 15.4%

22.9% 12.0% 15.4% 22.9% 18.3% 17.0% 16.3% 10.9% 19.1% 18.9% 11.6% 11.4% 16.4%

30.3% 44.2% 46.8% 39.9% 57.5% 45.5% 41.8% 57.2% 42.9% 59.9% 36.4% 21.4% 43.7%

10% 8% -10% -20% -21%

24,933 23,418 20,953 8,732 3,098

16.1 12.1 12.0 10.7 10.0 12.2

13.6 10.5 10.3 10.3 9.4 10.8

4.56 3.46 2.80 2.14 1.16 2.82

3.76 2.88 2.40 1.88 1.08 2.40

1.0% 2.3% 1.9% 2.6% 3.3% 2.2%

1.6% 2.5% 2.1% 2.8% 3.0% 2.4%

25.6% 26.0% 21.6% 18.7% 11.1% 20.6%

25.1% 25.0% 21.5% 17.2% 11.0% 20.0%

29.1% 63.7% 42.7% 48.7% 7.5% 38.3%

Source: Company Data, Bloomberg, J.P. Morgan estimates, as of Aug 29, 2014

11

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Comp Sheet for Asia-ex Bank Stocks (Continued) 29-Aug-14

Bbg code

Korea Shinhan Financial (Won) 055550 KS KB Financial (Won) 105560 KS Industrial Bank of Korea (Won) 024110 KS DGB Financial Group Inc (Won) 139130 KS Average Malaysia Maybank (M$) MAY MK Public Bank (F) (M$) PBK MK CIMB Group Holdings (M$) CIMB MK Hong Leong Bank (M$) HLBK MK RHB Capital (M$) RHBC MK AMMB Holdings (M$) AMM MK Average Philippines Bank of the Philippine Islands (BPI) (Peso) BPI PM Banco De Oro (Peso) BDO PM Metropolitan Bank and Trust Company (Peso) MBT PM Philippine National Bank (Peso) PNB PM Security Bank Corp (Peso) SECB PM East West Banking Corporation (Peso) EW PM Average Singapore DBS Holdings (S$) DBS SP UOB (S$) UOB SP Average Taiwan Cathay FHC (NT$) 2882 TT Fubon FHC (NT$) 2881 TT Mega Financials (NT$) 2886 TT Chinatrust FHC (NT$) 2891 TT First FHC (NT$) 2892 TT E.Sun (NT$) 2884 TT Taishin FHC (NT$) 2887 TT Sinopac FHC (NT$) 2890 TT Shinkong FHC (NT$) 2888 TT Average Thailand Siam Commercial (Bt) SCB TB Kasikorn Bank (Bt) KBANK TB Bangkok Bank (Bt) BBL TB Krung Thai Bank (Bt) KTB TB Bank of Ayudhya (Bt) BAY TB TMB Bank (Bt) TMB TB Thanachart Capital (Bt) TCAP TB Kiatnakin Finance (Bt) KKP TB TISCO Finance (Bt) TISCO TB Average Regional/Global HSBC Holdings (US$) 5 HK Standard Chartered (US$) 2888 HK Average

Price (LC)

Rating

Dec 14 PT (LC)

% to PT

52,500 41,550 17,600 17,700

OW N OW OW

65,000 50,000 21,000 21,500

24% 20% 19% 21%

24,517 15,809 9,576 2,337

11.3 10.2 10.0 9.1 10.5

10.12 19.26 7.35 14.38 9.20 6.70

OW N NR OW NR UW

11.00 19.00 NR 16.50 NR 6.20

9% -1% NR 15% NR -7%

29,346 23,539 19,440 8,206 7,500 6,407

95.00 90.50 85.95 87.30 126.60 29.10

N OW OW N OW UW

84.00 80.00 85.00 85.00 130.00 26.00

-12% -12% -1% -3% 3% -11%

17.94 23.15

OW UW

20.00 22.00

51.00 48.80 25.80 21.75 18.50 19.65 15.20 13.65 9.75

OW OW N OW N OW N N N

188.50 227.00 207.00 23.60 50.00 3.02 35.00 41.75 43.75

83.65 157.20

Source: Company Data, Bloomberg, J.P. Morgan estimates, as of Aug 29, 2014

12

Mkt Cap USD mn

P/E FY14E FY15E

P/BV FY13 FY14E

Div Yield FY13 FY14E

ROE % YTD FY14E FY15E USD

10.1 9.5 9.0 7.7 9.3

1.1 0.7 1.1 0.9 0.89

1.0 0.7 0.9 0.9 0.83

1.2% 1.2% 1.9% 1.6% 1.4%

1.7% 1.9% 3.3% 2.2% 2.1%

8.3% 6.0% 7.2% 9.2% 7.2%

8.7% 6.1% 7.3% 10.0% 7.6%

15.2% 2.1% 50.3% 11.3% 15.4%

13.3 16.3 NR 13.0 NR 11.3 13.3

12.4 14.9 NR 11.8 NR 11.1 12.4

1.95 3.3 NR 2.1 NR 1.67 2.05

1.83 2.7 NR 1.9 NR 1.54 1.84

5.3% 2.7% NR 3.1% NR 3.3% 3.5%

6.4% 2.7% NR 2.4% NR 3.6% 3.5%

15.3% 18.2% NR 15.1% NR 14.1% 14.6%

15.3% 17.2% NR 15.1% NR 13.4% 14.3%

9.4% 8.3% 1.9% 5.0% 22.7% -3.7% 7.3%

8,555 7,427 5,407 2,499 1,749 753

21.3 15.7 16.2 17.7 11.8 15.5 16.4

17.7 14.6 14.5 12.2 10.4 11.6 13.5

3.23 1.96 1.92 1.17 1.83 1.69 1.97

2.69 1.83 1.82 1.11 1.65 1.53 1.77

1.9% 1.5% 0.9% 0.0% 1.3% 0.0% 0.9%

2.1% 1.3% 0.9% 0.0% 1.4% 0.0% 1.0%

14.4% 12.1% 11.5% 6.9% 14.6% 10.4% 11.6%

14.6% 11.9% 12.0% 8.8% 15.0% 12.3% 12.4%

16.9% 36.4% 17.0% 4.5% 12.2% 21.7% 18.1%

11% -5%

35,377 29,728

10.5 12.6 11.5

9.8 12.5 11.1

1.33 1.51 1.42

1.14 1.43 1.28

3.2% 3.2% 3.2%

3.3% 3.2% 3.3%

11.4% 11.6% 11.5%

11.2% 11.3% 11.2%

8.1% 13.1% 10.6%

57.00 54.00 27.40 24.00 19.20 23.20 15.70 13.23 10.80

12% 11% 6% 10% 4% 18% 3% -3% 11%

21,440 16,711 10,748 10,708 5,732 4,638 4,496 4,052 3,044

13.7 10.8 10.9 7.6 12.1 12.3 9.6 9.5 12.2 11.0

16.1 10.6 10.2 10.1 11.2 10.4 9.1 8.8 10.0 10.7

2.17 1.58 1.33 1.66 1.14 1.31 1.18 1.03 0.90 1.37

1.58 1.38 1.24 1.39 1.14 1.22 1.18 0.95 0.84 1.21

2.9% 3.1% 4.3% 1.7% 2.7% 1.6% 3.0% 2.5% 0.6% 2.5%

2.2% 3.1% 4.3% 2.8% 2.5% 1.6% 2.1% 2.6% 0.8% 2.5%

13.6% 13.6% 11.8% 20.0% 9.7% 11.0% 13.2% 10.4% 7.2% 12.3%

9.5% 12.5% 11.8% 13.1% 9.8% 11.1% 12.3% 10.4% 8.0% 10.9%

14.4% 15.7% 2.6% 8.7% -0.5% 0.8% 4.4% -8.3% -5.5% 3.6%

OW OW N OW N UW UW UW N

200.00 230.00 225.00 25.00 35.00 2.10 34.00 42.00 45.00

6% 1% 9% 6% -30% -30% -3% 1% 3%

20,042 16,943 12,377 10,288 9,513 4,132 1,323 1,099 1,097

11.5 11.5 10.1 10.3 18.3 16.9 8.2 9.7 7.4 11.5

10.4 10.3 9.2 9.4 15.9 14.9 8.2 9.2 6.8 10.5

2.60 2.48 1.34 1.60 2.46 2.13 0.94 1.00 1.52 1.79

2.26 2.10 1.24 1.46 2.29 1.95 0.88 0.97 1.36 1.61

2.7% 1.3% 3.4% 3.7% 1.6% 1.1% 4.3% 7.2% 5.5% 3.4%

2.9% 1.5% 3.9% 3.8% 2.4% 1.5% 4.3% 7.2% 5.5% 3.7%

21.1% 19.8% 12.8% 14.8% 13.0% 12.0% 11.2% 10.2% 19.3% 14.9%

20.3% 18.9% 12.9% 14.8% 13.8% 12.5% 10.4% 10.4% 18.8% 14.7%

37.7% 51.5% 21.9% 53.4% 69.7% 52.4% 14.4% 19.2% 22.2% 38.0%

N N

92.00 169.00

10% 8%

206,155 50,104

12.4 11.0 11.7

10.9 10.5 10.7

1.12 1.06 1.09

1.08 1.01 1.04

4.5% 4.2% 4.4%

4.8% 4.3% 4.6%

8.9% 9.7% 9.3%

9.7% 9.6% 9.7%

2.3% -6.8% -2.2%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Figure 39: China: LDR vs. Stock Performance

Figure 43: Indonesia: LDR vs. Stock Performance

800

100%

2000

120%

700

95%

1800

110%

90%

1600

100%

85%

1400

90%

80%

1200

80%

400

75%

1000

70%

300

70%

800

60%

65%

600

50%

60%

400

40%

100

55%

200

30%

0

50%

0

20%

600 Rate Hike Cycle

500

200

LDRs

LDRs

MSCI CH Financials

MSCI ID Financials

Source: CEIC, Bloomberg.

Source: CEIC and Bloomberg.

Figure 44: Malaysia: LDR vs. Stock Performance

Figure 40: Korea: LDR vs. Stock Performance 400

160%

450

110%

400

105%

350

100%

350

140%

300

120%

250

100%

200

80%

150

60%

150

100

40%

100

80%

50

20%

50

75%

0

0%

0

70%

300

95%

250

90%

200

85%

Securities/Deposit

LDRs

MSCI KR Financials

Source: CEIC and Bloomberg.

120%

180

110%

160

100%

140 120

90%

100 80

80%

60

70%

40

60%

20 0

50%

LDRs

MSCI MY Financials

Figure 45: Philippines: LDR vs. Stock Performance

Figure 41: Taiwan: LDR vs. Stock Performance 200

LDRs

Source: CEIC, Bloomberg.

350

100%

300

90%

250

80%

200 70% 150 60%

100 50

50%

0

40%

LDRs

MSCI TW Financials

Source: CEIC and Bloomberg.

MSCI PH Financials

Source: CEIC, Bloomberg.

Figure 46: Thailand: LDR vs. Stock Performance

Figure 42: Japan: LDR vs. Stock Performance 200

105%

400

150%

180

100%

350

140%

160

95%

300

130%

90%

250

140 120

Rate Hike Cycle

100

85% 80%

80

75%

60 40

70%

20

65%

0

60%

LDRs

Source: CEIC and Bloomberg.

120% 110%

200

100%

150

90%

100

80%

50

70%

0

60%

LDRs

MSCI JP Financials

MSCI TH Financials

Source: CEIC, Bloomberg.

13

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Figure 47: China: LDR vs. Current Account/GDP

Figure 51: Indonesia: LDR vs. Current Account/GDP

100%

0.0%

95%

1.0%

90%

2.0%

85%

3.0%

80%

4.0%

75%

5.0%

70%

6.0%

65%

7.0%

60%

8.0%

55%

9.0%

50%

10.0%

LDRs

120%

-4.0% -3.0%

100%

-2.0% -1.0%

80%

0.0%

60%

1.0% 2.0%

40%

3.0% 4.0%

20%

5.0%

0%

6.0%

LDRs

Current Account as % GDP (RHS)

Current Account as % GDP (RHS)

Source: CEIC, Bloomberg

Source: CEIC and Bloomberg.

Figure 52: Malaysia: LDR vs. Current Account/GDP

Figure 48: Korea: LDR vs. Current Account/GDP 140%

-5.0%

105%

130%

-3.0%

100%

120%

-1.0%

110%

1.0%

100%

3.0%

90%

5.0%

85%

80%

7.0%

80%

70%

9.0%

60%

11.0%

50%

13.0%

40%

15.0%

LDRs

-10.0% -5.0%

95% 0.0%

90%

5.0% 10.0%

75% 15.0%

70% 65%

20.0%

LDRs

Current Account as % GDP (RHS)

Current Account as % GDP (RHS)

Source: CEIC, Bloomberg.

Source: CEIC and Bloomberg.

Figure 53: Philippines: LDR vs. Current Account/GDP

Figure 49: Taiwan: LDR vs. Current Account/GDP 115%

0.0%

110%

-6.0%

110%

2.0%

100%

-4.0%

4.0%

90%

-2.0%

6.0%

80%

0.0%

8.0%

70%

2.0%

10.0%

60%

4.0%

50%

6.0%

40%

8.0%

105% 100% 95% 90% 85% 80%

12.0%

75% 70%

14.0%

LDRs

LDRs

Current Account as % GDP (RHS)

Source: CEIC and Bloomberg.

Figure 54: Thailand: LDR vs. Current Account/GDP

Figure 50: Japan: LDR vs. Current Account/GDP 105%

-1.0%

100%

0.0%

95%

1.0%

90%

120%

80%

3.0%

100%

70%

0.0% 5.0%

90% 80%

65%

5.0%

70%

60%

6.0%

60%

LDRs

-5.0%

130% 110%

4.0%

-10.0%

140%

2.0%

75%

14

150%

85%

Source: CEIC and Bloomberg.

Current Account as % GDP (RHS)

Source: CEIC, Bloomberg.

10.0% 15.0%

LDRs

Current Account as % GDP (RHS)

Source: CEIC, Bloomberg.

Current Account as % GDP (RHS)

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Figure 55: US: LDR vs. Stock Performance

Figure 57: EU: LDR vs. Stock Performance

180

110%

160

160

105%

140

140

100% 95%

120

90%

100 80 60

80 60

75%

40

70% 65%

0

60%

LDRs

120% 100% 80%

20 0

60%

LDRs

MSCI US Financials

MSCI EU Financials

Source: CEIC and Bloomberg.

Source: CEIC and Bloomberg.

Figure 58: EU: LDR vs. Current Account/GDP

Figure 56: US: LDR vs. Current Account/GDP -7.0%

180%

-6.0%

160%

95%

-5.0%

140%

90%

-4.0%

110% 105% 100%

85% 80%

-3.0%

75%

-2.0%

70%

-1.0%

65% 60%

0.0%

LDRs Source: CEIC, Bloomberg

140%

100

80%

20

160%

120

85%

40

180%

-2.0% -1.5% -1.0% -0.5% 0.0%

120%

0.5%

100%

1.0% 1.5%

80%

2.0%

60%

2.5%

LDRs

Current Account as % GDP (RHS)

Current Account as % GDP (RHS)

Source: CEIC, Bloomberg.

15

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Figure 60: NIMs Under Pressure from Rise in Funding Costs

China: Mixed Margins on Rates & Risk China banks showed mixed trends in NIMs this quarter, with investment & interbank portfolios adding significant volatility to results. Underlying loan-deposit spreads were more consistent across banks, and fell -8bps H/H for the sector. This compression was driven by flat lending yields and rising deposit costs, particularly as depositors shift to higher-rate time deposits, a trend we’ve witnessed in other parts of Asia. Indeed, on a system basis, CASA deposits rose +5% YTD, while time deposits rose +12%. Of the state banks, ICBC showed the best margin performance, with NIMs up +4bps Q/Q; but here too, loan-deposit spreads fell -5bps, and the real driver was an increase in investment (+10bps) and interbank (+46bps) yields. Likewise, CCB saw a large jump in investment yields (+21bps) and interbank yields (+69bps), although here it was not enough to offset the rise in interbank funding costs (+98bps). Strangely, ABC saw the exact opposite, where falling interbank yields (-20bps Q/Q) was the big drag on NIMs, which fell 6bps Q/Q. Volatility in NIMs was more pronounced at the JSBs, where banks used higher-return investments to offset the pressure on overall funding costs. CITIC Bank saw NIMs fall -25bps H/H, due to a contraction in both loan-deposit spreads (-12bps) as well as interbank spreads (-91bps). However, the bank offset some of this pressure by increasing high-yield investments, where rates rose +156bps H/H to 5.31%. Indeed, investments rose from 10% of total earning assets in 2H13 to 21% today, by surging some +141% H/H. Likewise, Minsheng increased on-balance sheet NSCAs by +19% H/H, and rising interbank (+29bps) and investment yields (+16bps) helped offset declining loan-deposit spreads (-20bps). Part of the decline in L-D spreads at Minsheng is due to the de-risking of its small-micro loan book, which fell from 26% to 24% of total loans this half. Overall, we think NIMs are likely to decline going forward, as pressure builds on banks to lower lending rates (e.g. mortgages), and deposit costs continue to rise. This should favor state banks, but even they face challenges to sustain low cost funding. ABC, for example, saw demand deposits decline from 55% to 52% of total deposits in the half. Our view would be to look past headline NIMs, and focus on changes in asset composition to see who is “reaching for yield” to offset funding pressure. We think those reaching for yield are mostly JSBs, which is why we’re still bearish on the stocks.

NIM

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

YTD

ABC

2.80%

2.78%

2.70%

2.77%

2.92%

2.96%

2.90%

-0.06%

ICBC

2.66%

2.59%

2.56%

2.56%

2.59%

2.60%

2.64%

0.04%

BOC

2.21%

2.22%

2.24%

2.20%

2.31%

2.29%

2.25%

-0.04%

CCB

2.77%

2.71%

2.71%

2.71%

2.82%

2.81%

2.78%

-0.03%

BoCom

2.49%

2.53%

2.43%

2.40%

2.38%

2.32%

2.37%

0.05%

Citic

2.80%

2.65%

2.51%

2.64%

2.58%

2.37%

2.36%

-0.01%

CMB

2.97%

2.93%

2.85%

2.73%

2.79%

2.65%

2.49%

-0.16%

MSB

2.65%

2.45%

2.38%

2.31%

2.83%

2.62%

2.61%

-0.01%

CQRB

3.61%

3.31%

3.49%

3.40%

3.48%

3.39%

3.43%

0.04%

Total

2.77%

2.69%

2.65%

2.64%

2.74%

2.67%

2.65%

-0.02%

StateBk

2.59%

2.57%

2.53%

2.53%

2.60%

2.60%

2.59%

-0.01%

JSBs

2.81%

2.68%

2.58%

2.56%

2.73%

2.55%

2.49%

-0.06%

Source: Company reports.

Figure 61: Volatility in Interbank Spreads Lead to Mixed Trends Loan-Deposit Spread 1H13

2H13

1H14

1H13

2H13

1H14

ABC

4.47%

4.26%

4.24%

4.21% -0.12%

0.48%

1.04%

2.04%

ICBC

4.10%

3.85%

3.80%

3.75%

0.23%

0.53%

0.32%

0.77%

BOC

3.51%

3.30%

3.25%

3.17%

0.99%

1.26%

1.81%

2.40%

CCB

4.30%

3.94%

3.87%

3.92%

0.42%

1.22%

1.67%

1.38%

BoCom

4.17%

4.02%

3.95%

3.90% -0.61% -0.30% -0.38% -0.26%

Citic

4.33%

4.00%

3.97%

3.85%

0.24%

0.41%

0.52% -0.39%

CMB

4.53%

4.25%

4.20%

4.05% -0.06%

0.55%

0.22%

0.49%

MSB

4.99%

4.69%

4.76%

4.56%

0.52%

0.16% -0.23%

0.29%

CQRB

5.52%

5.16%

5.18%

5.06%

0.84%

1.11%

0.88%

0.99%

Se ctor

4.44%

4.16%

4.14%

4.05%

0.27%

0.60%

0.65%

0.86%

State Bk

4.10%

3.84%

3.79%

3.76%

0.38%

0.87%

1.21%

1.65%

JSBs

4.84%

4.52%

4.53%

4.38%

0.38%

0.56%

0.35%

18% 16%

16%

0.35%

Figure 62: Interbank Book Jumped into Half-Year at JSBs Interbank Assets (Q/Q)

14%

12%

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

ABC

-9.6%

3.7%

6.7%

18.4%

5.4%

5.2%

2.5%

3.1%

ICBC

-5.4%

0.6%

3.4%

8.9%

2.4%

3.5%

0.1%

5.1%

BOC

10.3%

-1.1%

16.5%

4.9%

0.8%

6.3%

1.4%

4.9%

CCB

-33.9%

-5.0%

47.0%

-13.6%

3.7%

4.2%

0.2%

4.7%

3.6%

5.5%

-1.3%

11.4%

-1.1%

1.2%

-2.2%

8.2%

Citic

-16.2%

15.6%

5.5%

10.8%

7.6%

4.3%

-4.1%

6.1%

CMB

-20.9%

11.6%

16.5%

60.0%

3.0%

4.8%

-0.6%

5.7%

MSB

-15.4%

-14.8%

-10.7%

22.3%

-2.1%

12.1%

-5.6%

5.7%

CQRB

1.6%

1.4%

16.1%

14.4%

1.0%

3.3%

3.3%

7.9%

Total

-9.5%

2.0%

11.1%

15.3%

2.3%

5.0%

-0.5%

5.7%

State Bk

-7.0%

0.8%

14.4%

6.0%

2.2%

4.1%

0.4%

5.2%

-17.5%

4.2%

3.8%

31.0%

2.9%

7.1%

-3.4%

5.8%

BoCom

JSBs

Source: Company reports.

Figure 63: Tight Liquidity Has Compressed NIMs at JSBs

12%

3.01%

6%

6%

2.50%

6% 4%

2% 0%

0%

2.80%2.81% 2.68% 2.58%

2.60%

8%

6% 1%

0%

5%

2.40%

2.64% 2.53% 2.55%

WMP/Assets

NSCA/Assets

2.56%

2.58% 2.57% 2.57%2.59%2.57%

2.73% 2.56% 2.60%

2.53%2.53%

2.30%

1% StateBk Source: Company reports.

16

2.94%

2.70%

7%

Source: Company reports.

3.17%

2.80%

10%

8%

2%

3.11%

2.90%

13%

10%

4%

3.20%

3.20% 3.00% 2.91%

13% 13% 12%

Net Interest Income (Q/Q)

3Q13

3.10%

16%

2H12

Source: Company reports.

3.30%

Figure 59: Growth in NSCAs and WMPs Helped Boost JSB Earnings

Interbank Spread

2H12

JSBs

2.55% 2.49% 2.60% 2.59%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

China: Asset Quality Still Under Pressure As mentioned on the previous page, we remain more focused on risk management than returns, in part because markets currently give little credit to the latter. Asset quality continued to deteriorate this quarter, with NPLs rising +11% Q/Q for the sector and Overdue loans rising +36% in the first half. We’d note that across the sector, Overdue loans rose at a faster pace than that of NPLs, which may indicate some relaxation or time lag on NPL recognition. At CITIC Bank, NPLs rose +26% H/H, while Overdue loans rose +52%, pushing the ratio of NPLs/Overdues to fall from 56% of loans to 47% in the first half. Minsheng also saw this ratio plummet, with NPLs/Overdues falling from 49% to 35% in the first half, after Overdue loans spiked by +67%. Asset quality showed the sharpest deterioration at Chongqing Rural Bank, where NPLs surged +30% Q/Q, and yet still the NPL/OD ratio fell from 65% to 49%, as Overdues rose +57% H/H. As we’ve highlighted before, the biggest area of weakness at Chongqing was in the Manufacturing sector, where the NPL ratio rose from 0.70% to 1.89% in the first half. The rise in NPLs may also have been tempered by increasing write-offs and NPL sales, which we've highlighted in the past. BOC wrote-off or disposed of RMB10bn of NPLs during the first half, up from 2bn last year. Likewise, ICBC wrote-off RMB17bn of loans, and sold RMB4.1bn of NPLs at a 40.6% discount. Minsheng was also more aggressive in managing NPLs, reducing them by RMB5-6bn via internal restructuring, and writing off another RMB3.2bn, twice the amount of last year. Write-offs and sales can cap NPL ratios, but our view is that areas with overcapacity – particularly those in exportoriented areas – will continue to see deterioration. This is why high-frequency datapoints like PMI and IP remain important drivers for the stocks. Banks with larger exposure to the East Coast in particular have been hit, which is why we think the JSBs have seen much weaker asset quality than state banks. Indeed, manufacturing & trade credit account for 25% of total loans; yet they account for 63% of system NPLs. In the past 2.5 years, NPLs in these two sectors are up almost RMB127 billion (or +92%), whereas system-wide NPLs are only up RMB121 billion (or +39%). In effect, while NPLs were rising in export-related sectors, they were being partially offset by falling NPLs in areas like real estate (-33% since Dec 2011), Transport (-32%) and utilities (-65%). This is particularly important to take into account as we look at the geographic mix of NPLs on the following pages. Figure 64: Retail Weakness in Both Housing + Other Personal Loans ABC ICBC BOC CCB BoCom Citic CMB M SB CQRB Sector Loan Gr.

2H11 5% 11% 3% -7% n.a. -3% 2% n.a. -28% 4% 8%

H/H NPL Grow th: Retail Retail as a % of 1H12 2H12 1H13 2H13 1H14 Loans NPLs 9% 11% 3% 12% 10% 29% 18% 23% 28% 24% 3% 22% 27% 25% 9% 22% 9% 5% 26% 28% 20% 7% 19% 11% 3% 26% 29% 10% n.a. n.a. n.a. n.a. n.a. 24% n.a. 116% 37% 26% 17% 28% 23% 19% 15% 23% 41% 32% 34% 35% 26% n.a. n.a. n.a. n.a. n.a. 36% n.a. -12% 7% -7% -22% 3% 40% 39% 13% 8% 21% 16% 21% 28% 20% 7% 10% 12% 8% 8%

Figure 65: Growth of Total NPLs Y/Y + NPL Ratio & Reserve Coverage Q/Q Total NPL Growth

NPL

2Q13

3Q13

4Q13

1Q14

ABC

0%

1%

1%

0%

5%

6%

1.24%

346%

ICBC

8%

2%

7%

7%

7%

5%

0.99%

238%

BOC

1%

5%

4%

2%

10%

7%

1.02%

217%

CCB

4%

3%

2%

4%

7%

5%

1.04%

249%

BoCom

14%

3%

3%

5%

5%

7%

1.13%

204%

Citic

26%

6%

4%

18%

18%

7%

1.19%

193%

CMB

12%

14%

15%

7%

8%

19%

0.98%

251%

MSB

4%

6%

3%

12%

6%

11%

0.93%

216%

-16% 6%

-2% 4%

-1% 4%

18% 8%

-10% 6%

30% 11%

0.85% 1.04%

419% 259%

5%

3%

3%

4%

7%

6%

1.08%

251%

14%

9%

7%

12%

11%

12%

1.03%

220%

CQRB Setctor State Bk JSBs

2Q14 Ratio

NPL

1Q13

Cover.

Source: Company reports.

Figure 66: Growth in Overdue Loans Across the Sector ABC ICBC BOC CCB BoCom Citic CMB M SB CQRB Sector

H/H Grow th in Overdue Loans 2H11 1H12 2H12 1H13 2H13 1% 16% 3% 8% 2% 0% 31% -11% 17% -9% -1% 17% -6% 21% -3% -8% 43% -6% 17% -4% 0% 4% 58% 15% 11% -12% 27% 57% 43% 16% -6% 38% 14% 38% 12% 127% 63% 12% 47% -2% -20% -5% -18% 3% -15% 9% 26% 12% 23% 1%

Overdue as % 1H14 Loans +H/H 30% 1.60% 0.26% 34% 1.68% 0.33% 29% 1.35% 0.20% 39% 1.31% 0.30% 36% 1.82% 0.41% 52% 2.57% 0.74% 37% 1.86% 0.36% 67% 2.69% 0.96% 57% 1.75% 0.52% 42% 0.79% 0.11%

Source: Company Reports.

Figure 67: Manufacturing Clearly Impacted by Economic Slowdown ABC ICBC BOC CCB BoCom Citic CMB M SB CQRB Sector Loan Gr.

H/H NPL Grow th: Manufacturing 2H11 1H12 2H12 1H13 2H13 7% 1% 7% 12% 14% 13% -4% -1% -4% 7% 17% 11% -1% 4% 0% 14% 15% 10% 9% 9% n.a. n.a. n.a. n.a. n.a. 19% -17% 37% 36% 27% 44% 8% 15% 19% 31% n.a. n.a. n.a. n.a. n.a. 51% -15% -7% 44% -41% 4% 5% 7% 10% 14% 7% 9% 6% 5% 1%

M fg as a % of 1H14 Loans NPLs 15% 18% 47% 8% 15% 28% 10% 16% 35% 14% 15% 45% n.a. 19% n.a. 20% 20% 31% 10% 16% 32% n.a. 14% n.a. 206% 20% 40% 13% 16% 38% 6%

Source: Company reports.

Figure 68: R&W Trade Pressured by SME & Service Industries ABC ICBC BOC CCB BoCom Citic CMB M SB CQRB Sector Loan Gr.

H/H NPL Grow th: Retail & Wholesale Trade R&W as a % of 2H11 1H12 2H12 1H13 2H13 1H14 Loans NPLs 6% 44% 1% 10% 17% -1% 7% 18% 38% 16% 1% 21% 28% 36% 8% 29% -1% 51% -11% 36% -11% 30% 12% 22% -8% 9% 44% 68% 55% 19% 4% 22% n.a. n.a. n.a. n.a. n.a. n.a. 11% n.a. 2% 30% -8% 48% 131% 66% 15% 42% 20% 18% 11% 6% 36% 45% 11% 21% n.a. n.a. n.a. n.a. n.a. n.a. 9% n.a. 7% 123% -29% -11% -53% 1% 6% 3% 4% 31% 28% 26% 9% 25% 9% 25% 6% 13% 8% 11% 2% 8%

Source: Company reports.

Source: Company reports.

17

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

China: Fall in NPL Coverage Continues One disturbing trend is that despite a consistent rise in nonperforming loans, banks appear unwilling to increase provisions. This quarter ICBC took just 39bps of provisions, which marks the sixth time in eight quarters where the bank has taken less than 50bps of provisions. Over that same time period, NPL coverage has dropped by 50%, from 288% to 238%. Even banks that did take higher provisions, like BOC (60bps) and CITIC (120bps) failed to stem a sharp fall in coverage ratios, which fell 22% and 31% Y/Y, respectively. This trend of under-reserving is particularly concerning because it comes at a time when banks have the earnings power to absorb returns. Markets are not giving credit to system ROEs of 20.6%, but banks seem more focused on sustaining higher returns and/or earnings growth, than reinforcing balance sheets. This is perhaps most extreme at the JSBs, where coverage dropped materially at Minsheng (-105%), CITIC (-31%), to CMB (-53%). While coverage is still high in absolute terms at ~200%, NPLs are rising at almost +40% Y/Y at these same banks. The fall in reserves/loans means banks will be forced to raise provisioning in the future, as NPLs continue to rise. Reserve levels at most banks have now fallen below 2.50%, which is the target level for 2016. Minsheng saw reserves drop to 2.01%, and yet the bank still provisioned just 75bps in the quarter. In fact, the only bank with significant excess reserves (ABC) was penalized on capital this quarter under the transition to Advanced IRB. Excess reserves are effectively assigned a riskweight under China’s methodology, which pushed down Core Tier 1 from 9.48% to 8.65%. We think markets look through this, as core capital on international standards is far higher, at 9.97%; but it begs the question on why a bank should have a lower capital ratio for having taken more prudent reserves. The other issue we found with results was the lack of provisioning for higher-risk investment assets which surged in the quarter. CITIC saw such assets rise +103% H/H to 13% of total assets; and yet the bank has put aside reserves of just 0.02%. CCB has been the most conservative bank in this area, taking losses on non-lending assets of RMB1.8bn in 1H14, which we think relates to WMPs. Perhaps this is why CCB has limited WMPs to just 6% of assets, vs. 10% for the industry. In the past, we’ve noted the structural problems with overcapacity by pointing to the rise of NPLs in manufacturing-focused Eastern China relative to Western & Central China. What’s interesting is that in the past year quarters we've seen this divergence narrowing, with bad debt starting to pick in the West. This is something to watch, given that writebacks & lower NPLs in the West helped offset some of the pressure being felt in the East. Figure 69: Eastern China Showing Stress from Export Focus ABC ICBC BOC CCB BoCom Citic CMB M SB Sector

2H11 -3% 4% 16% 41% 20% 10% 3% 5% 12%

Source: Company reports

18

H/H NPL Grow th: Eastern China East as a % of 1H12 2H12 1H13 2H13 1H14 Loans NPLs 6% 13% 0% 10% 0% 59% 62% 18% 11% 5% 4% 16% 56% 63% 6% 22% 1% 10% 14% 49% 64% 2% 11% 7% 13% 14% 57% 73% n.a. n.a. n.a. n.a. n.a. 47% n.a. 19% 26% 11% 39% 37% 68% 88% 37% 28% 23% 26% 30% 54% 69% n.a. n.a. 17% 16% n.a. 72% n.a. 5% 11% 7% 10% 15% 57% 67%

Figure 70: Provisioning Remains Muted, Weighing on NPL Coverage 4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Avg.

ABC

1.32%

0.75%

0.57%

0.51%

1.17%

0.72%

0.71%

0.82%

ICBC

0.36%

0.55%

0.41%

0.27%

0.40%

0.54%

0.39%

0.42%

BOC

0.31%

0.47%

0.30%

0.24%

0.24%

0.77%

0.60%

0.42%

CCB

0.82%

0.44%

0.38%

0.45%

0.82%

0.49%

0.47%

0.55%

BoComm

0.56%

0.67%

0.42%

0.61%

0.63%

0.66%

0.56%

0.59%

Citic

1.53%

0.56%

0.52%

0.63%

0.78%

0.93%

1.20%

0.88%

CMB

0.01%

0.42%

0.57%

0.60%

0.37%

1.31%

1.50%

0.68%

MSB

0.44%

1.14%

0.76%

0.52%

1.08%

0.91%

0.75%

0.80%

-0.06%

0.34%

0.66%

0.46%

0.57%

0.50%

1.10%

0.51%

Total

0.59%

0.59%

0.51%

0.48%

0.67%

0.76%

0.81%

0.63%

State Bk

0.68%

0.58%

0.42%

0.42%

0.65%

0.63%

0.55%

0.56%

JSBs

0.66%

0.71%

0.62%

0.58%

0.74%

1.05%

1.15%

0.79%

CQRB

Source: Company reports.

Figure 71: NPL Coverage Has Declined Across the Sector 4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Y/Y

ABC

326%

341%

345%

348%

367%

362%

346%

2%

ICBC

296%

288%

288%

269%

257%

245%

238%

-50%

BOC

236%

244%

239%

233%

229%

227%

217%

-22%

CCB

271%

271%

265%

268%

268%

260%

249%

-16%

BoCom

251%

232%

223%

217%

214%

212%

204%

-19%

Citic

288%

243%

224%

232%

207%

192%

193%

-31%

CMB

352%

328%

305%

281%

266%

268%

251%

-53%

MSB

315%

325%

320%

293%

260%

257%

216%

-105%

CQRB

351%

431%

465%

488%

431%

501%

419%

-46%

Total

298%

300%

297%

292%

278%

280%

259%

-38%

State Bk

276%

275%

272%

267%

267%

261%

251%

-21%

JSBs

318%

299%

283%

269%

244%

239%

220%

-63%

Source: Company reports.

Figure 72: Falling Ratio of NPLs to Overdue Loans 90%

NPLs / Overdue Loans

80% 70% 60% 50% 40%

79%

78%

75% 62%

30%

59%

53%

20%

49%

47% 35%

10% 0% CCB

ABC

BOC

BoCom

ICBC

CMB

CQRB

Citic

MSB

As of 1H14 Source: Company reports.

Figure 73: Western China Showing Begins to Show Deterioration ABC ICBC BOC CCB BoCom Citic CMB M SB Sector

H/H NPL Grow th: Western China West as a % of 2H11 1H12 2H12 1H13 2H13 1H14 Loans NPLs -7% 8% -3% -7% -8% 3% 34% 37% 12% 21% 5% -52% -21% -4% 31% 13% 4% 9% -15% 0% -7% -5% 28% 32% 18% 15% -5% -16% -6% -9% 33% 23% n.a. n.a. 33% n.a. n.a. n.a. 28% n.a. 85% 34% -8% 26% -15% 2% 27% 11% 16% 75% -9% -20% -8% 42% 23% 20% n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. -5% -18% -9% -2% 4% 14% 30% 25%

Source: Company reports

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

China: Capital Demands & Off-B/S Exposure One of the reasons we’re concerned about the fall in reserves/loans is that capital ratios remain under pressure in parts of the sector. Of course, this quarter saw the implementation of Advanced IRB, which along with solid earnings helped boosted Tier 1 by +48bps at ICBC, +54bps at BOC, +66bps at BoCom, +38bps at CMB, and +10bps at CCB. As mentioned on the previous page, the transition was only a negative experience for ABC, due to their large amount of excess reserves. We think only ICBC (11.4%) and CCB (11.2%) enjoy a position of excess capital, although BoComm stands out among the rest of the banks for having a healthy capital level (10.7%). BOC is still somewhat light on capital, at 10.1%. Of course, pref share issuance will help lift these ratios well above the minimum of 9.5% for systemically important banks (and 8.5% for smaller banks), but given the increase in leverage in recent years, we think the sector is looking a bit light on capital. This is particularly the case at JSBs, where core capital is now below 9% at CMB, Minsheng, and CITIC, and falling rapidly at Chongqing Rural. The latter shows just how onerous the recent Document 127 was at raising risk-weights on NSCAs in the interbank book. Core capital at CQRB fell by -205bps H/H, as risk-weighted assets surged +27% H/H, which likely reflects the fact that trust beneficiary rights account for 9.1% of assets. Likewise, Minsheng Bank saw RWAs rise +12% H/H, which likely reflects the higher-risk nature of its NSCAs, which account for 7% of total assets. In order to conserve capital, the bank actually cut its dividend in half from last year, with a payout ratio of just 10%, vs. 17% for all of last year. As mentioned on the previous pages, the key thing to watch will be the growth in investment & other higher-yield assets. Once again, Minsheng was a leader in this category, particularly in the growth in off-balance sheet investments. AUM at MinshengRoyal Asset Management, which is 40% owned by the bank, has seen AUM increase by +139% H/H to RMB330bn, the equivalent of 9% of total assets as of the end of the half. We think most of these are non-standardized assets, and could leave the bank on the hook for losses. This follows the growth in Unconsolidated Structured Entities (U.S.E.) in recent quarters, which are sponsored by the bank itself or third parties. The final area we’d focus on this quarter was fee growth, which slowed in the quarter for state banks (+5% Y/Y), but saw continued growth at the JSBs (+39%) due to off-b/s activities. Most banks noted that they cut financing-related fees to SMEs, starting in August 2014. This comes after both the CBRC and NDRC reviewed fees charged to customers. The state banks generally had weaker growth, which reflects much slower growth in WMPs and off-balance sheet investment vehicles, which continued to be a tailwind for JSBs. CITIC Bank saw fees surge +61% Y/Y in the first half, with 1/6 of the fees coming from WMP business, which was up +87%. Likewise, CQRB recorded fee growth of +56% Y/Y, although two-thirds of this growth again came from WMP-related fees. In fact, as we might expect given the increase in higher-risk investments, the bigger increase in nonNII this quarter was from trading gains, which were particularly strong at CQRB and CITIC.

Figure 74: Loan Loss Reserves and/or Core Capital is Low at JSBs Reserves / Loans

Core Capital Ratio

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

ABC

4.30%

4.46%

4.41%

4.31%

9.35%

9.25%

9.48%

8.65%

ICBC

2.44%

2.43%

2.38%

2.36% 10.59% 10.57% 10.88%

11.36%

BOC

2.23%

2.21%

2.23%

2.21%

9.59%

10.13%

CCB

2.62%

2.66%

2.65%

2.59% 10.87% 10.75% 11.11%

11.21%

BoCom

2.20%

2.24%

2.31%

2.30%

9.87%

9.76%

10.04%

10.70%

Citic

2.09%

2.13%

2.21%

2.30%

9.24%

8.78%

8.90%

8.77%

CMB

2.21%

2.22%

2.27%

2.46%

9.38%

9.27%

9.09%

9.47%

MSB

2.28%

2.21%

2.23%

2.01%

8.18%

8.72%

8.51%

8.77%

CQRB

3.43%

3.46%

3.45%

3.55% 11.34% 11.85% 10.96%

9.80%

Total

2.64%

2.67%

2.68%

2.68%

9.87%

State

2.76%

2.80%

2.80%

2.76%

JSBs

2.19%

2.19%

2.24%

2.26%

9.52%

9.70%

9.82%

9.85%

9.84%

10.04% 10.01% 10.22% 10.41% 8.93%

8.92%

8.83%

9.00%

Source: Company reports.

Figure 75: Balance Sheet Expansion Accelerated in 2Q14 Total Assets (Q/Q)

Total Deposit (Q/Q)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

ABC

2.6%

-0.3%

5.2%

4.5%

2.7%

0.1%

6.1%

2.2%

ICBC

0.1%

0.9%

4.3%

2.9%

1.3%

-0.5%

3.7%

3.7%

BOC

2.8%

1.8%

8.9%

2.4%

1.7%

0.5%

9.1%

1.6%

CCB

0.9%

2.5%

5.1%

1.6%

-0.3%

0.9%

5.2%

0.8%

BoCom

0.9%

3.3%

0.3%

5.1%

3.0%

2.2%

-0.8%

6.1%

Citic

-1.0%

7.0%

9.3%

8.3%

0.7%

0.7%

5.5%

9.1%

CMB

2.0%

3.4%

9.7%

14.3%

0.3%

-1.0%

10.2%

11.9%

MSB

-2.8%

-2.6%

1.7%

8.8%

0.3%

-1.6%

5.1%

7.3%

CQRB

1.8%

1.2%

9.4%

8.1%

2.5%

0.3%

10.4%

2.9%

Total

1.2%

1.6%

5.5%

4.1%

1.3%

0.2%

5.5%

3.4%

State Bk

1.4%

1.4%

5.2%

3.0%

1.4%

0.3%

5.3%

2.5%

-0.5%

2.7%

7.2%

10.7%

0.4%

-0.6%

7.1%

9.6%

JSBs

Source: Company reports.

Figure 76: Exposure and Mix of WMPs Across the Sector In Rmb

Total

35% of

4% of

Billion

WMP

WMPs

Assets Gteed

ABC

% of Total Ungtd

As % of

As % of

Assets

Equity

975

341

640

43%

57%

6%

108%

ICBC

1,710

599

812

34%

66%

8%

126%

BOC

875

306

619

20%

80%

6%

91%

CCB

989

346

656

67%

33%

6%

87%

1,000

350

251

70%

30%

16%

227%

Citic

546

191

172

43%

57%

13%

228%

CMB

798

279

201

2%

98%

16%

279%

MSB

420

147

143

26%

74%

12%

189%

CQRB

61

21

24

NA

NA

10%

161%

Sector

7,374

2,581

3,519

40%

60%

8%

132%

BCOM

Source: Company reports, BOC as of 1Q14.

Figure 77: Fee Growth Remains Weaker at State Banks Fee Growth Y/Y 3Q13

4Q13

1Q14

Non NII Growth (Y/Y) 2Q14

3Q13

4Q13

1Q14

2Q14

ABC

3%

-5%

3%

-3%

-1%

-34%

10%

ICBC

13%

2%

10%

7%

24%

4%

8%

2%

BOC

27%

-16%

17%

12%

16%

-9%

13%

14%

CCB

19%

3%

11%

5%

21%

3%

33%

-33%

BCOM

22%

21%

10%

16%

24%

19%

27%

-5%

Citic

60%

45%

71%

52%

39%

34%

80%

66%

CMB

53%

47%

79%

57%

42%

51%

89%

79%

MSB

20%

44%

21%

8%

13%

43%

15%

26%

177%

-4%

5%

56%

136%

-41%

18%

124%

Total

44%

15%

25%

23%

35%

8%

32%

30%

St Bks

15%

-4%

10%

5%

15%

-9%

16%

-5%

JSBs

44%

45%

57%

39%

31%

43%

61%

57%

CQRB

-2%

Source: Company reports.

19

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

HK Banks: Loan Growth Surprises in 1H14

Figure 78: HK: NIMs Mixed on Compression in Onshore Book Se m i-Annual NIM

Last year, HK banks achieved some of the fastest profit growth in the region, with earnings up +19% Y/Y. That momentum was driven by a mix of NIM expansion (+17bps Y/Y), strong fee income (+15%), and persistently low credit costs. Yet despite strong numbers, the large-cap stocks put up relatively dull performance: BOCHK dropped -11% YTD; Hang Seng, -1%; and BEA, -1%. This de-rating reflected rising concerns about credit growth in China, which is now coming through the numbers in a few key areas. First, lending to Chinese counterparties after the transfer of risk was strong across the board, rising +20% Y/Y, to 19% of sector loans (based on JPMe coverage). These figures are net of any loans where a guarantee is provided by a party located in a different country. If we look at the gross exposure to Mainland corporates, the amount is far higher, closer to 28% of sector exposure. This is particularly the case at BOCHK, where gross exposure is HK$373bn, some 1.5x larger than China exposure net of offshore guarantees. We argue this figure is more important, because banks likely have exposure to the on- and off-shore entities of Mainland corporates. Dual exposure explains why we’ve seen impaired loans rise simultaneously in both the HK & China book, as shown in the table on the next page. BEA saw deterioration in its China book in the first half, with onshore NPLs rising +46% H/H, pushing the NPL ratio up from 0.49% to 0.74%. This deterioration led to a pullback in onshore loan growth, which slowed to just +6% H/H, but not in the cross-border book, which management views as higher quality, given the underlying collateral. Indeed, loans in HK actually accelerated by ~9% H/H. Moreover, the bank only put aside 9bps of credit costs related to China, and 15bps for the entire group. While this is up +75% Y/Y, it’s still far too low, and NPL coverage has now declined 21% over the past 18 months, to 60%. China also hurt BEA this quarter on margins, as falling interest rates led to NIM compression of -24bps H/H in the onshore book – a figure that was compounded by the significant +60% sequential growth in onshore interbank assets. Indeed, even the non-China book saw NIM compression of -13bps H/H, hit by rising funding costs. Perhaps the one silver-lining of results is that despite the fast balance sheet growth, with assets up +7% H/H, risk-weighted assets only grew +2%, which allowed the CET1 ratio to improve by +20bps H/H, to 11.6%. That said, overall we think the results demonstrate that China will continue to be a headwind for the stock, particularly given that 19% of the loan book is in property development, and 16% is investment property. Hang Seng Bank’s results stand in contrast to BEA, given the former’s lower exposure to China. Indeed, the NPL ratio fell 2bps H/H, to 0.20%, and despite this, the bank increased provisions by +50%, boosting NPL coverage to 113%. NIMs were also more stable, something seen the past 2 years; in fact, margins only fell 1bp H/H, to 1.92%, mostly on the back of rising deposit competition in Hong Kong, and margins in the onshore business rose during the first half, as deposit costs eased. The fact that most of the interbank book remains in HK means that HSB is likely to have far better gearing to the US rate cycle, even though it has cost them the NIM expansion enjoyed by peers over the last few years. 20

NIM

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

BEA

1.73% 1.73% 1.77% 1.63% 1.70% 1.83% 1.98% 1.79%

BOCHK

1.43% 1.21% 1.44% 1.64% 1.56% 1.67% 1.70% 1.74%

DSB

1.52% 1.52% 1.31% 1.47% 1.61% 1.77% 1.82% 1.79%

DSF

1.52% 1.52% 1.31% 1.47% 1.61% 1.77% 1.81% 1.79%

HSB

1.81% 1.75% 1.81% 1.85% 1.85% 1.84% 1.93% 1.92%

Total

1.62% 1.55% 1.58% 1.65% 1.68% 1.78% 1.86% 1.81%

Source: Company reports.

Figure 79: HK: Fee Growth Much Weaker this Year on Fund Sales Fee Grow th (Y/Y) 2H12

1H13

2H13

5%

19%

BOCHK

-5%

DSB DSF

Non NII Grow th (Y/Y) 2H12

1H13

2H13

1H14

17%

8% 131%

-5%

-6%

11%

14%

17%

3%

36%

16%

11%

-7%

34%

41%

25%

16%

55%

35%

35%

14%

28%

43%

22%

16%

36%

-5%

72%

59%

HSB

16%

22%

10%

4%

4%

11%

47%

7%

Total

13%

24%

17%

8%

56%

14%

22%

6%

BEA

1H14

Source: Company reports.

Figure 80: HK: Very Low RWA Growth Led to Upside Surprise on Capital RWA Grow th (H/H)

Loan Grow th (H/H)

2H12

1H13

2H13

1H14

2H12

1H13

2H13

BEA

1%

-1%

13%

2%

7%

9%

6%

1H14 7%

BOCHK

5%

14%

6%

2%

4%

8%

4%

10%

DSB

6%

2%

9%

n.a.

3%

7%

4%

6%

DSF

6%

2%

9%

n.a.

4%

7%

4%

6%

HSB

3%

17%

5%

-4%

6%

8%

1%

8%

Sector

4%

8%

8%

0%

5%

8%

4%

7%

Source: Company reports.

Figure 81: HK: Exposure to China is Understated by Offshore Gtees Exposure to China HK$bn

Net

Gross

% of Total Loans

Off-BS

Net

Gross

Of f-BS

1H14 BEA

207

218

52

47%

50%

12%

BOCHK

196

420

70

21%

44%

7%

DSB

10

17

3

10%

17%

2%

HSB

63

63

8

10%

10%

1%

BEA

190

210

62

47%

52%

15%

BOCHK

153

373

83

18%

44%

10%

DSB

9

16

3

9%

16%

3%

HSB

62

54

9

10%

9%

1%

BEA

152

185

64

43%

53%

18%

BOCHK

138

318

71

18%

41%

9%

DSB

8

12

1

9%

14%

2%

HSB

52

43

8

10%

8%

2%

2013

2012

Source: Company reports.

.

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

HK Banks: Capital, Returns, Credit at Risk

Figure 83: HK Banks: NPLs Continue to Rise in Both HK & China H/H NPLs: Hong Kong

It’s important to note that while loans outside HK rose +5% H/H at both Hang Seng and BEA, both also showed a contraction in trade finance loans, which reinforces our view that lower rates & a weaker CNY have weighed on cross-border carry-trades. Indeed, trade loans at BEA fell -6% H/H, and are up just +10% Y/Y, while trade loans at HSB fell -1% H/H, and are actually down -18% Y/Y. This compares to growth last year of +14% at BEA, and +10% at HSB. As we’ve noted before, despite assurances that trade finance is well-collateralized, the data doesn’t show it. Yes, it is a short-duration, self-liquidating asset class; but it’s often unsecured for better corporate clients. On the table below, we show the % of loans at each bank covered by pledged collateral or other security. That ratio is <20% for trade finance at both BOCHK and Hang Seng Bank. Moreover, we find that the offshore loans in both those banks also have lower collateral levels than peers (<30% vs. 60-70%). Figure 82: Low Collateral Levels on Trade / Offshore at BOCHK/HSB Collateral Coverage: 1H14 HK

Trade Fin. Of fshore

BEA

75%

53%

BOCHK

67%

DSB

81%

HSB

74%

24%

Collateral Cove rage : 2013 HK

Trade Fin. Of fshore

71%

73%

40%

71%

12%

27%

70%

14%

28%

64%

63%

82%

61%

64%

26%

75%

20%

29%

1H13

2H13 1H14

56%

19%

BOCHK

-5%

DSB

41%

DSF

NPL

2H13

46% 0.66%

56%

19%

46% 0.59%

13%

-60% 0.10%

15%

33%

199% 0.90%

50%

3% 0.27%

22%

-25%

53% 2.18%

41%

50%

3% 0.27%

22%

-25%

53% 2.18%

HSB

-7%

4%

-6% 0.16%

n.a.

n.a.

Sector

21%

21%

-4% 0.30%

31%

9%

BEA

1H14 Ratio

n.a.

n.a.

100% 1.22%

Source: Company reports.

Figure 84: HK Banks: While Provisions Remain at Structural Lows Sem i-Annual Provisions LLP

2H10

1H11

BEA

0.09%

-0.03%

BOCHK

0.01% 0.01% 0.10% 0.02% 0.20% 0.09% 0.09% 0.08%

2H11

1H12

2H12

1H13

2H13

1H14

0.07% 0.08% 0.05% 0.10% 0.14% 0.15%

DSB

-0.04%

0.22%

-0.01%

0.07% 0.12% 0.31% 0.41% 0.45%

DSF

-0.04%

0.22%

-0.01%

0.07% 0.12% 0.31% 0.41% 0.45%

HSB

0.11% 0.06% 0.11% 0.10% 0.05% 0.07% 0.12% 0.10%

Total

0.04% 0.07% 0.07% 0.07% 0.11% 0.14% 0.19% 0.20%

Source: Company reports.

Figure 85: HK: Low Reserve Levels to Cushion Against Rising NPLs Reserves / Loans 2H12

One final detail that stuck with us in the half – and keeps us more cautious on the sector – is that strong loan growth is increasingly funded with time deposits. This competition for higher-rate funding could have an impact on margins, particularly given the competing pressures of cross-border lending and the US raising interest rates. While LDRs are still low in the sector at 73%, the marginal cost of funding could squeeze NIMs, making the sector less geared to rising USD rates than in the past. Consider that at BOCHK, CASA fell 2% H/H, while time, call, and notice deposits surged +22%. Likewise, CASA fell -3% at BEA, and was flat at HSB, yet time deposits jumped +8% and 38%, respectively, to help fund growth.

H/H NPLs: China 1H13

Source: Company reports.

While HSB & BEA cut back on trade finance, BOCHK grew this segment aggressively in the first half, with loans up +8.6% H/H. Indeed, total loan growth was +10.5% in the first six months, with a surge in HK corporate lending (+16%), trade finance, and loans for use outside HK (+11%). This growth matched that of the parentco, which was noticeable in its loan growth relative to peers. NIMs actually surprised to the upside, rising +4bps H/H. The bank continued to see a benefit from higher yields onshore, with interbank yields rising another +31bps H/H (+46bps Y/Y), and bond yields rising +25bps H/H (+43bps Y/Y), driven by increasing its allocation to RMB bonds. That said, there has been a cost to the increasing ties to China, and like BEA, that was mainly on the credit line. NPLs in the onshore business rose from 0.61% to 1.58% in the first half, and in the process went from being 33% of Group NPLs, to 77% in just 6 months. While the overall NPL ratio is still low at 0.31%, provisioning was somewhat muted this half, at just 8bps, which caused the NPL coverage to decline from 174% to 153% H/H.

NPL Ratio

1H13

2H13

Core Capital Ratio 1H14

2H12

1H13

2H13

1H14

BEA

0.24% 0.23% 0.23% 0.24%

9.8% 10.4% 11.4% 11.6%

BOCHK

0.45% 0.46% 0.46% 0.44% 12.1%

DSB

0.27% 0.32% 0.41% 0.50% 10.3% 10.3% 10.4% 10.9%

DSF

0.26% 0.31% 0.40% 0.49% 10.3% 10.3% 10.4% 10.9%

HSB*

0.26% 0.24% 0.25% 0.23% 12.2% 13.6% 10.4% 11.8%

Total

0.30% 0.31% 0.33% 0.35% 11.1%

5.2% 10.6% 11.8%

9.9% 10.7% 11.5%

Source: Company reports. *HSB 2013 is fully loaded Basel III number.

Figure 86: Growth in Offshore Loans & Trade Finance by Bank Offshore Loans Trade finance Trade Bills Offshore Loans Trade finance Trade Bills

500 HK$ bn 450 400 350

69 71 93

300

85

250

67 6

60 6

253

241

200 150

294

100

265

50

52

52

143

136

7 6 29

6 6 29

1H14

2013

1H14

2013

0 1H14

2013

BOCHK

1H14

2013

BEA

HSB

DSB

Source: Company reports.

21

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Taiwan: Robust WM to offset TMU decline Second-quarter results in Taiwan were generally better than expectations; NIM expansion is moderating but loan growth is still tracking at +6% Y/Y, and robust fees in wealth management offset the sharp decline of TMU revenue. System loan growth ended up at +0.6% Q/Q and +6.2% Y/Y, up from +4.9% in FY13 and +3.3% in FY12, with offshore credit remaining the key growth driver. Excluding non-recurring items, earnings growth was over 20% Y/Y in 1H14 for most banks, with private banks generally delivering stronger PPOP growth than state banks. Offshore banking continues to grow much stronger than domestic demand: while DBU loan growth was just + 0.4% Q/Q, overseas/OBU loan growth reached 2.2% sequentially, and direct lending from China branches surged +22%. Total offshore lending now accounts for 15.6% of total loans, up from 13.6% one year ago. We continue to think that Taiwan banks have defensive balance sheets in terms of USD-LDRs, particularly when compared with Singapore. Beyond OBU credit, SME is delivering better momentum than average loan growth, up 8% Y/Y, and now accounts for over 54% of total private corporate loans. As we’ve seen in other markets like Korea & Malaysia, this is partly due to increased disintermediation in the large corporate segment (-1% Y/Y), and more attractive lending spreads for smaller corporates. In contrast to the rest of the region, the balance sheets of Taiwan banks are still relatively under-geared. This plays to our theme of owning more liquid banks as we believe the prospect of rising USD rates is just around the corner. As of 2Q14, the sector LDR remained at ~77.8%. Other than Mega and CHB, most banks still have rather good liquidity (<85% LDR). Mega usually maintains its LDR at a much higher level than that of peers due to its high government deposits (over NT$300bn), which equals 18% of its customer deposits, and leads to an elevated LDR of 88%. Private banks in general delivered much stronger loan growth than state banks with over 10% growth Y/Y at Chinatrust, Cathay, E.Sun, and Taishin, while state banks mostly focus on lowering their exposure to lower-margin government lending, which weighed on overall credit growth. Total credit exposure to China is capped at 1x bank equity by law, and the ratio is now at 62% for the system, vs. 58% in 4Q13 (with Mega and Sinopac over 80%). That said, we don’t think this regulatory ceiling will affect growth momentum, given the majority of exposure is still interbank deposits at either BOCHK or BCK (Taipei) and thus could be re-deployed to loans or trade finance if risk-reward is becomes more attractive or credit demand accelerates further.

Figure 87: Loan Growth Getting a Boost from SME, Offshore Asset Growth (Y/Y) 3Q13

4Q13

1Q14

Loan Growth (Y/Y) 2Q14

3Q13

4Q13

2Q14

8%

11%

10%

n.a.

2%

3%

8%

ChangHwa

4%

6%

8%

n.a.

1%

1%

6%

6%

Chinatrust

8%

11%

11%

8%

7%

12%

12%

12%

ESun

10%

11%

13%

15%

12%

11%

9%

10%

First

6%

7%

7%

n.a.

1%

0%

2%

2%

Fubon

6%

10%

25%

24%

10%

7%

7%

11%

8%

7%

5%

5%

7%

3%

3%

3%

2%

Mega

14%

16%

16%

n.a.

10%

12%

10%

5%

Shinkong

12%

9%

20%

n.a.

7%

5%

9%

6%

Sinopac

9%

9%

10%

n.a.

5%

4%

4%

-1%

Taishin

8%

5%

7%

19%

7%

7%

7%

9%

Total

8%

9%

12%

15%

6%

6%

7%

6%

HuaNan

Source: Company reports.

Figure 88: Although Overall Credit Remains Challenged On Weak Mfg 85%

15%

84% 83%

10%

82% 81%

5%

80% 79%

0%

78% 77%

-5%

76% 75%

-10%

LDR

Loan Growth (R)

Household (R )

Manufacturing (R)

Source: CEIC

Figure 89: LDRs Remain Low within the Overall Sector Loan / Deposit Ratios LDR

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

67%

67%

66%

65%

65%

64%

67%

68%

ChangHwa

88%

87%

87%

86%

85%

84%

86%

87%

Chinatrust

74%

76%

76%

73%

72%

74%

74%

74%

ESun

75%

73%

74%

75%

75%

73%

71%

72%

First

90%

90%

89%

87%

86%

83%

85%

84%

Fubon

81%

84%

84%

82%

86%

83%

83%

87%

HuaNan

84%

83%

85%

84%

83%

82%

82%

81%

Mega

91%

88%

88%

88%

91%

87%

87%

88%

Shinkong

79%

77%

81%

78%

76%

74%

74%

71%

Sinopac

76%

76%

73%

73%

73%

73%

71%

72%

Taishin

82%

82%

83%

83%

84%

82%

83%

84%

Total

81%

80%

80%

80%

80%

78%

79%

79%

Source: Company reports.

Figure 90: Offshore Loan Growth Stabilizing after Sharp Deceleration 14.0%

60%

12.0%

50% 40%

10.0%

30%

8.0%

20%

6.0%

10%

4.0%

0%

2.0%

-10%

0.0%

-20%

OBU / DBU Source: CEIC.

22

1Q14

Cathay

OBU Loan Growth

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Taiwan: Margins Moderate with SHIBOR This quarter we saw a general trend of moderating NIM expansion at most banks due to the gradual unwinding of higher-yield RMB portfolios in 4Q13 and 1Q14. The diverging trends in NIM and loan-deposit spreads still persist at individual banks as higher funding costs at Rmb deposits remain a drag on overall spread but the majority of this is then redeployed into interbank deposits at BOCHK or BCK (Taipei) or trade finance that is only reflected in NIM (but not lending yields). With slowdown of RMB deposit growth in recent months, such divergence is likely to slow in the near future. Policy rate hikes have been the traditional driver of rising margins, but we don’t expect a rate hike in Taiwan until the first quarter of 2015 (for +12.5bps), although our economics team does not rule out an earlier move by the CBC given better the economic recovery and rising inflation pressure, with CPI up 1.75% Y/Y in July (and core +1.5%). Continuing the trend from last year, fee income grew 12% Y/Y in the second quarter. Mutual fund sales have replaced bancassurance as the key growth driver for wealth management businesses in 1H14, with sales of USD products being the primary driver of better product sales. However, bancassurance could be back to focus in 3Q14 as recent regulatory changes on interest sensitive life products could pull forward demand in front of any new restrictions, triggering a surge in bancassurance sales. Private banks remain the dominant players in wealth management sales, which in turn is driving much stronger fee growth.

Figure 91: Taiwan Banks: NIMs Improved on Loan Demand, Offshore Quarterly NIM Annualized NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

1.27%

1.21%

1.26%

1.28%

1.21%

1.29%

1.42%

1.38%

ChangHwa

1.04%

1.05%

1.04%

1.08%

1.10%

1.05%

1.10%

n.a.

Chinatrust

1.55%

1.54%

1.55%

1.52%

1.51%

1.54%

1.59%

1.57%

ESun

1.25%

1.27%

1.27%

1.28%

1.28%

1.29%

1.27%

1.28%

First

1.20%

1.21%

1.26%

1.26%

1.26%

1.26%

1.28%

1.28%

Fubon

1.02%

1.00%

1.03%

1.02%

1.00%

1.07%

1.10%

1.10%

HuaNan

1.05%

1.04%

1.09%

1.09%

1.08%

1.17%

1.11%

1.11%

Mega

1.25%

1.22%

1.20%

1.19%

1.21%

1.27%

1.28%

n.a.

Shinkong

1.38%

1.41%

1.41%

1.42%

1.39%

1.40%

1.44%

1.40%

Sinopac

1.17%

1.15%

1.21%

1.19%

1.20%

1.22%

1.25%

n.a.

Taishin

1.48%

1.48%

1.49%

1.53%

1.53%

1.53%

1.57%

1.55%

Total

1.24%

1.23%

1.26%

1.26%

1.25%

1.28%

1.31%

1.33%

Source: Company Reports.

Figure 92: Gearing to a Better Market Outcome: WM Fees / Total Fees WM Fees / Total Fees 3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

41%

45%

45%

45%

47%

50%

44%

n.a.

Chinatrust

42%

39%

40%

40%

42%

47%

40%

42%

ESun

32%

35%

48%

38%

43%

44%

46%

49%

First

40%

47%

43%

47%

48%

46%

n.a.

n.a.

Fubon

74%

82%

79%

78%

68%

71%

84%

n.a.

HuaNan

56%

46%

54%

52%

50%

51%

n.a.

n.a.

Mega

30%

24%

32%

28%

29%

24%

28%

n.a.

Shinkong

39%

44%

46%

41%

39%

40%

46%

n.a.

Sinopac

58%

59%

64%

65%

63%

63%

65%

n.a.

Taishin

53%

51%

62%

60%

57%

73%

74%

n.a.

Total

47%

47%

51%

49%

49%

51%

53%

45%

Source: Company reports

Figure 93: Taiwan Banks: Fee Contribution / Total Bank Revenues Fee Contribution / Total Bank Revenues

A key bright spot for the sector in FY13 was TMU revenues; this unit continued to see strong returns across the sector in 1Q14, but has declined sharply in 2Q14, given the depreciation of CNH during 1Q14 and regulatory intervention. Under TMU, banks play the role of introducing derivatives products to corporate clients and in turn book profits as FX/derivatives gains or trading gains in the P&L. Banks have had this business for a long period of time, but the demand has surged materially in the past 15 months for two reasons. First, greater volatility across currencies on the expectation of QE tapering has boosted hedging/speculating demand for corporate clients conducting international trade; second, the launch of on-shore RMB businesses has allowed banks to provide RMB-related derivatives that used to be done at OBU or HK branches only. Sinopac has been banned from sales of TRF (Target Redemption Forwards) for one year this April while other eight banks have been fined by NT$2-4m for inappropriate risk management/KYC mechanism. As a result, TMU revenue was in general down 40-70% Q/Q at most private banks, with Cathay the exception, which management attributed to a smaller base of fees and continued new customer growth. With potential re-opening of non-hedging TMU businesses in the coming months, we might see some recovery on related revenue, but momentum is unlikely to rebound to previous levels.

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

21%

24%

24%

25%

24%

25%

23%

22%

ChangHwa

16%

15%

18%

17%

16%

9%

17%

n.a.

Chinatrust

44%

42%

43%

37%

41%

41%

46%

20%

ESun

29%

29%

30%

29%

30%

33%

29%

33%

First

14%

18%

16%

17%

17%

18%

16%

17%

Fubon

25%

28%

26%

22%

24%

33%

25%

29%

HuaNan

15%

15%

17%

17%

17%

17%

17%

16%

Mega

16%

17%

19%

18%

18%

17%

17%

n.a.

Shinkong

19%

34%

23%

23%

20%

21%

21%

23%

Sinopac

15%

17%

24%

20%

20%

20%

20%

n.a.

Taishin

27%

27%

27%

28%

25%

27%

26%

30%

Total

22%

24%

24%

23%

23%

24%

23%

24%

Source: Company reports.

Figure 94: Taiwan Banks: Fee Growth a Potential Driver for Earnings Fee Growth (Y/Y) 3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

14%

19%

16%

36%

26%

28%

26%

10%

ChangHwa

-1%

-6%

31%

26%

1%

-38%

4%

n.a

Chinatrust

10%

11%

1%

7%

-1%

7%

18%

4%

ESun

17%

43%

31%

29%

26%

30%

14%

28%

First

-19%

22%

6%

6%

35%

15%

20%

19%

Fubon

-3%

-10%

7%

-14%

7%

27%

26%

29%

HuaNan

-8%

-9%

29%

17%

11%

30%

7%

2%

Mega

18%

2%

31%

16%

18%

25%

-5%

n.a

Shinkong

19%

54%

47%

39%

21%

3%

5%

14%

Sinopac

-1%

30%

91%

63%

49%

51%

0%

n.a

Taishin

6%

8%

23%

25%

5%

18%

17%

9%

Total

5%

15%

28%

23%

18%

18%

12%

14%

Source: Company reports.

23

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Taiwan: Asset Quality Remains Solid Credit costs generally stayed at low levels in the second quarter, as Taiwan continued to see a further improvement in sector-wide asset quality. Indeed, the system NPL ratio edged down from 0.33% to 0.28% Q/Q, and the coverage ratio rose from 363% to 434% as a result -- a figure that's more reflective of low NPLs than significant reserves (which are just 1.21% of loans). Exposure in default-ridden sectors like solar (AURIA Solar), drybulk shipping (TMT), and LED (CMLT) from last year have been largely been cleaned up, with over 60% recovery rate from divestments of TMT collateral helped to boost recovery during 1H14, while regulatory requirement of a 1% reserve for performing loans has been fulfilled at most banks except Shin Kong. Given the recent gas explosion in southern Taiwan, exposure to LCY Group (both LCY Chemical and its solar subsidiary, Taiwan Polysilicon), which is around NT$20bn sectorwide, could be an uncertainty for credit costs in 2H14. That said, it is really Taiwan Polysilicon that faces operational issues, and given that bank exposure to this business is only NT$1.5bn, we see less potential for a material impact on the sector. Regulatory change remains one uncertainty for the sector. Over the past three years, the FSC has implemented new reserve requirements every year in order to build up the industry reserve balance. The latest requirement is for banks to reach a 1% reserve against performing loans before the end of 2015 while there is increasing discussion that FSC might aim to increase the reserve requirement for special mention loans (category II), from the current 2% to 5-10%. We believe this should be an issue beyond 2014, and the impact should be manageable given this category only represents 1-2% of total loans. In addition, recent stress tests on mortgage and real estate/construction lending, with assumptions of a 30% drop on property prices and a 2% increase in policy rates only showed a capital impact of – NT$74 billion, which is manageable for the entire sector. Stepping back, despite low provisions, like HK we worry that at some point in the future, rising NPLs could take a toll on the sector. Lower pre-provision earnings, and relatively low (but improving) general reserve levels means that any surprise in asset quality has the potential to be a material impact for earnings in the sector. As such, we prefer to focus on banks with solid track record on risk management and strong capital position, such as E.Sun and Fubon. Given what we’ve seen in other countries like Japan, Taiwan’s low inflation level, high cyclicality, and low expectations may actually work for the market if we see any inflection point in either export growth or domestic consumption. The sector also remains among the most sensitive to rates within Asia, with an 8-10% increase in EPS for a 25bps move in short-term rates. As we move closer to domestic rate hikes, the prospect of gearing to this theme will remain a potential positive catalyst for the sector, with improving loan & fee growth a more important driver in the meantime.

24

Figure 95: NPL Ratios Remain Low Despite Uptick in Restructurings Quarterly NPL Ratio NPL

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

0.33%

0.34%

0.33%

0.32%

0.38%

0.29%

0.30%

0.18%

ChangHwa

0.34%

0.33%

0.33%

0.32%

0.32%

0.32%

0.28%

0.22%

Chinatrust

0.39%

0.42%

0.44%

0.53%

0.42%

0.38%

0.25%

0.20%

ESun

0.16%

0.17%

0.20%

0.20%

0.21%

0.20%

0.18%

0.15%

First

0.45%

0.44%

0.45%

0.46%

0.46%

0.47%

0.28%

0.24%

Fubon

0.16%

0.12%

0.12%

0.13%

0.11%

0.12%

0.09%

0.09%

HuaNan

0.45%

0.44%

0.44%

0.43%

0.42%

0.42%

0.36%

0.31%

Mega

0.19%

0.17%

0.17%

0.17%

0.17%

0.16%

0.12%

0.09%

Shinkong

0.54%

0.46%

0.45%

0.44%

0.46%

0.42%

0.37%

0.36%

Sinopac

0.35%

0.30%

0.26%

0.28%

0.44%

0.37%

0.36%

0.37%

Taishin

0.15%

0.15%

0.15%

0.16%

0.20%

0.15%

0.16%

0.14%

Total

0.32%

0.30%

0.30%

0.31%

0.33%

0.30%

0.25%

0.21%

Source: Company reports

Figure 96: One-offs to Comply with New Reserving Requirements Quarterly Provisions Annualized Provision

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

Cathay

0.00%

0.81%

-0.05%

0.04%

0.09%

0.14%

-0.05%

0.10%

ChangHwa

0.15%

0.26%

-0.17%

0.02%

-0.08%

0.00%

-0.29%

n.a.

Chinatrust

0.27%

0.07%

-0.09%

0.02%

0.34%

1.71%

0.12%

0.03%

ESun

0.10%

0.29%

0.18%

0.26%

0.21%

0.20%

0.18%

0.07%

First

0.47%

0.54%

0.06%

0.03%

0.34%

0.68%

0.23%

0.12%

Fubon

-0.05%

0.09%

-0.08%

0.02%

1.38%

0.08%

-0.05%

0.07%

HuaNan

0.50%

0.59%

0.22%

0.23%

0.27%

0.36%

0.28%

0.08%

Mega

0.47%

0.64%

0.25%

0.17%

0.35%

0.58%

0.12%

n.a.

Shinkong

0.08%

0.39%

0.26%

0.15%

0.26%

0.39%

0.35%

0.34%

Sinopac

0.25%

0.04%

-0.05%

0.02%

0.42%

0.61%

0.19%

n.a.

Taishin

-0.21%

0.14%

-0.11%

-0.13%

0.00%

0.29%

0.08%

-0.32%

0.18%

0.35%

0.04%

0.07%

0.33%

0.46%

0.10%

0.06%

Total

Source: Company reports

Figure 97: Taiwan Banks: Defensive Rate Sensitives at the Right Price LC

LC

Mkt

Price Rating Target Cap

P/E

P/B

14E

57.00 21,440 13.7 x 16.1 x

1.6 x

1.5 x

2.2% 1.9% 13.6% 9.5%

ChangHwa 18.60 UW Chinatrust 21.75 OW ESun 19.65 OW

15.60

First

18.50

14E

15E

Fubon

1.2 x

1.1 x

1.0% 1.1%

7.6 x 10.1 x

1.4 x

1.3 x

2.8% 3.0% 20.0% 13.1%

23.20

4,638 12.3 x 10.4 x

1.2 x

1.1 x

1.6% 1.6% 11.0% 11.1%

19.20

5,732 12.1 x 11.2 x

1.1 x

1.1 x

2.5% 2.7%

48.80 OW

54.00 16,711 10.8 x 10.6 x

1.4 x

1.3 x

3.1% 3.3% 13.6% 12.5%

HuaNan

18.90 UW

14.50

5,887 14.5 x 13.1 x

1.2 x

1.2 x

2.8% 3.1%

Mega

25.80

N

27.40 10,748 10.9 x 10.2 x

1.2 x

1.2 x

4.3% 4.3% 11.8% 11.8%

Shinkong

9.75

N

10.80

3,044 12.2 x 10.0 x

0.8 x

0.8 x

0.8% 1.0%

Sinopac

13.65

N

13.23

4,052

8.8 x

1.0 x

0.9 x

2.6% 2.8% 10.4% 10.4%

Taishin

15.20

N

15.70

4,496

9.6 x 9.1 x 11.6 x 11.3 x

1.2 x 1.2 x

1.1 x 1.1 x

2.1% 2.2% 13.2% 12.3% 2.3% 2.4% 11.6% 10.5%

Total

N

4,816 14.9 x 14.1 x

15E

ROE

15E

51.00 OW

15E

Div Yield

14E

Cathay

14E

24.00 10,708

9.5 x

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

8.3% 8.2%

9.7% 9.8% 8.7% 9.2% 7.2% 8.0%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Korea: Earnings Begin to Stabilize

Figure 98: Korea: Loan Growth Remains Muted at National Banks Asset Grow th (Y/Y)

While falling interest rates has been a boon to banks in ASEAN, falling rates in Korea has led to NIM contraction of ~24bps over the past two years, as shown in the table on the right. That in turn has led to a series of negative revisions; consider that FY14 estimates have fallen by 35% over the same time period, and are down 15% in the past 12 months. The good news is that the past quarter was probably the first in recent memory where each of the banks made their forecasts. NIMs were flat/up at the large cap banks, and in-force spreads have been stable at ~2.53% since September 2013. Loan growth has also started to pick up, with growth of +6% Y/Y (and +2% Q/Q). Corporate credit demand shows signs of turning, especially in SME, where loans are up +7% Y/Y from +4% this time last year. The bad news is that the 25bps rate cut last week is likely to lead to further margin compression, particularly given that most of the boost to spreads this year has been driven by a one-off from the reset long-term funding rates. Shinhan remains our top pick in the sector, and met forecasts for the second quarter. Underlying bank NIMs were flat Q/Q, and loan growth was solid at +2.6% Q/Q, up from +1.7% in the previous quarter. Management notes that growth is coming from smaller SMEs (+6% Y/Y), and retail loans (+4%), which were in turn the result of higher demand for Chonsei loans. To be fair, SFG benefitted from a number of one-off gains, including W55bn from the sale of Visa & Mastercard shares, as well as the disposal of its stake in SK C&C, for W45bn. Strong revenue growth was also complimented by good cost control, with expenses actually down -1% Y/Y, as well as benign asset quality. While provisions jumped from 34bps to 61bps Q/Q, one-fifth of this was due to forward-looking provisions of the portfolio, and the base effect from last quarter was abnormally low due to one-offs. Net net, we think clean earnings power is around W500bn per quarter, putting the stock at ~10x forward earnings. Results at KBFG showed an improvement from the previous quarter, when earnings were materially impacted by the customer information leakage case at KB Card, although we found some of the underlying details lacking. NIMs rose +2bps Q/Q at the Group level (+4bps at the bank), as high cost debentures rolled off in the quarter; but this was partly offset by its big push into fixed-rate mortgages at promotional rates. Fee income picked up +12% Q/Q, as KB Kookmin Card resumed operations halfway through the quarter, although total fees were still down Y/Y. Like Shinhan, one of the main positives was the lack of big one-off losses. There were minor ones like Daehan Electric (-W24bn) & the People’s Happiness Fund (-4bn), but this was offset by CVA gains of W21bn due to favorable FX movements. Ultimately the disappointment comes down to lackluster loan growth, which was flat Q/Q and up just +3.9% Y/Y, due mostly to a weaker growth in SMEs. With KBFG more focused on deploying excess capital (T1: 13.1%) through high-priced deals rather than organic growth, we think shares will remain at a discounted value, with shares at 0.7x book today.

Loan Growth (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BFG

8%

9%

6%

6%

14%

12%

11%

11%

DGB

11%

10%

7%

7%

12%

9%

9%

9%

HFG

1%

4%

5%

4%

3%

4%

6%

4%

IBK

7%

8%

6%

5%

5%

5%

7%

6%

KBFG

2%

2%

4%

2%

1%

3%

6%

4%

SFG

3%

3%

2%

1%

1%

3%

2%

3%

Total

5%

6%

5%

4%

6%

6%

7%

6%

Source: Company reports.

Figure 99: Korea: Sector NIMs Begin to Bottom at National Banks Quarterly NIM Annualized NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BFG

2.70% 2.60% 2.45% 2.47% 2.46% 2.46% 2.55% 2.50%

DGB

2.70% 2.65% 2.62% 2.54% 2.50% 2.52% 2.60% 2.54%

HFG

2.12% 2.01% 1.99% 1.97% 1.90% 1.92% 1.91% 1.93%

IBK

2.08% 1.98% 1.95% 1.92% 2.08% 1.98% 1.92% 1.92%

KBFG

2.82% 2.79% 2.73% 2.65% 2.55% 2.57% 2.46% 2.48%

SFG

3.37% 3.27% 3.17% 3.19% 3.12% 3.21% 3.17% 3.17%

Total

2.63% 2.55% 2.49% 2.46% 2.44% 2.44% 2.44% 2.42%

Source: Company reports.

Figure 100: Korea: Fees Stuck in Neutral, with Little Hope for Growth Fee Growth (Y/Y)

Non-NII Grow th (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

BFG

-25%

-16%

32%

35%

4%

17%

8%

2Q14 13%

DGB

-13%

1%

-17%

-2%

-25%

-56%

9%

-68%

HFG

-5%

0%

-6%

2%

1%

69%

46%

106%

IBK

-19%

3%

-5%

-3%

n/a

n/a

n/a

n/a

KBFG

-13%

-12%

-15%

-10%

3%

434%

-9%

-24%

SFG

-19%

-6%

6%

0%

44%

-51%

-40%

37%

Total

-15%

-5%

-1%

4%

5%

83%

3%

13%

Source: Company reports.

Figure 101: Korea: Potential Operating Leverage if Revenue Accelerates Quarterly Cost/Income CIR

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BFG

48%

66%

49%

52%

48%

68%

48%

44%

DGB

48%

73%

53%

66%

48%

61%

56%

48%

HFG

67%

74%

66%

70%

62%

81%

74%

66%

IBK

54%

61%

35%

52%

-6%

58%

45%

55%

KBF

62%

62%

61%

64%

53%

79%

63%

58%

SFG

54%

67%

59%

56%

63%

65%

58%

55%

Total

55%

67%

54%

60%

45%

69%

57%

54%

Source: Company reports.

25

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Korea: Earnings Begin to Stabilize Hana’s results beat expectations by ~25%, almost the exact opposite of the large miss last quarter. There were a number of oneoffs that boosted results, however, including a W106bn FXtranslation gain, and a W46bn capital gain on selling SK Hynix shares, offset partly by W17bn of ERP expenses from Hana Daetoo Securities. On a “clean” basis, with think earnings matched forecasts. NIMs were up 2bps Q/Q, driven by higher-yielding SME loans, as well as a fall in funding costs. Loans rose +1.2% Q/Q, with much faster growth in SMEs at both HNB (+0.8% Q/Q; SOHO +3.6%), and KEB (+4.6% Q/Q; SOHO +15%). While gains are unlikely to repeat, they certainly helped the Group build capital, with CET1 rising from 9.3% to 9.6% Q/Q. The biggest issue for HFG remains its high cost base, with cost/income of 66%. Given sluggish growth and low ROEs at the national banks, along with a nascent acceleration in SME credit demand, we have favored IBK and the regional banks within Korea. IBK in particular had strong results, with NIMs up +4bps Q/Q, driven by a mix of lower SMIF bond rates as well as the roll-off of high-cost debentures. Loan growth was +1.4% Q/Q and +6.3% Y/Y, which helped boost net interest income by +6% Y/Y. Provisions also remain subdued at 65bps. While we continue to like Daegu, results have been somewhat of a mixed bag the past 2 quarters. After NIMs rose +8bps last quarter on the redemption of high-cost hybrids (W400bn at 8.6%), they rose just +1bp this quarter, mostly due to lower asset yields and the origination of a W135bn low-rate loan to Daegu Metropolitan City. Non-NII remained weak, with another W7bn of impairment losses on the People’s Happiness Fund & STX, and credit costs remained elevated at 70bps, about a third of which related to additional losses on Sungdong Shipbuilding (W3.8bn) and Pantech (W13.8bn). With the stock at 0.8x book for a 10% ROE, we continue to be OW. Overall, second quarter results were solid, and recent policy moves to boost domestic demand (potentially increase dividends) reinforced the recent rally, with Korea banks up +12% on average since results. That said, while there are nascent signs of a turnaround in SME demand, we remain more cautious on the overhang in consumer leverage, as well as the shift to fixed rate mortgages, which have increased from 65% in 2010 to 69% today, and act like is a structural overhang on margins. While the recent BOK cut could reinforce asset quality & growth, it also adds another headwind to earnings growth. Net net, we remove our negative outlook on the market, but would remain neutral on the space.

Figure 103: Korea: Provisions Remain High Despite Deleveraging Quarterly Provisions Annualized LLP

3Q12

KRW mn

160

142

140 120

180

173

180

121 106

113 94

100

74

2Q13

3Q13

4Q13

1Q14

2Q14

DGB

0.90% 0.39% 0.42% 0.59% 0.48% 0.87% 0.77% 0.74%

HFG

0.68% 1.15% 0.48% 0.58% 0.43% 0.70% 0.57% 0.49%

IBK

0.85% 0.71% 0.99% 0.64% 0.92% 0.82% 0.70% 0.70%

KBFG

0.69% 0.88% 0.61% 0.65% 0.83% 0.51% 0.50% 0.59%

SFG

0.81% 0.60% 0.78% 0.41% 0.37% 0.60% 0.34% 0.61%

Total

0.72% 0.71% 0.64% 0.56% 0.61% 0.76% 0.60% 0.62%

Source: Company reports.

Figure 104: Deleveraging Has Reinforced Reserves & Capital Levels Reserves / Loans 4Q13

1Q14

NPL

2Q14 Cover

Core Tier 1 Ratio 4Q13

1Q14

A/E

2Q14 Ratio

BFG

1.29% 1.32%

n.a.

145%

9.1%

8.9%

n.a. 13.0 x

DGB

1.09% 1.17% 1.17%

140%

9.8%

9.7%

8.6% 14.0 x

HFG

1.06% 1.04% 1.04%

138% 10.5% 10.3% 10.5% 15.2 x

IBK

1.44% 1.48% 1.44%

172%

KBFG

1.29% 1.34% 1.29%

126% 12.6% 12.8% 13.1% 11.4 x

SFG

1.19% 1.15% 1.20%

185% 11.3% 10.0%

Total

1.23% 1.25% 1.23% 151% 10.3% 10.0% 10.2% 13.3 x

8.4%

8.4%

8.7% 14.5 x 9.9% 11.5 x

Source: Company reports.

Figure 105: Korea: ROEs at More Normalized Level of 8% in 2Q14 ROE 3Q13

4Q13

ROA

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BFG

11.4%

2.5% 11.6% 11.3% 0.85% 0.18% 0.86% 0.85%

DGB

12.9%

4.1%

8.5% 11.0% 0.92% 0.29% 0.60% 0.78%

HFG

7.5%

1.4%

4.1%

8.4% 0.47% 0.07% 0.25% 0.54%

IBK

6.2%

4.7%

9.1%

7.9% 0.41% 0.32% 0.61% 0.54%

KBFG

6.8%

4.1%

5.8%

6.2% 0.58% 0.35% 0.51% 0.53%

SFG

8.0%

5.1%

8.4%

8.5% 0.66% 0.44% 0.72% 0.72%

Total

8.8%

3.7%

7.9%

8.9% 0.65% 0.28% 0.59% 0.66%

Source: Company reports.

Figure 106: Korea: Valuations Discount Continuation of Current ROEs LC

LC

Mkt

Price Rating Target Cap

P/E 14E

P/B 15E

14E

Div Yield 15E

14E

ROE

15E

14E

15E

BFG

16,800

NR

NR

3,878

NR

NR

NR

NR

NR

NR

DGB

17,700

OW 21500

2,337

9.1 x

7.7 x

0.9 x

0.8 x

2.2%

2.6%

9.2% 10.0%

IBK

17,600

OW 21000

9,576 10.0 x

9.0 x

0.9 x

0.9 x

3.3%

3.5%

7.2%

7.3%

KBFG

41,550

N 50000 15,809 10.2 x

9.5 x

0.7 x

0.6 x

1.9%

2.1%

6.0%

6.1%

SFG

52,500

OW 65000 24,517 11.3 x 10.1 x

1.0 x

0.9 x

1.7%

2.0%

8.3%

8.7%

NR

NR

Total

8.1 x

7.3 x

0.7 x

0.6 x

1.8%

2.0%

6.1%

6.4%

60

Big Caps

7.2 x

6.5 x

0.6 x

0.5 x

1.2%

1.4%

4.8%

4.9%

40

Small Caps

9.6 x

8.3 x

0.9 x

0.8 x

2.7%

3.1%

8.2%

8.7%

80

67

65

20

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

KB

Woori 2007

Source: Company reports.

26

1Q13

0.40% 0.55% 0.57% 0.46% 0.64% 1.05% 0.70% 0.59%

Figure 102: Productivity Per Employee in Korea Banks: 2007 vs. 2012 200

4Q12

BFG

Hana

Shinhan 2012

KEB

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Korea: Trying to Stimulate Domestic Demand Korea banks began to de-rate in mid-2011, when the economy began to decelerate and the BOK was forced to ease monetary policy, cutting rates by 75bps over the next 2 years. During that time period, we saw deleveraging accelerate within the financial system, with loan growth slowing from +7% to +2%. One of the biggest drivers of that slowdown was the slump in the housing market, where NBFCs and co-op banks in particular pulled back on lending to lower-income segments. Indeed, mortgage growth for these institutions slowed from 13% Y/Y to 3% Y/Y in just under 18 months. That slowdown in housing credit reinforced an ongoing contraction in capex, with FAI falling from 18% of GDP to 15% in the past 3 years alone. Of course, whereas falling interest rates has been a boon to some geographies in ASEAN, falling rates in Korea has led to NIM contraction of ~40bps over the past two-and-a-half years, with margins falling from 2.82% in 4Q11, to 2.42% in 2Q14. That in turn has led to a series of negative revisions; consider that FY14 estimates have fallen by 35% in the last two years alone, as shown in the chart on the right. The good news is that the past quarter was probably the first in recent memory where each of the banks made their forecasts. Indeed, NIMs rose +2-4bps Q/Q at the group level for Hana, KBFG, and IBK, and were flat at Shinhan. Moreover, loan growth has started to pick up, with growth of +6% Y/Y, as corporate demand begins to turn, especially in SME, where loans are up +7% Y/Y from +3% this time last year. While policy has aimed towards fiscal consolidation in recent years, the gov’t has recently stepped up its rhetoric to boost domestic demand, which if successful could be a tailwind for credit growth. This includes a series of measures aimed at the transfer of corporate savings to investment, and corporate wealth to consumers. To incentivize higher dividend payouts, the MOSF tax code revisions includes a measure to reduce the withholding rate on dividends from 14% to 9% for minority shareholders, and exclude dividend income from the comprehensive tax for majority shareholders. To incentivize greater capex, it proposes a 10% tax on retained earnings if a portion of corporate earnings are not spent on local capex, dividends, or wage increases. To encourage hiring, it offers a 10% tax credit for the increased portion of wages compared to the average increase of the last three years. As we show on the right, this could be a trigger to increase dividends within the banking sector, which has been paying out only 15% of earnings in recent years. Given weaker GDP growth (2Q: 2.4% SAAR) and subdued inflation (July: +1.6%), the BOK also lowered policy rates in August by 25bps (to 2.25%), its first move in 15 months. The BOK also raised its bank lending ceiling for SMEs, from W3trn to W15trn, which allocates funding to banks at below-market interest rates, along with providing partial credit guarantees on SME exposures. Earlier in this report we noted that real lending rates (2.89%) and real deposit rates (0.99%) are among the highest in Asia, which gives policy flexibility to the central bank. That flexibility forces us to move towards a more neutral stance on the sector, with a focus on SME-related banks (DGB, IBK). Ultimately, however, we think the most recent rate cut is too little, too late, and will do more to weigh on NIMs than boost loan growth and/or asset quality.

Figure 107: Korea: Housing Credit Rebounds with NBFC Lending 32%

18% 16%

30%

14%

28%

12% 10%

26%

8%

24%

6% 4%

22%

2%

20%

0%

NBFC Market Share (R)

Comm'l Bank Growth

Non-Bank Growth

Source: CEIC.

Figure 108: Korea: EPS Revisions Stabilize after ~2 Years of Downgrades 105

FY14 YTD: -7% FY15 YTD: -16%

100 95 90 85 80 75 70 65 60

FY14

FY15

Source: Bloomberg.

Figure 109: Korea: Looking for Signs of a Turn in Fixed Asset Investment 38% 36% 34% 32% 30% 28% 26% 24% 22% 20%

Non-Residential

Residential

Source: CEIC.

Figure 110: Korea: Assuming Higher Payout Ratios & Pro Forma Yields Price (KRW) FY2014 EPS (Won) DPS (Won) Payout Yield Pro Forma New Payout New DPS New Yield

SFG KBFG HFG IBK DGB SSC 52,500 41,550 42,550 17,600 17,700 48,750 4,661 900 19% 1.7%

4,078 800 20% 1.9%

3,633 550 15% 1.3%

1,755 580 33% 3.3%

1,949 390 20% 2.2%

3,777 800 21% 1.6%

39% 1,800 3.4%

39% 1,600 3.9%

30% 1,100 2.6%

40% 702 4.0%

40% 780 4.4%

40% 1,511 3.1%

Source: Bloomberg. Based on JP Morgan research estimates for FY2014E.

27

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Singapore: Topline Decelerates with Credit

Figure 111: Singapore: Sharp Deceleration in Loan Growth Asset Grow th (Y/Y)

In the last 3 years, system loans in Singapore have grown at a pace of +17%. Like Hong Kong, that growth was driven by a surge in offshore credit, primarily in USD trade finance, to clients in Greater China. There are signs that this trend is slowing. Loan growth at DBS & UOB peaked at ~17% in 3Q14, and is now just 10% & 12%, respectively. USD credit in particular has decelerated in the first half of 2014, to just +4% Q/Q at UOB, and flat at DBS. This fits system data showing the offshore bill financing has slumped from a peak of +171% Y/Y in Sep-11 to just 32% Y/Y in June – and 9% YTD. We think much of this has to do with lower margins on the business; increasing credit risk (in light of Qingdao Port); and lower demand for cross-border carrytrades, given the weakness in CNY and the fall in 3M SHIBOR, which is down some 92bps over the past 6 months. Trade finance has been a significant growth engine for DBS in particular, and trade assets now make up 19% of total loans. That said, growth slowed from a pace of +21% Y/Y in 2013, to a net increase of just +1% in the first half of 2014. Indeed, after rising from S$14 billion in March 2010 to S$63bn today, we’d note that trade balances have now been flat for the past four quarters. Management has noted that while demand for new loans is strong, they're deliberately choosing to keep the growth low in trade credit, in order to ensure its asset quality. But we also think that falling offshore rates has impacted overall demand, as shown in system demand. Moreover, falling onshore rates has weighed on NIMs at DBS, particularly in the HK business, which fell by 9bps Q/Q and -10bps Y/Y. Second quarter figures clearly show a steep fall in both trade margins (-5bps Q/Q) and interbank yields (-17bps), both of which are likely in part due to the 75bps fall in market rates in China from early May to the end of June. Slower credit growth also had an impact on net fee income, which fell -1% Q/Q, driven by a steep fall in Trade (-6%) and Loan-related (-21%) fees, which was partly offset by stronger Investment Banking fees (+21%). While loan growth has decelerated, so too has deposit funding. Indeed, deposits at DBS fell -1% Q/Q, or -3% for SGDdeposits. This pushed up group LDRs by ~200bps Q/Q, to 87%, and SGD-LDRs by +400bps, to 77%. The bank had better success raising USD liquidity, and the USD-LDR is now 105%. This dynamic of very weak deposit growth is in-line with system trends. Despite the fact that system loans continue to grow at +16% Y/Y, system deposits are growing just flat, and are actually down -0.5% YTD. Indeed, we saw similar trends at UOB, where SGDdeposits fell -3% sequentially, causing local currency LDRs to jump 500bps Q/Q, to 100%. CA deposits actually declined 12% Q/Q, leading to a 41.5% CASA ratio, the lowest among SG banks. That said, UOB also had better success raising USD liquidity, with deposits up +4%, which kept the USD-LDR flat at 71%, as USDloans also rose +4% sequentially. The lack of liquidity and high LDRs leads us to believe that Singapore banks will have far less sensitivity to rising rates when the Fed begins to hike. In effect, deposit competition & the lack of excess liquidity may work against the banking sector, particularly at UOB.

28

Loan Growth (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

DBS

11%

14%

12%

8%

20%

18%

13%

10%

UOB

12%

12%

11%

8%

16%

17%

13%

12%

Total

12%

14%

11%

9%

17%

18%

15%

11%

Source: Company reports.

Figure 112: Singapore: LDRs Have Been Stable vs. System Loan / Deposit Ratio LDR

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

DBS

85%

84%

86%

87%

86%

86%

85%

87%

UOB

88%

86%

85%

87%

90%

85%

87%

89%

Total

86%

85%

86%

87%

88%

86%

86%

88%

Source: Company reports.

Figure 113: Singapore: NIMs Rose at DBS Due to Interbank Book Quarterly NIM Annualized NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

DBS

1.68% 1.63% 1.64% 1.62% 1.60% 1.61% 1.66% 1.67%

UOB

1.84% 1.77% 1.70% 1.71% 1.71% 1.74% 1.73% 1.71%

Total

1.75% 1.69% 1.66% 1.66% 1.65% 1.66% 1.69% 1.69%

Source: Company reports.

Figure 114: Singapore: Fee Growth Weaker on Lower Markets Activity Fee Growth (Y/Y)

Non NII Grow th (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

DBS

9%

18%

1%

5%

11%

5%

-3%

-18%

UOB

9%

12%

-9%

-6%

-11%

4%

-9%

5%

Total

12%

14%

1%

0%

1%

-1%

1%

9%

Source: Company reports.

Figure 115: Singapore: Cost Discipline Key in a Period of Falling Rates Cost / Income Ratio 3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

DBS

45%

48%

41%

43%

44%

48%

42%

46%

UOB

41%

45%

42%

44%

43%

44%

43%

44%

Total

42%

45%

42%

44%

42%

44%

41%

43%

Source: Company reports.

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Singapore: Topline Decelerates with Credit UOB had weaker results for the second consecutive quarter, which led us to downgrade the stock to Underweight. NIMs fell another 2bps in 2Q14, and like DBS, this was mostly driven by a steep fall in interbank yields, which fell -22bps Q/Q, from 1.63% to 1.41%. In fact, lending rates (-3bps) and securities yields (+5bps) fared much better in terms of stability. Fees were also a tad weaker, falling -6% sequentially, and -7% Y/Y for the entire first half. That was mostly due to lower Investment- and Loan-related fees, while Trade-related fees actually rose mid-single digits on the quarter & half. While UOB doesn’t break out its trade book, it was clear in 2Q results that lending to Greater China was very strong, up +8% Q/Q and +44% Y/Y, with most of this in USD, leading us to believe that the bank continues to push into this segment. UOB’s geographic spread has led to greater funding pressures across the franchise, which also reinforces NIM compression. Indeed, NIMs fell -7bps Q/Q in Thailand, -21bps in Indonesia, and -21bps in Greater China. We think that reflects LDRs near or above 100% in each of these geographies, as well as smaller scale to compete for CASA. This mix also exposes the group to local asset quality issues, which came through in 2Q results. Indeed, NPLs rose +11% Q/Q overall, which was due to a rise across Malaysia (+4%), Thailand (+21%), and Indonesia (+21%), which was mostly due to working capital loans. Singapore also saw NPLs rise +18% sequentially, driven primarily by high-end Singapore margins, with the group NPL ratio on mortgages rising +20bps Q/Q. In contrast, NPLs at DBS actually fell -12% Q/Q, almost all of which was driven by their Rest of World portfolio. We’ve been bearish on Singapore in part because it offers low returns and a growing exposure to offshore markets where we worry about asset quality and/or funding availability. While trade finance has historically been a low loss asset class, we still think lending to China is something different, as a considerable amount of external liquidity ends up in the shadow banking market. In the short-term, we think China will continue to attract liquidity from across the region, as short-term rates offer an opportunity for margin expansion in geographies like HK, Singapore, and Taiwan, where yields are far lower. In the longterm, this may prove a more accident-prone asset class, and one in which investors are unlikely to pay a premium multiple for growth. With Sing banks at 11.5x FY14E book vs. ROEs of -11-12%, we still think the stocks are not cheap enough to turn more positive on the sector. DBS is our only OW, and largely due to its gearing to higher US rates, given its low SGD-LDR.

Figure 116: Singapore: Asset Quality Has Been Better at DBS NPL Grow th Q/Q NPL

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

DBS

-4%

-1%

2%

8%

2%

-2%

-9%

-12%

UOB

18%

-5%

-5%

-4%

-2%

-2%

0%

11%

4%

-4%

-3%

3%

5%

-1%

-6%

-1%

Total Source: Company reports.

Figure 117: Singapore: Credit Costs Rose at UOB on Overseas Quarterly Provision Annualized LLP

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

DBS

0.11% 0.23% 0.40% 0.42% 0.25% 0.22% 0.24% 0.20%

UOB

0.30% 0.31% 0.30% 0.30% 0.13% 0.23% 0.26% 0.32%

Total

0.19% 0.25% 0.25% 0.31% 0.20% 0.21% 0.20% 0.23%

Source: Company reports.

Figure 118: Singapore: RWA Growth Slowing Post-Basel 3 RWA Grow th Y/Y

RWA / Assets

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

DBS

9%

10%

3%

3%

61%

59%

59%

59%

UOB

20%

24%

9%

11%

57%

58%

56%

56%

Total

14%

17%

8%

7%

55%

54%

53%

54%

Source: Company reports.

Figure 119: Singapore: Capital Robust on Fully-Phased Basel III Reserves / Loans 4Q13

1Q14

NPL

CET1 B3 (4Q)

2Q14 Cover

4Q13

1Q14

A/E

2Q14 Ratio

DBS

1.40% 1.37% 1.31%

147% 11.9% 11.7% 12.2% 11.9 x

UOB

2.19% 2.04% 1.97%

149% 11.5% 10.5%

Total

1.60% 1.54% 1.48%

151% 11.4% 11.1% 11.8% 12.6 x

n.a. 11.6 x

Source: Company reports.

Figure 120: Singapore: ROEs Impacted by Provisions & NIM ROE 3Q13

4Q13

RORWA

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

DBS

10.7% 11.8% 14.4% 11.1% 1.44% 1.64% 2.03% 1.56%

UOB

12.0% 12.3% 12.6% 12.5% 1.82% 1.82% 1.91% 1.93%

Total

11.9% 12.1% 14.1% 12.9% 1.76% 1.78% 2.08% 1.93%

Source: Company reports.

Figure 121: Singapore: Valuations Fair vs. Low Double-Digit ROE LC

LC

Mkt

Price Rating Target Cap

P/E 14E

P/B

Div Yield

15E

14E

15E

14E

15E

ROE 14E

15E

DBS

17.94 OW

20.00 35,377 10.5 x

9.8 x

1.1 x

1.1 x

3.3%

3.6% 11.4% 11.2%

UOB

23.15 UW

22.00 29,728 12.6 x 12.5 x

1.4 x

1.3 x

3.2%

3.5% 11.6% 11.3%

11.5 x 11.1 x

1.3 x

1.2 x

3.3%

3.5% 11.5% 11.2%

Total

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

29

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

SG & HK: Trade Finance & Offshore Risk Since early 2010, Asia’s offshore financial centers have seen a surge in credit supply, with loans growing at a CAGR of 21% in Hong Kong, and 18% in Singapore. Much of this was due to a rise in cross-border carry-trades with China, which were incentivized by the rise of onshore interbank rates, as well as the continued appreciation of CNY. Indeed, the two charts on the right show the rise in offshore bill financing in HK, which has grown 12x-fold since 2009, from $13bn to $165bn, as well as in Singapore, which has grown 10x-fold, from $6bn to $69bn. Given onshore rates are still above that found in either HK or Singapore, we expect this type of lending to continue on a structural basis. That said, from a near-term perspective, falling SHIBOR rates (-82bps since April) coupled with rising concerns on asset quality have caused banks to pull back on credit supply. In the case of StanChart, the bank took nearly $185mm in provisions on $250mm of exposure to commodity financing in Qingdao Port. Likewise, we’ve seen DBS pull back from the segment to in a bid to test the asset quality of their portfolio, with trade loans up just +1% in the quarter.

Figure 122: Singapore: LDRs Up +40% Since ‘09 on Foreign Banks 115%

30.0%

110%

25.0%

105%

20.0%

100%

15.0%

95%

10.0%

90%

5.0%

85%

0.0%

80% 75%

-5.0%

70%

-10.0%

Source: CEIC.

System LDR Loan Growth (R)

Average LDR of Big 3 Deposit Growth (R)

Figure 123: HK: System LDRs Continue to Rise on Trade Finance 75%

35.0%

70%

30.0%

65%

25.0% 20.0%

60%

15.0%

55%

10.0%

50%

Beyond asset quality, one of the issues with this offshore growth has been the rise in banking system leverage. Ultimately, offshore growth imposes liquidity constraints on domestic funding, as loan proceeds don’t get recycled back in the home market. Since the end of 2009, LDRs have increased some +40% in Singapore (to 112%), and +22% in Hong Kong (to 74%). That’s largely driven by deposit growth that today lags loan growth by some 16% in Singapore (0% vs. 16%), and 3% in Hong Kong (13% vs. 16%). It’s also not inconceivable that if the Fed exits QE, the cost of wholesale funding will rise in kind, and become a disadvantage for banks that lack a natural base of USD deposits. This would be a bigger headwind for Singapore than HK, which still has FXLDRs of 77%. For now, we think the slowdown in cross-border carry trades is merely an overhang on earnings growth. As discussed earlier, loan growth at the Singapore banks has slowed from 17% to 12% the past 3 quarters, and is running just +4% YTD. In fact, and NIMs also felt pressure this quarter from declining onshore rates, which hit the interbank book at both DBS (-17bps Q/Q) and UOB (-22bps). We also saw NIM compression at the HK banks, but here loan growth has been more steady. Indeed, trade credit is up +15% in the first six months alone, helping drive system loan growth of 11%. The key thing to watch is whether a slowdown in credit leads to any material increase in provisions. For now, we continue to be surprised by the low level of credit costs in both markets, although this has been a natural offset to declining NIMs in a period of falling interest rates.

5.0%

45%

0.0%

40%

-5.0%

35%

-10.0%

System LDR

Loan Growth (R)

Deposit Growth (R)

Source: CEIC.

Figure 124: Singapore: Offshore Bill Financing Decelerates $75

200% 150%

$60

100%

$45

50% $30

0%

$15

-50%

$0

-100%

Offshore

Onshore

Total Growth

China Bills Growth

Source: CEIC.

Figure 125: Hong Kong: Offshore Bill Financing Decelerates $180

200%

$160 150%

$140 $120

100%

$100 $80

50%

$60 $40

0%

$20 $0

-50%

Bill Financing (FX) Source: CEIC.

30

Total Growth

China Bill Growth

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

HK/SG: Offshore Exposure Adds to Risk

Figure 127: Singapore: Loan Composition & Growth by Geography DBS

The issue of offshore lending also extends beyond trade finance. HK banks have seen their onshore lending in China increase significantly in the past two years, with exposure ranging from 10% (HSB) to 46% (BEA) of total lending. Last year’s results showed profitability in the onshore business under pressure, with pre-tax earnings down for most of the sector. Part of this is due to inferior deposit franchises, with funding competition squeezing overall margins. But increasingly the issue is asset quality, as NPLs & Overdue loans continue to rise. Indeed, this brings us back to our core issue of underreserving at the HK banks. In China, state banks are required to carry 2.50% reserves to loans, to cushion the balance sheet from asset quality stress. If one applied the same ratio to HK banks, that would imply reserves solely for China of 0.25% for banks with 10% exposure, and 118bps of reserves for BEA; yet the sector has just ~30bps of total reserves. In effect, HK banks are still reserved as though the onshore credit experience will mirror that seen in HK. Singapore is no stranger to rising offshore credit, and here we think the risk is underappreciated by markets. Much of the growth in the last quarterly result was driven by faster credit growth offshore, where the banks have much lower-quality deposit franchises. Indeed, consider UOB’s 2Q14 disclosure by currency: LDRs are 100% in Singapore, 91% in Malaysia, 104% in Thailand, and 102% in Indonesia. This is likely to be a material headwind to traditional “asset sensitivity” if & when the US raises rates. While historically the Singapore banks had lower SGD-LDRs, today we only see that at DBS, where the ratio is just 77%. Furthermore, even if a rise in USD rates helps boost Singapore margins, it’s likely to be offset by headwinds in other geographies, as the impact of rising USD rates creates outflows in local geographies, reinforcing tighter liquidity. This is particularly an issue for UOB given their much greater footprint in ASEAN relative to DBS.

Y/Y 8%

Sing.

UOB

Q/Q

Mix

3%

Y/Y

47%

1%

Thailand

-3%

2%

65%

9%

3%

14%

9%

9%

1%

5%

-3%

-3%

3%

44%

8%

7%

Indo. Gr. China

18%

1%

Others

-4%

-2%

8%

7%

-1%

5%

9%

2%

100%

12%

2%

100%

Total

36%

Mix

11%

ASEAN

Malaysia

Q/Q

Source: Company reports.

Figure 128: Singapore: Loan Composition & Growth by Currency DBS Y/Y

UOB

Q/Q

Mix

Y/Y

Q/Q

Mix

SGD

7%

2%

40%

8%

1%

55%

USD

12%

0%

35%

35%

4%

16%

MYR

n.a.

n.a.

n.a.

7%

3%

13%

THB

n.a.

n.a.

n.a.

10%

1%

5%

n.a.

n.a.

n.a.

-6%

-4%

2%

10%

3%

26%

15%

7%

10%

9%

2%

100%

12%

2%

100%

IDR Othe rs Total Source: Company reports.

Figure 129: Singapore: Deposit Composition & Growth by Currency DBS Y/Y

UOB

Q/Q

SGD

-2%

USD MYR

LDR

Y/Y

Q/Q

LDR

-3%

77%

3%

-3%

100%

44%

2%

105%

33%

4%

71%

n.a.

n.a.

n.a.

3%

0%

91%

THB

n.a.

n.a.

n.a.

2%

0%

104%

IDR

n.a.

n.a.

n.a.

-3%

-3%

102%

Othe rs

2%

-1%

85%

12%

6%

68%

Total

9%

-1%

87%

8%

0%

89%

Source: Company reports.

Figure 126: Risk Weights Have Come Down Over Time for the Sector 2011 Risk-Weighting

BOCHK

2012

HSB

BOCHK

Figure 130: Risk Weights Have Come Down Over Time for the Sector 2012

2013

HSB

BOCHK

HSB

Risk-Weighting

DBS

2013 UOB

DBS

1H14 UOB

DBS

UOB

Mortgage % Mortgage A-IRB

9% 91%

13% 100%

8% 91%

14% 100%

9% 91%

14% 98%

Mortgage % Mortgage A-IRB

6% 98%

10% 100%

5% 97%

10% 100%

8% 96%

13% 100%

Other Retail Corporate Central Gov't / Bks Institutions SME & Specialized

22% 64% 0% 28% n/a

46% 55% 9% 14% 5%

23% 70% 6% 27% 49%

45% 57% 5% 14% 4%

24% 64% 1% 36% 43%

49% 59% 11% 18% 3%

Other Retail Corporate Central Gov't / Bks Institutions SME & Specialized

54% 60% 9% 26% 86%

39% 79% 0% 21% 69%

61% 52% 10% 22% 92%

31% 75% 1% 26% 67%

65% 51% 12% 21% 86%

27% 71% 3% 17% 68%

Credit RWA / Assets Total RWA / Assets RWA: % IRB

34% 39% 79%

32% 31% 97%

38% 42% 83%

31% 31% 97%

39% 44% 87%

36% 36% 96%

Credit RWA / Assets Total RWA / Assets RWA: % IRB

46% 61% 90%

43% 53% 91%

43% 59% 91%

45% 58% 92%

43% 60% 89%

44% 57% 93%

RWA Composition % Credit Risk % Market Risk % Operational Risk

89% 3% 8%

88% 1% 12%

91% 1% 7%

88% 1% 11%

91% 2% 7%

89% 1% 10%

RWA Composition % Credit Risk % Market Risk % Operational Risk

81% 13% 6%

86% 7% 7%

79% 15% 6%

85% 8% 7%

77% 17% 6%

83% 10% 7%

Source: Company disclosures.

Source: Company disclosures.

31

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Thailand: Overhang Could Last Longer We’ve been bullish on large cap Thai banks, despite weakness in private consumption & investment, and a political stalemate that brought economic growth to a halt. The key to our thesis was improving liquidity, as falling funding costs (-27bps YTD) helped drive NIM expansion of +12bps in 2Q14 results. With stocks up +44% YTD and banks trading at 11.5x FY14E, the question is whether outperformance can continue. We take a more cautious stance for the back half of the year, and see less room for meaningful EPS upgrades and/or multiple expansion. The biggest headwind going forward is rising funding costs, as banks compete for liquidity ahead of stronger loan growth. One year time deposit rates currently average 1.70%, but we’ve seen a number of campaigns in recent weeks offering 2.702.80% for 8-12 months. Moreover, we still see deteriorating asset quality in areas like SME, where NCB data shows NPLs up +32% Y/Y, and consumer credit more generally, where +30day delinquencies are up +28% Y/Y. In fact, we think there is too much hope resting on fiscal stimulus to bail out these issues, and expect a slower roll-out of public spending projects. Second quarter earnings were up +4% for the sector, but particularly strong across the more liquid stocks like KBANK (+7% Y/Y), KTB (+17%), and SCB (+16%). The biggest driver for earnings was margin expansion, with NIMs up +11-15bps Q/Q across the big 4, benefitting from a steep fall in deposit costs. In the first 6 months of the year, funding costs plummeted 47bps at SCB, 36bps at KBANK, and 27bps on average for the sector. Even BBL saw margins expand +15bps Q/Q, despite having the most asset sensitive balance sheet. The bank’s lower duration corporate book has been an overhang on margins the past 2 years, with NIMs down 22bps since 2Q12, while margins rose +13bps at SCB and 22bps at KBANK over the same time period. Margin expansion was all the more important for 2Q results because loan growth remains so weak, and loans are up just +2.1% YTD for the sector. Consumer & SME credit demand is particularly weak, with HP loans +2% YTD at BAY, -6% at SCB, and –4%/-3% at TISCO & TCAP. One of the reasons we expect tighter liquidity going forward is deposit disintermediation, particularly to higher-yielding MMFs or bancassurance products. The latter has been a big driver of fee income in recent quarters, even though there were some mitigating factors in 2Q14 which limited growth in nonNII to just +1% Y/Y. KBANK continues to have the strongest fee income, which rose +11% Y/Y, driven by credit-related fees & mutual fund sales. KTB also had good non-NII growth (+6% Y/Y), mostly on the back of improving results at KTC Card, which is 49.45% owned by the bank. In contrast, BBL has continued to struggle (-7% Y/Y), and the HP-focused lenders saw a sharp contraction in fees (TCAP: -33% Y/Y, KK: -38%), mostly on weaker loan growth & brokerage income. SCB didn’t have impressive fees (+0%), but they made up for it on the cost line. Indeed, expenses rose just +4% Y/Y at SCB, below that of revenues (+7% Y/Y). This pushed the cost/income ratio down from 38.4% to 37.5% in the past year, which is 400700bps below the other big 4 banks. The auto-focused lenders have also exercised tight cost control, given the contraction in HP lending, with expenses down -10% Y/Y at TISCO, -17% at TCAP, and -12% at KK. 32

Figure 131: Thailand: Sharp Deceleration in Loan Growth Asset Grow th (Y/Y)

Loan Growth (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BAY

10%

10%

8%

6%

13%

7%

12%

9%

BBL

5%

7%

7%

3%

9%

9%

10%

6%

12%

10%

9%

5%

10%

8%

7%

6%

KTB

7%

12%

8%

5%

10%

12%

10%

10%

SCB

11%

12%

6%

5%

13%

12%

9%

5%

TMB

11%

8%

5%

13%

9%

10%

10%

10%

TISCO

24%

24%

4%

2%

25%

18%

7%

0%

TCAP

7%

3%

0%

0%

12%

5%

2%

-1%

KBANK

KK

-2%

7%

4%

1%

17%

13%

12%

6%

Total

10%

10%

6%

4%

13%

11%

9%

6%

Source: Company reports.

Figure 132: Thailand: Big NIM Expansion on Falling Funding Costs Quarterly NIM Annualized NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BAY

4.28% 4.22% 4.22% 4.24% 4.25% 4.55% 4.23% 4.25%

BBL

2.49% 2.35% 2.33% 2.31% 2.33% 2.23% 2.20% 2.35%

KBANK

3.55% 3.53% 3.49% 3.52% 3.52% 3.59% 3.61% 3.75%

KTB

2.81% 2.92% 2.71% 2.76% 2.83% 2.83% 2.77% 2.88%

SCB

3.23% 3.11% 3.10% 3.11% 3.23% 3.20% 3.20% 3.34%

TMB

2.80% 2.89% 2.85% 2.94% 3.09% 3.46% 2.82% 2.84%

TISCO

2.93% 2.77% 2.84% 2.87% 2.83% 2.72% 2.73% 2.94%

TCAP

2.67% 2.70% 2.60% 2.70% 2.70% 2.79% 2.70% 2.84%

KK

3.14% 3.48% 3.42% 3.85% 3.74% 3.65% 3.71% 3.67%

Total

3.07% 3.04% 2.98% 3.02% 3.06% 3.10% 3.02% 3.14%

Source: Company reports.

Figure 133: Thailand: Fee Growth Most Impressive at KBANK Fee Growth (Y/Y)

Non NII Grow th (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BAY

11%

10%

-4%

-2%

4%

-24%

-13%

-18%

BBL

10%

3%

0%

-7%

15%

8%

7%

-4%

KBANK

22%

14%

16%

11%

20%

15%

19%

8%

KTB

14%

6%

6%

-1%

10%

15%

-9%

6%

SCB

23%

11%

9%

0%

36%

8%

-4%

-5%

TMB

12%

0%

-17%

-7%

7%

15%

-9%

-13%

TISCO

15%

-4%

-21%

3%

-9%

-17%

-26%

-7%

TCAP

19%

-5%

-17%

-33%

21%

-8%

-29%

-14%

KK

70%

22%

-20%

-38%

51%

24%

-18%

-33%

Total

19%

8%

3%

-2%

19%

5%

-3%

-4%

Source: Company reports.

Figure 134: Thailand: Margins + Non-NII Drives SCB, KBANK, KTB Revenue Grow th (Y/Y)

Cost Grow th (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BAY

8%

3%

1%

-2%

10%

-4%

0%

11%

BBL

6%

3%

3%

3%

6%

2%

-2%

35%

KBANK

17%

13%

16%

12%

17%

9%

15%

7%

KTB

10%

9%

5%

10%

11%

22%

11%

11%

SCB

24%

12%

6%

7%

14%

8%

2%

4%

TMB

14%

25%

2%

1%

12%

2%

13%

7%

TISCO

10%

3%

-8%

2%

-11%

-32%

-23%

-10%

TCAP

14%

4%

-7%

1%

-5%

-7%

-3%

-17%

KK

29%

12%

1%

-17%

11%

-12%

-17%

-12%

Total

15%

9%

2%

2%

7%

-1%

0%

4%

Source: Company reports.

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Thailand: Overhang Could Last Longer Asset quality continues to be a key focus for us, given the significant deceleration in credit growth. Loan growth peaked at a pace of +19% Y/Y in Mar-11, and is running at just +6% Y/Y as of 2Q14 results. Tighter credit and maturing consumer portfolios are two key overhangs on asset quality, and are main reasons that provisions remain elevated in the sector. Credit costs were in-line with guidance at KBANK (80bps) and flat sequentially at SCB (72bps), even though the latter saw gross NPLs rise +5% Q/Q and +13% Y/Y. KTB took an outsized provision of 115bps in the second quarter, which boosted NPL coverage from 106% to 113%, although this was more of a catch-up provision after the first quarter, when the bank set aside just 39bps of reserves. Asset quality is most under pressure at HP lenders like TISCO, which took 159bps of provisions. In fact, this was still not enough to offset a 19% sequential rise in NPLs, and NPL coverage fell further to 105%, from 145% this time last year. KK also saw a surge in NPLs, up +30% Q/Q and +70% Y/Y, but also took just 64bps of provisions. That meant NPL coverage dropped from 92% to 64% in the second quarter, by far the lowest in the sector. TMB was perhaps the one positive surprise of 2Q credit costs, as the bank took just 23bps of provisions, as it released ~600mm of reserves taken last year on a debt-for-equity swap, where shares have since been sold. On our recent visit to Thailand, we got the sense that the overhang on asset quality is likely to continue. To be fair, the larger banks are well-reserved, and have high capital levels. CET1 is 14.8% at BBL, 12.5% at SCB, and 12.9% at KBANK, although the latter faces further deductions on capital from the intangibles related to K-Transformation (which could hit capital by ~130bps). The problem is that we’re at the end of a significant leverage cycle. The ratio of consumers borrowing from the formal sector has increased from 53.3% in 2012, to 64.6% in 2013, to 74.8% in 2014. Household debt/GDP has increased from 77% of GDP to 82% in the past year alone. As we’ll discuss on the next page, this follows a period where wages grew +35% since 2010. Going forward, we expect a more muted lending cycle, even taking into account the ability of the NCPO to expedite certain public spending programs. In terms of stock preference, we'd stick with KBANK, and be adding to KTB. Despite our reservations over SME lending, KBANK has historically been more conservative, lending up to 1x collateral, while other lenders will lend up to 3x collateral, using credit guarantees from TCG. KTB also has an opportunity to accelerate loan growth, particularly in private sector corp. lending, which should boost NIMs. More broadly, however, we'd be trimming exposure from this market, and downgrade our market rating to Neutral. NIM compression & asset quality pressure will weigh on earnings growth, which should slow to +7% in FY14, and +10% in FY15, after rising +22% in each of the previous 2 years. Much of that earnings growth was driven by rising leverage, as well as falling tax rates – two factors that won't be sustained, and were a large factor behind the significant outperformance YTD (+8% vs. MSCI AxJ Financials) and since 2010 (+20% vs. MSCI AxJ Financials).

Figure 135: Thailand: Countercyclical Provisioning for Growth Quarterly Provisions Annualized LLP

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BAY

1.41% 1.40% 1.44% 2.70% 1.40% 2.06% 1.74% 1.76%

BBL

0.38% 0.60% 0.41% 0.78% 0.39% 0.38% 0.46% 0.50%

KBANK

0.61% 0.78% 1.02% 0.62% 0.82% 0.82% 0.98% 0.80%

KTB

0.39% 2.67% 0.40% 0.98% 0.79% 0.71% 0.39% 1.15%

SCB

0.54% 0.90% 0.62% 0.64% 0.97% 0.96% 0.71% 0.72%

TMB

1.06% 4.60% 0.93% 2.93% 0.96% 1.34% 0.87% 0.23%

TISCO

0.95% 0.88% 1.43% 1.16% 1.08% 2.19% 1.58% 1.69%

TCAP

0.62% 0.48% 0.69% 3.17% 0.82% 0.99% 0.80% 1.05%

KK

1.04% 0.83% 1.32% 1.60% 0.71% 1.12% 1.53% 0.64%

Total

0.63% 1.36% 0.74% 1.31% 0.83% 0.95% 0.81% 0.90%

Source: Company reports.

Figure 136: Thailand: Strong Capital at the Large Cap Banks Reserves / Loans 4Q13

1Q14

NPL

2Q14 Cover

Tier 1 Capital Ratio 4Q13

1Q14

A/E

2Q14 Ratio

BAY

2.34% 2.31% 2.29% 132% 10.2% 10.4% 10.3%

9.5 x

BBL

5.18% 5.30% 5.39% 217% 14.4% 14.4% 14.8%

8.3 x

KBANK

3.09% 3.17% 3.22% 146% 12.0% 11.9% 12.9%

9.9 x

KTB

3.60% 3.64% 3.85% 113% 10.2%

SCB

3.41% 3.38% 3.39% 144% 11.9% 12.2% 12.5%

TMB

6.09% 6.23% 5.66% 150% 10.6% 10.5% 10.7% 12.4 x

TISCO

2.17% 2.28% 2.39% 105%

9.1%

9.4% 11.5% 14.0 x

TCAP

3.97% 4.02% 4.05%

83%

9.5%

9.3%

KK

3.81% 3.82% 3.82%

69% 13.1% 12.8% 13.3%

Total

3.74% 3.79% 3.78% 129% 11.2% 11.2% 11.8% 11.5 x

9.8% 10.2% 11.7 x 9.7 x

9.9% 20.9 x 7.2 x

Source: Company reports.

Figure 137: Thailand: ROEs Remain High on Concentrated Mkt Share ROE 3Q13

4Q13

RORWA

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BAY

12.7% 10.3% 10.5% 11.0% 1.95% 1.50% 1.51% 1.62%

BBL

12.6% 10.6% 11.9% 11.7% 1.97% 1.65% 1.89% 1.88%

KBANK

20.9% 17.8% 20.3% 20.0% 3.03% 2.58% 3.05% 3.16%

KTB

18.3% 19.9% 15.8% 14.1% 1.99% 2.19% 1.75% 1.57%

SCB

21.9% 19.5% 20.7% 22.5% 3.09% 2.81% 3.10% 3.49%

TMB

12.7% 11.8% 10.2% 16.1% 1.60% 1.47% 1.25% 1.99%

TISCO

21.8% 14.5% 15.9% 16.7% 2.34% 1.62% 1.89% 2.15%

TCAP

14.7% 13.2% 11.0% 10.1% 0.92% 0.84% 0.70% 0.66%

KK

11.7% 12.0%

Total

17.0% 15.3% 15.5% 15.7% 2.25% 2.03% 2.09% 2.18%

7.9%

6.7% 1.96% 2.01% 1.34% 1.14%

Source: Company reports.

Figure 138: Thailand: Valuations Now Price In Domestic Acceleration BAY BBL

LC LC Mkt P/E Price Rating Target Cap 14E 15E 50.00 N 35.00 9,513 18.3 x 15.9 x 207.00 N 225.00 12,377 10.1 x 9.2 x

P/B 14E 15E 2.3 x 2.1 x 1.2 x 1.1 x

Div Yield ROE 14E 15E 14E 15E 2.4% 2.8% 13.0% 13.8% 3.9% 4.1% 12.8% 12.9%

KBANK KTB

227.00 23.60

OW OW

230.00 16,943 11.5 x 10.3 x 25.00 10,288 10.3 x 9.4 x

2.1 x 1.5 x

1.8 x 1.3 x

1.5% 3.8%

1.8% 19.8% 18.9% 4.2% 14.8% 14.8%

SCB

188.50

OW

200.00 20,042 11.5 x 10.4 x

2.3 x

2.0 x

2.9%

3.4% 21.1% 20.3%

TMB TISCO

3.02 43.75

UW N

2.10 4,132 16.9 x 14.9 x 45.00 1,097 7.4 x 6.8 x

1.9 x 1.4 x

1.8 x 1.2 x

1.5% 5.5%

1.7% 12.0% 12.5% 5.5% 19.3% 18.8%

TCAP KK

35.00 41.75

UW UW

34.00 1,323 42.00 1,099

8.2 x 9.2 x

0.9 x 1.0 x

0.8 x 0.9 x

4.3% 7.2%

4.6% 11.2% 10.4% 7.8% 10.2% 10.4%

Total Big Caps

11.8 x 10.6 x 10.8 x 9.8 x

1.7 x 1.8 x

1.5 x 1.6 x

3.2% 3.0%

3.5% 15.5% 15.3% 3.4% 17.1% 16.7%

Small Caps

12.1 x 11.0 x

1.5 x

1.4 x

4.2%

4.5% 13.1% 13.2%

8.2 x 9.7 x

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014

33

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Thailand: Focus on Asset Quality & NIMs During an extended period of weak external demand, Thailand epitomized the use of fiscal stimulus to support domestic demand. Minimum wage hikes (30-90% increase), rice subsidies (50% above market), and auto rebates (up to Bt100k) all supported domestic consumption, as did a surge in consumer leverage. The problem is that stimulus measures are now wearing off, creating a meaningful drag for underlying growth. Indeed, loan growth has slowed from a peak of +18% Y/Y in June 2013, to just +3% today. That in turn has weighed on asset quality, and a sharp pullback in credit supply – particularly in higher-risk areas liked used car lending or small SMEs. Indeed, National Credit Bureau data for 2Q14 shows NPLs are up +17% in consumer unsecured; +28% Y/Y in hire purchase; and +32% in SME. This in turn has led to a surge in credit reviews, which rose from 6.6mm reviews in 2012, to 16.0mm in 2013, to 14.5mm in just the first 6 of 2014. Recent 2Q GDP figures show Thailand’s economy expanded +3.5% sequentially, leaving headline GDP up +0.4% Y/Y. Domestic demand in particular (+10.8% Q/Q) showed a bounce back after the very weak first quarter and 5 consecutive quarters of Y/Y contraction in private consumption. Increased gov’t spending (+19.6% Q/Q) and fixed investment (+17%) gives us hope that the sector will see improving credit demand, which typically lifts bank stocks. On the fiscal side, the NCPO has accelerated the approval of factory permits, repaid famers under the rice subsidy plan, and recently approved an infrastructure spending plan of THB2.4 trillion, the equivalent of 20% of GDP, which will be rolled out over the next 7 years. The MOF has also proposed a tax rebate of up to 20% of income for those making less than 15k baht a month, which would be a powerful trigger for private consumption. On the monetary side, the BOT has kept a neutral stance, with policy rates at just 2.00%. Recent measures by the military to cancel all future LPG hikes and reduce the cost of diesel likely keep prices contained, with headline inflation of 2.2% in July, and core at 1.8%, well within the BOT’s target range of 0.53.0%. Easy monetary policy has been a boon to banks, despite the economic slowdown. Over the past year, 1Y time deposit rates are down 100bps, while savings rates are down 25bps. As loan demand decelerated, Thai banks allowed lower funding costs to offset the pressure on lending yields. This was most apparent in recent 2Q results, where net interest margins rose +11-15bps across the big 4 banks, and +21/14bps at TISCO/TCAP. One negative consequence of low rates has been the rise in leverage, as savers increasingly shifted liquidity into deposit alternatives. These alternatives included bancassurance products, which surged +37% Y/Y on a YTD basis, as well as high-yielding money market funds, which are up +23% Y/Y. Savings also shifted to FX deposits; indeed, while THB-deposits are up just +3% YTD, foreign currency deposits are up nearly +8%. The net effect of this savings shift has been a rise in loan/deposit ratios at the banks. Indeed, LDRs are up from 85% to 88% over the past 18 months.

Figure 139: Thailand: Rising LDRs as Deposit Growth Suffers 95%

20% 15%

90%

10% 85% 5% 80%

0%

75%

-5%

Adj. LDR ex-Interbank

Loan Growth

Deposit Growth

Source: CEIC.

Figure 140: Thailand: Consumer-Led Credit Expansion Decelerates 700

155

THB bn

600

150

500

145

400

140

300

135

200

130

100

125

0

120

Consumer Bank Credit

Private Consumption Index (R )

Source: CEIC.

Figure 141: Thailand: Credit Enquires Surge as Banks Tighten Supply 30 25

29.0

Loan Enquiries & Credit Reviews, in Millions

20 14.3

15 10

14.0

16.0 13.1

11.6

10.3 5.8

7.6

6.6

5 0 2010

2011

2012

Enquiry for New Loan

2013

2014 Annualized

Enquiry for Credit Review

Source: National Credit Bureau.

Figure 142: National Credit Bureau: Rise in NPLs Across Sectors 35%

NPL Growth Y/Y

32% 28%

30% 25% 20%

17%

15% 10% 3%

5% 0% -5% -10% SMEs Source: National Credit Bureau.

34

Auto Loan

Personal Loan

Credit Card

-8% Housing Loan

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Thailand: Focus on Asset Quality & NIMs The rise in system LDRs could lead to much more dramatic funding competition should credit demand return. Indeed, on our visit to see banks a few weeks back, we could already see this beginning. 1Y time deposit rates averaged ~1.70% in June data; but most banks are offering deposit campaigns with rates above 2.70%. BAY is offering an 8M time deposit at 2.75%, while the Government Savings Bank is offering an 11M at 2.80%. TMB had the best deposit growth in the first half (+8% YTD), mostly due to growth in its “No Fixed” product, which offers TDtype rates (2.25% currently) but with the flexibility to withdraw money 2-3 times a month. Likewise, BBL is now offering a deposit that’s 1.70% with T+1 withdrawals. SCB mentioned they might start to increase rates ahead of the rush for liquidity. More broadly, we currently pencil in a rate hike for 1Q15, which could be a headwind for NIMs & earnings after falling funding costs helped the banks re-rate this year. Margins could also feel some pressure from the lack of loan growth in higher-yield segments, as home equity is 400-500bps above regular mortgage, and small SME is 300-400bps above regular SME – two areas seeing much more conservative lending today.

Figure 143: Thailand: Decline in CoF Has Been a Tailwind for Earnings

(15)

(16) (24) (28)

(30) (36)

(21)

(23)

(28)

Funding Cost Declines YTD (bps)

(45) SCB

KBANK TCAP

BAY SECTOR TISCO

KK

BBL

KTB

TMB

Source: CEIC.

Figure 144: Thailand: Recent Surge in FX Deposits & MMFs Y/Y Growth

NAV of Fixed Income Funds, THB trn

2.0

30%

1.8

25% 1.6

20%

1.4

15% 10%

1.2

More broadly, the increase in leverage the past few years is likely to weigh on growth going forward. The proportion of consumers with access to formal credit has increased from 53% to 75% the past 2 years, and consumer credit/GDP has increased from 78% to 82% in the last year alone. Much of that has been supported by lower tax rates and rising wages, which are up 35% from the end of 2010. Going forward, however, the prospect of tighter liquidity, higher rates, and a higher debt burden could stifle growth. It’s already shown to have an impact on household credit, with overall consumer delinquencies of 31-90 days up +28% over the past year. We’ve debated a more negative stance on the sector, but find that despite the headwinds, ROEs are likely to remain high. We’ve debated a more negative stance on the sector, but find that despite the headwinds, ROEs are likely to remain high. One reason for this is strong pricing power, with the top 5 banks controlling roughly 70% of system deposits. Another is the waning competition from SFIs. From 2003 to 2011, deposit market share for the SFIs increased from 16% to 27%, as they were exempt from paying the FIDF’s deposit insurance levy of 0.40%, and could thus offer more attractive savings products. Regulators leveled the playing field in 2013, when the levy was increased to 0.47% and SFIs were ordered to pay the fee; since then, deposit share has fallen back to ~24%. Last week, the MOF announced that it will establish a new supervisory committee for SFIs to the military council (NCPO), which will look for further curb activities of the SFIs, by reviewing provisioning requirements, NPL classifications, and capital requirements. The latter is a looming constraint in particular, as SFIs have seen equity/assets fall by ~200bps the past 2 years to 6.1% (see chart on the right), even as comm’l banks saw capital ratios rise.

35%

5% 1.0

0%

0.8

-5%

NAV of Fixed Income Funds

Y/Y Growth

Source: CEIC.

Figure 145: Lower Rates Fueling Surge in Bancassurance Fees 40 35

Premium in Bt Billions

Growth in Time Deposits Y/Y

30

25% 20% 15%

25

10%

20

5%

15

0%

10

-5%

5

-10%

0

-15% Bancassurance Premium

Time Deposit Growth

Source: CEIC, Company Reports.

Figure 146: SFIs Challenged by Deposit Levy, Low Capital Levels 28% 26%

SFI Loan Market Share

Equity / Assets

11% 10%

24%

9%

22% 8% 20% 7%

18% 16%

6%

14%

5% SFI Loan Share

Commercial Banks

SFIs

Source: CEIC.

35

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Indonesia: Balancing NIM, Growth & NPLs

Figure 147: Indonesia: With NIMs Contracting on Deposit Repricing Quarterly NIM Annualized

Last quarter we discussed the typical seasonality of Indonesia bank results, after the sector saw NIM compression (-16bps), disappointing loan growth (flat) and pressure on asset quality (NPLs +8%) in 1Q14 results. Our view was that these headwinds would likely prove temporary, leading to much stronger second quarter results; but that view was wrong. Sector NIMs compressed another 22bps in 2Q14, as banks struggled to raise CASA funding; loan growth remained weak, rising just +4% Q/Q; and sector NPLs rose another +10%, showing more fundamental pressure on asset quality. Like Thailand, the headwinds on margins, credit growth and asset quality are all likely to weigh on earnings momentum going forward (FY14E: +5% Y/Y vs. FY12/13: +20%/+17%). With bank stocks up +44% YTD, and trading at 11.9x FY14E and 10.6x FY15E earnings, we see little room for upgrades and/or multiple expansion. Given the structural growth opportunity in Indonesia, and potential for fiscal progress, we remain neutral on the sector; but within that view, we’d focus on much more liquid, defensive balance sheets for now (e.g. BBCA). Margin compression continued in the second quarter, with NIMs down -9bps Q/Q at Mandiri, -16bps at Bank Negara, -26bps at Rakyat, and a staggering -52bps at Danamon. Only BCA showed an increase in margins (+3bps), which reflects their stronger deposit franchise. Part of this compression was due to a catch-up in deposit rates, after the initial move in asset yields helped push NIMs up +36bps in the back of 2013. Certainly deposit growth remains weak, which is one reason LDRs remain elevated at 93% for the sector. System loan growth is currently running at +16% Y/Y, still above that of deposits (+13%), and we think this poses a tradeoff between margins & credit going forward. In effect, should banks continue to push loan growth, they’ll likely face further pressure to compete for deposits, driving up rates. It will also lead to a negative mix shift towards highercost time deposits, which is something we observed in the second quarter. At Mandiri, CASA deposits were down -4% in the first half, while time deposits rose +8%, keeping the LDR stable at ~87%. At Bank Negara, CASA deposits also fell -4% H/H, while time deposits surged +35%. This surge in time deposits was the key reason that LDRs dropped from 90% to 82% Q/Q. However, the Rph-LDR only dropped from 86% to 84%, while the bigger improvement came in the FX-book, where LDRs fell from 84% to 63%. Overall, BBNI’s CASA ratio fell from 69% to 61% in just 6 months. Even Rakyat (-3% YTD growth in CASA vs. +5% in TDs) and BCA (+1% vs. +10%) had to rely more on time deposits to fund growth, although the latter continues to enjoy a 77% CASA ratio, and BRI has seen strong savings growth (+15% Y/Y) vs. the industry (+10%). BCA is an interesting example of slowing credit growth in a period of tighter liquidity. After growing loans at a CAGR of 27% the past 3 years, the bank slowed to just +14% in the second quarter. The biggest slowdown at BCA was in mortgages, which were flat over the past 3 quarters, after growing at a CAGR of +46% the previous 3 years. This slowdown was echoed at Mandiri, where mortgages were up just +1% Y/Y, after also growing at a CAGR of +31% between 2Q09 and 2Q13. 36

NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BBCA

5.42%

5.57%

5.90%

5.95%

6.04%

6.18%

6.45%

6.46%

BBNI

5.77%

5.92%

6.16%

6.20%

5.89%

6.09%

6.08%

5.82%

BBRI

8.43%

8.39%

8.19%

7.97%

8.59%

9.45%

9.06%

8.80%

BDMN

10.0%

10.2%

10.1%

9.7%

9.58%

9.06%

8.62%

8.14%

BMRI

5.89%

5.67%

5.50%

5.34%

5.72%

6.16%

5.94%

5.84%

Total

7.10%

7.14%

7.17%

7.03%

7.16%

7.39%

7.23%

7.01%

Source: Company reports.

Figure 148: Indonesia: Loan Growth Decelerates Further on Liquidity Asset Growth (Y/Y)

Loan Growth (Y/Y)

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BBCA

14%

12%

12%

14%

26%

21%

20%

14%

BBNI

17%

16%

16%

19%

29%

26%

24%

16%

BBRI

22%

14%

16%

16%

32%

25%

20%

17%

BDMN

15%

18%

21%

17%

13%

15%

15%

13%

BMRI

19%

15%

14%

14%

24%

22%

20%

13%

Total

17%

15%

16%

16%

25%

22%

20%

15%

Source: Company reports.

Figure 149: Indonesia: LDRs Stretched in Tight Liquidity Environment Loan / Deposit Ratio LDR

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BBCA

66%

69%

72%

74%

75%

76%

78%

76%

BBNI

77%

78%

83%

84%

85%

86%

90%

82%

BBRI

86%

80%

90%

90%

91%

89%

92%

94%

BDMN

130%

129%

123% 122%

127%

BMRI

85%

80%

84%

85%

88%

85%

88%

87%

Total

89%

87%

93%

94%

93%

92%

94%

93%

135% 135% 127%

Source: Company reports.

Figure 150: Indonesia: NPLs Continue to Rise on Tighter Credit Supply NPL Grow th Q/Q NPL

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BBCA

-14%

6%

-1%

9%

14%

2%

9%

8%

BBNI

1%

-9%

14%

-9%

1%

-5%

5%

-2%

BBRI

2%

-13%

17%

-2%

3%

-9%

15%

17%

BDMN

-2%

-11%

21%

0%

-5%

-9%

1%

14%

BMRI

4%

-2%

12%

-1%

6%

5%

8%

11%

Total

-2%

-6%

13%

0%

4%

-3%

8%

10%

Source: Company reports.

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Indonesia: Balancing NIM, Growth & NPLs

Figure 151: Indonesia: NPL Ratios Still Low By Historic Standards Quarterly NPL Ratio

Tighter liquidity constrains credit supply, which in turn affects asset quality. This is why NPLs continued to rise beyond the typical seasonality of the first quarter. As sector loan growth slowed from +20% in 1Q14 to +15% Y/Y in 2Q14, asset quality continued to deteriorate. Special mention loans rose +30% YTD across the big 4 state banks, up from a pace of +14% in 1H13, and +11% in 1H12; moreover, net NPLs rose +10% Q/Q, after an +8% rise in the first quarter. Within our coverage, Special Mentions rose the most at Bank Rakyat, up +48% H/H and well above the increase seen last year (+23%). The NPL ratio in the Micro segment rose +37bps H/H to 1.41%, but the biggest drag came from Small Commercial exposures, which account for 20% of total loans, and saw NPLs rise +100bps H/H to 4.13%. Perhaps not surprisingly, that segment also showed the biggest drop in loan balances during the half, contracting 4% even as the rest of the portfolio rose +10%. Mandiri also struggled in the Micro segment, where NPLs rose from 3.02% to 3.31% in the first 6 months. Perhaps the most severe deterioration in credit was at BBTN, where NPLs rose +31% H/H, to 5.01% of loans. This was driven by a surge in the NPL ratio for both non-subsidized mortgages (+52bps H/H, to 3.13%), as well as construction loans (+193bps, to 6.67%). Even Commercial NPLs surged by ~400bps in 1H14, to 10.52%. To be fair, Indonesia banks increased provisions to compensate for the deterioration in asset quality. Second quarter provisions spiked to 1.75% at Bank Rakyat, the highest level since 3Q11. NPL coverage is down ~24% over the past year, but still robust at 176%. Likewise, provisions jumped to 1.33% at Bank Mandiri, and stayed elevated at BBNI (1.40%), in part due to lower recoveries of write-offs than in previous periods (1H: 50%, 2012-13: 74%). Finally, BCA had perhaps the best results of the sector, even though Special Mentions rose +33% YTD, due to consumer credit, particularly motorcycle loans, where NPLs rose from 1.1% to 3.5% in the past year. The bank took 40bps of provisions in 2Q14, but still has significant NPL coverage, at 365%. They also seem most conservative at reining in risk, with management targeting total loan growth of just +8% Y/Y for the full-year.

NPL

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BBCA

0.43% 0.42% 0.41% 0.42% 0.45% 0.44% 0.47% 0.50%

BBNI

3.27% 2.73% 3.12% 2.55% 2.44% 2.17% 2.32% 2.19%

BBRI

2.25% 1.78% 2.00% 1.81% 1.77% 1.55% 1.78% 1.97%

BDMN

2.40% 2.08% 2.50% 2.38% 2.19% 1.89% 1.90% 2.10%

BMRI

2.04% 1.87% 2.08% 1.89% 1.90% 1.90% 2.07% 2.23%

Total

2.08% 1.78% 2.02% 1.81% 1.75% 1.59% 1.71% 1.80%

Source: Company reports.

Figure 152: Indonesia: Credit Costs Were Mixed Despite Rise in NPLs Quarterly Provision Annualized LLP

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BBCA

0.53% 0.28% 0.58% 0.42% 0.83% 0.77% 0.31% 0.40%

BBNI

1.53% 0.61% 0.98% 1.96% 1.55% 0.26% 1.98% 1.40%

BBRI

0.76% 0.51% 0.72% 0.83% 0.80% 1.49% 0.98% 1.75%

BDMN

1.87% 4.16% 2.82% 2.89% 2.68% 2.46% 2.55% 2.99%

BMRI

1.24% 0.54% 0.98% 1.32% 1.20% 0.85% 0.81% 1.33%

Total

1.19% 1.22% 1.21% 1.48% 1.41% 1.17% 1.32% 1.58%

Source: Company reports.

Figure 153: Indonesia: Capital Levels High, But RWA Growth Fast Reserves / Loans 3Q13

4Q13

NPL

Tier 1 Capital Ratio

1Q14 Cover

3Q13

4Q13

A/E

1Q14 Ratio

BBCA

1.70% 1.79% 1.80% 383% 15.2% 15.0% 16.9%

7.6 x

BBNI

2.93% 2.67% 2.84% 122% 14.1% 13.8% 14.5%

7.7 x

BBRI

3.44% 3.39% 3.45% 194% 16.0% 15.8% 17.1%

7.9 x

BDMN

2.57% 2.41% 2.46% 129% 17.8% 17.3% 18.2%

5.8 x

BMRI

3.56% 3.50% 3.51% 169% 13.2% 13.1% 14.1%

8.4 x

Total

2.84% 2.75% 2.81% 199% 15.2% 15.0% 16.2%

7.5 x

Source: Company reports.

While we don't expect a full-fledged NPL cycle in Indonesia, tighter liquidity is imposing constraints on the banking sector. To sustain asset quality, banks need to keep lending; to sustain lending, banks need additional liquidity. That liquidity is coming at a higher cost. We’re likely to continue to see faster growth in time deposits vs. CASA, so long as the latter offers rates of 1.902.15%, while the former offers rates of >7.00%. Even if banks can access cheap funding, we’re likely to see loan growth decelerate to ~15%, a level that hasn’t been seen since late 2009. This in turn should weigh on asset quality, particularly more levered SMEs and/or consumers, where wage growth has been +39% since 2010. We’re less concerned about housing, given that affordability has actually fallen the past few years, from 55% in 2010, to 45% in 2013; but we could see an overhang in unsecured and/or auto finance, much as we've seen in Thailand. For that reason, we remain Neutral on the sector, and would stick with BCA as a defensive pick in a tough liquidity & asset quality environment.

Figure 154: Indonesia: Valuations Still Rich Given the Macro Challenges LC

LC

Mkt

Price Rating Target Cap BBCA 11,825 OW

P/E 14E

P/B 15E

Div Yield

ROE

14E

15E

14E

15E

14E

15E

13000 24,933 16.1 x 13.6 x

3.8 x

3.1 x

1.6%

1.8% 25.6% 25.1%

BBNI

5,475 UW

4400 8,732 10.7 x 10.3 x

1.9 x

1.7 x

2.8%

2.9% 18.7% 17.2%

BBRI

11,100 OW

12000 23,418 12.1 x 10.5 x

2.9 x

2.4 x

2.5%

2.8% 26.0% 25.0%

BDMN 3,780 UW

3000 3,098 10.0 x

9.4 x

1.1 x

1.0 x

3.0%

3.2% 11.1% 11.0%

BMRI 10,500

9500 20,953 12.0 x 10.3 x

2.4 x

2.1 x

2.1%

2.4% 21.6% 21.5%

Total

12.2 x 10.8 x

2.4 x

2.1 x

2.4%

2.6% 20.6% 20.0%

Big Caps

13.4 x 11.5 x

3.0 x

2.5 x

2.0%

2.4% 24.4% 23.9%

Small Caps

10.4 x

1.5 x

1.3 x

2.9%

3.1% 14.9% 14.1%

N

9.8 x

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

37

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Indonesia: Deceleration + Deposit Remix Indonesia’s real GDP expanded just +4.9% SAAR in 2Q14, leaving first half growth at the slowest pace since the end of 2008. This deceleration marks a necessary rebalancing for an economy that became overly dependent on commodity-related exports to finance private consumption. In a period of weak external demand, capital inflows helped boost liquidity, lower interest rates, and encourage domestic demand, all of which allowed the country to sustain faster economic growth in recent years. The problem is there are limits to this rebalancing, as consumption uses up excess local liquidity, and current account deficits begin to drain the system of deposits. This led to a sharp fall in Rph- deposit growth, which is still growing just +13.0% Y/Y, well below that of loans (+15.5%). This releveraging also drove a significant rise in loan/deposit ratios, which are up +13% over the past 3 years, to 94% today.

Figure 155: Indonesia: Weak Rph Deposit Growth Weighs on Lending 96%

35%

92%

30%

88%

25%

84%

20%

80%

15%

76%

10%

72%

5%

LDR

Loan Growth (R)

Deposit Growth (R)

Source: CEIC.

Figure 156: Reaching the End of the FAI Cycle: Capex/GDP vs. LDR 35%

Rph-LDR

120% 110%

The biggest area of adjustment is the import of capital goods, which helped fuel the capex cycle and pushed FAI/GDP up from 25% in 2007 to 32% in 2013. In the second quarter, real imports fell -5% Y/Y, and real FAI ex-construction contracted by 1%. This contraction is driven by tighter monetary policy, with overnight rates up +175bps over the past 18 months, as well as tighter banking liquidity, which pushed up lending rates by +114bps over the same period. Despite the slowdown, we expect monetary policy to remain tight in the second half, particularly after the current account printed a deficit of 4.3% of GDP in 2Q14. While some of that is due to seasonal factors (i.e. Ramadan), Bank Indonesia also noted that the elevated deficit has coincided with a rise in external debt, particularly among corporates. Indeed, as the IMF’s Article IV reports, external borrowing is up +9% Y/Y, mostly due to the commodities sector, which itself faces pressures, with coal down -16% YTD, and CPO down –17%. We also expect fiscal policy to remain tight, given that the fiscal deficit through May is running at Rph129 trillion, and if it tracks last year’s trajectory, would likely reach ~Rph273trn, or 2.7% of GDP, well above the revised budget target of 251trn. Indeed, since August the gov’t has restricted the sale of subsidized fuel in Indonesia to curtail the subsidy spend, which could affect logistics costs and economic activity more broadly in the second half. The elevated current account deficit will also keep banking liquidity tight, even though we're likely to see some seasonal easing in funding conditions after the holidays. In fact, one of the disappointing things about this cycle has been the lackluster expansion in time deposits, despite the increase in rates – a relationship that typically held true. Although average commercial bank TD rates are up some +220bps over the past 9 months, growth in time deposits has been just 12%, almost half the pace of 2 years ago. Moreover, growth in CASA deposits has been particularly weak, reflecting interest rates that are some ~700bps below that of short-term time deposits. At Mandiri, CASA deposits were down -4% in the first half, while time deposits rose +8%; at Bank Negara, CASA also fell -4% H/H, while time deposits surged +35%. Indeed, BBNI’s CASA ratio fell from 69% of total deposits to 61% in just 6 months. Even BRI (-3% vs. +5%) and BCA (+1% vs. +10%) had to rely more on time deposits to fund growth. 38

30%

FAI / GDP

100% 90%

25%

80% 70%

20%

60% 50%

15%

40% 30%

10%

20%

Structures

Machinery & Transport

Rph-LDR (RHS)

Source: CEIC.

Figure 157: Indonesia: Time Deposit Growth Finally Accelerates 14%

3M Time Deposit Rate

Time Deposit Growth Y/Y

12%

40% 35% 30% 25%

10%

20% 8%

15% 10%

6%

5%

4%

0% 3M Time Deposit Rate

Time Deposit Y/Y (RHS)

Source: CEIC.

Figure 158: Indonesia: Low CASA Rates Leads to Shift to Time Deposits 12%

CASA

Time Deposits

+35

YTD Deposit Growth +11%

10% +8%

8%

+5%

6% 4% 2%

+1%

0% -2% -4%

-4%

-6% BMRI (YTD: +1%) Source: Company Reports.

-3% -5% BNI (YTD: +8%)

BRI (YTD: +0%)

BCA (YTD: +3%)

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Indonesia: Deceleration + Deposit Remix Tight liquidity conditions force a trade-off between loan growth, asset quality & margins. In the first half, banks choose to push loan growth funded with higher-cost deposits, which ultimately weighs on NIMs. As a result, margins fell 9bps Q/Q at Mandiri, 16bps at Bank Negara, 26bps at Rakyat, and a staggering 52bps at Danamon. Only BCA showed an increase in margins (+3bps), which reflects their stronger deposit franchise, but also slower loan growth, which was +13% Y/Y, and mgmt now expects to decelerate to +8% by year-end. Increasing lending rates can restore margins, but only at the risk of hurting asset quality. This is why tighter liquidity is such headwind to bank earnings, particularly at the end of a releveraging cycle. Indeed, apart from falling margins, there were signs of deteriorating asset quality in 2Q14 results. Special mention loans rose +30% H/H on average across the big 4 state banks in 2Q14, up from a pace of +14% in 2Q13, and +11% in 2Q12. While we expected NPLs to rise due to seasonal factors in the first quarter, the continuation of that trend was a negative surprise in the second quarter. Pressure on asset quality was perhaps most stark at BBTN, where NPLs rose +31% H/H, to 5.01% of loans. This was driven by a surge in the NPL ratio for both non-subsidized mortgages (+52bps H/H, to 3.13%), as well as construction loans (+193bps, to 6.67%). Even Commercial NPLs surged by ~400bps in 1H14, to 10.52%. We single out BBTN in part because it’s so focused on the consumer segment, which is one where we think credit demand & supply will remain subdued. Like Thailand, Indonesia has seen average wages surge some +39% since the end of 2010, which along with lower interest rates was a boon for private consumption & real estate-related industries. The latest banking survey shows that demand for consumer loans remains well below last year. Demand for auto financing remains particularly weak (-39.8), matching system data that shows car sales struggling to grow. Indeed, overall household loan growth has slowed from +20% Y/Y in mid-2013 to +13% Y/Y in June. Nowhere was this more apparent than in mortgage growth at Mandiri, which slowed from a CAGR of +31% between 2Q09 and 2Q13, to just +1% Y/Y in 2Q14. Likewise, in BCA mortgages are up just +9% Y/Y, after growing +53% in 2011, +49% in 2012, and +27% in 2013, And management expects total mortgages to remain flat this year.

Figure 159: Rise in Special Mention Loans Across Indonesia Banks 50%

48%

First Half Rise in Special Mention Loans, 2012-14

40%

33% 30%

25%

22%

20%

14%

23%

23% 13%

11%

10%

6%

0% -10% BMRI

BBNI

BBRI 1H12

1H13

BBCA

BDMN

1H14

Source: Company Reports.

Figure 160: Mortgages at Mandiri: Consumer Credit Under Pressure 30,000

40%

MortgageLoans vs. Growth Y/Y

35%

25,000

30% 25%

20,000

20% 15,000

15% 10%

10,000

5%

5,000

0%

Mortgage Loans

Mortgage Growth

Source: Company Reports.

Figure 161: Rising Rates Typically Impact Consumer Credit Demand 50%

HH Loan Growth

45% 40%

Consumer Lending Rate 12% (Inverted) 13%

35%

14%

30% 25%

15%

20%

16%

15% 10%

17%

5% 0%

18% Household Loan Growth

Consumer Lendidng Rate (Inverted)

Source: CEIC.

As has been the case for the past year, the key thing to watch will be the balance of payments, and whether Indonesia can manage its current account deficit. For now, easy liquidity externally has helped carry some of the burden. Indeed, while the second quarter CAD widened to $9.1bn, from $4.2bn in 1Q14, this was more than offset by a capital surplus of $14.5bn, with FDI of $4.8bn, other investments of $1.9bn, and portfolio inflows of $7.7bn. In fact, portfolio flows for the first half totaled $16.8 billion, up from $9.8bn for the whole of 2013. This dependence on external financing makes Indonesia vulnerable to a rise in external rates and/or a shift of liquidity out of EMs, and likely enforces a tighter fiscal & monetary stance than otherwise would be the case given the current levels of growth.

Figure 162: Chart on Current Account vs. Capital Account 900

600

IDR trn

700

500

500

400

300

300

100

200

-100

100

-300

0

Change in Bank Credit Non-bank Capital Acct Balance

Current Acct Balance 4Q change in Deposits

Source: CEIC.

39

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Malaysia: Competition as FAI Continues Figure 163: Malaysia: Loan Growth Slower on Disintermediation Asset Grow th (Y/Y) 3Q13 AMMB

4Q13

1Q14

Figure 167: Malaysia: Credit Costs Remain Subdued

Loan Growth (Y/Y)

2Q14

3Q13

4Q13

1Q14

Quarterly Provisions Annualized

2Q14

LLP

3Q12

4Q12

1Q13

2Q13

3Q13

-0.10%

-0.05%

4Q13

1Q14

2Q14

5%

7%

4%

-2%

6%

6%

5%

1%

AMMB

0.07% 0.34% 0.36%

15%

10%

4%

6%

14%

12%

12%

8%

CIMB

0.16% 0.10% 0.15% 0.13% 0.36% 0.53% 0.19% 0.26%

4%

7%

5%

4%

7%

8%

8%

7%

HLB

Maybank

14%

13%

13%

9%

12%

14%

14%

13%

Maybank 0.10% 0.28% 0.11% 0.52% 0.33%

PBK

11%

11%

9%

11%

12%

12%

11%

11%

PBK

RHBC

11%

1%

7%

11%

14%

9%

11%

13%

RHBC

Total

10%

8%

7%

6%

11%

10%

10%

9%

CIMB HLB

Source: Company reports.

-0.06%

0.18%

0.12% -0.07% 0.08% 0.10% 0.09% -0.07%

0.23%

0.16%

0.17% 0.17% 0.16% 0.15% 0.19% 0.17% 0.15% 0.11% -0.12%

Total

0.36% 0.55% 0.50% 0.10% 0.39% 0.17% 0.05%

0.05% 0.20% 0.25% 0.22% 0.14% 0.21% 0.19% 0.13%

Source: Company reports.

Figure 164: Malaysia: NIMs Pressured by Rates / Competition

Figure 168: Malaysia: Capital May be Under Pressure in Basel 3

Quarterly NIM Annualized NIM

-0.06%

0.16% 0.29% 0.09%

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

Reserves / Loans 1Q14

2Q14

4Q13

1Q14

NPL

Tier 1 Ratio

2Q14 Cover 4Q13

1Q14

A/E

2Q14

Ratio

AMMB

2.79% 2.68% 2.87% 2.72% 2.53% 2.55% 2.90% 2.44%

AMMB

2.36% 2.37% 2.26% 127%

9.2% 10.1% 10.0% 10.2 x

CIMB

3.20% 3.03% 2.80% 2.81% 2.85% 2.91% 2.80% 2.86%

CIMB

2.67% 2.57% 2.47%

9.8%

HLB

1.95% 1.97% 2.01% 1.93% 1.95% 1.94% 1.98% 1.93%

HLB

1.70% 1.61% 1.52% 129% 10.5%

79%

9.4%

9.5% 10.8 x

9.8% 10.9% 12.0 x

Maybank 2.63% 2.54% 2.53% 2.42% 2.33% 2.32% 2.24% 2.23%

Maybank 1.59% 1.63% 1.61% 108% 11.0% 10.4% 11.4% 11.9 x

PBK

2.40% 2.32% 2.27% 2.25% 2.26% 2.18% 2.13% 2.09%

PBK

0.80% 0.78% 0.77% 119%

RHBC

2.21% 2.14% 2.08% 2.18% 2.23% 2.30% 2.12% 2.12%

RHBC

1.79% 1.74% 1.63%

Total

2.53% 2.45% 2.43% 2.38% 2.36% 2.37% 2.36% 2.28%

Total

1.82% 1.78% 1.71% 105% 10.1%

Source: Company reports.

Fee Growth (Y/Y) 3Q13

CIMB

67% 11.1% 10.2% 10.9% 11.4 x

22%

4Q13 -4%

1Q14

2Q14

3Q13

4Q13

33%

-5%

76%

22%

1Q14

ROE

2Q14

-21%

-6%

6%

-3%

14%

-5%

-11%

22%

-5%

-20%

10%

17%

-21%

-4%

0%

8%

-40%

-3%

Maybank

13%

26%

-9%

1%

28%

43%

-4%

-23%

8%

6%

13%

6%

RHBC

109%

86%

17%

Total

28%

22%

7%

4%

3%

8%

6%

-6% 102%

32%

11%

-11%

-2%

22%

-9%

-9%

33%

Source: Company reports.

9.7% 10.3% 11.9 x

3Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

AMMB

14.4% 13.9% 15.4%

CIMB

14.0% 13.7% 12.9% 10.7% 1.94% 1.87% 1.86% 1.79%

HLB

3.6% 1.91% 1.84% 2.06% 0.51%

16.3% 15.2% 14.4% 15.1% 2.12% 1.98% 1.87% 1.99%

Maybank 15.9% 16.3% 13.1% 13.4% 2.32% 2.41% 1.96% 1.97% PBK

21.9% 20.7% 19.9% 20.2% 2.17% 2.07% 2.01% 2.05%

RHBC

13.9% 12.2% 10.6% 12.7% 2.43% 2.09% 1.77% 1.77%

Total

16.1% 15.3% 14.4% 12.6% 2.15% 2.04% 1.92% 1.68%

Figure 170: Malaysia: Valuations Not Cheap Despite Underperformance

Quarterly Cost/Income 3Q12

4Q13

RORWA

Source: Company reports.

Figure 166: Malaysia: Cost/Income Ratio an Opportunity CIR

9.3% 15.1 x

Figure 169: Malaysia: ROEs Compress on Additional Capital Demands

Non NII Grow th (Y/Y)

HLB

PBK

8.5%

Source: Company reports.

Figure 165: Malaysia: Fee Growth Weakening Despite Cap Markets Biz

AMMB

9.3%

4Q12

1Q13

2Q13

3Q13

4Q13

LC

1Q14

LC

Mkt

Price Rating Target Cap

2Q14

P/E 14E

P/B 15E

14E

Div Yield 15E

14E

15E

ROE 14E

15E

AMMB

46%

47%

53%

49%

48%

44%

42%

51%

AMMB

CIMB

57%

58%

58%

59%

59%

56%

57%

59%

HLB

14.40 OW

16.50

8,191 13.0 x 11.8 x

1.9 x

1.7 x

2.4%

2.8% 15.1% 15.1%

Maybank

10.10 OW

11.00 29,191 13.3 x 12.4 x

1.8 x

1.7 x

6.4%

6.9% 15.3% 15.3%

PBK

19.28

19.00 23,486 16.3 x 14.9 x

2.7 x

2.5 x

2.7%

2.9% 18.2% 17.2%

Total

13.5 x 12.5 x

2.0 x

1.8 x

3.8%

4.3% 15.7% 15.3%

Big Caps

14.8 x 13.7 x

2.3 x

2.1 x

4.6%

4.9% 16.7% 16.3%

Small Caps

12.2 x 11.4 x

1.7 x

1.6 x

3.0%

3.6% 14.6% 14.2%

HLB

44%

45%

45%

51%

44%

44%

43%

46%

Maybank

52%

42%

49%

48%

45%

46%

47%

45%

PBK

30%

30%

32%

31%

29%

31%

32%

32%

RHBC

46%

52%

53%

52%

50%

51%

54%

55%

Total

46%

46%

48%

48%

46%

45%

46%

48%

Source: Company reports.

40

6.68 UW

6.20

6,367 11.3 x 11.0 x

1.5 x

1.4 x

3.6%

4.5% 14.1% 13.4%

N

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Malaysia: Fiscal Support for the Cycle Unlike Thailand or Indonesia, Malaysia hasn’t seen a noticeable deceleration in growth since mid-2013. In fact, Malaysia's economy expanded at a much stronger pace than expected in 2Q14, up +6.4% Y/Y (JPMe: 5.7%) and +7.5% Q/Q. Part of this was due to stronger net exports, as imports rose only +3.9%, well below that of exports (+8.8%). Better growth also reflects ongoing fiscal stimulus which has supported domestic demand, particularly in fixed asset investment, which rose +7.2% Y/Y. Much of this echoes first quarter data, and more broadly reflects the continued progress on the ETP program, which should sustain FAI/GDP of 29% this year.

Figure 171: LDRs Have Also Increased on Weak Deposit Growth 82%

16%

81%

14%

80% 79%

12%

78% 77%

10%

76%

8%

75% 74%

6%

73% 72%

4%

LDR

While Malaysia enjoys a tailwind from fiscal stimulus, the continued strength of domestic demand has weighed on the current account, and the BoP more broadly. Indeed, Malaysia has seen a structural decline in its current account surplus, which has fallen from the pre-2008 levels of 10-15% of GDP, to just 3.8% last year. We expect it to narrow further, to 2.4% in 2014. This put more pressure on the capital account, which was boosted in recent years by portfolio inflows, with foreigners now owning 29% of total government debt. In 2Q14, Malaysia’s BoP recorded a small deficit of -$0.3bn, following a deficit of $5.2bn in the first quarter. While the narrowing CA surplus was a factor in 2Q14 (from $6.0bn to $4.9bn Q/Q), the bigger factor has been the capital account, which printed a -$15.0bn deficit in the first half of 2014, up from -$7.5bn in 2012, and -$4.6bn in 2013. That deficit is due to ongoing direct investment outflows of -$5.9bn, even as $2.1bn of portfolio inflows provided an offset.

An accelerating investment cycle & weak deposit growth were likely factors behind BNM’s decision to raise policy rates in early July; moreover, the strong 2Q14 GDP print is likely to pull forward the next hike to the September meeting. This environment of tightening liquidity keeps us focused on defensive names like Maybank, which enjoys a 38% CASA ratio, and HLBK, which has an LDR of just 78%, below the sector average of 89%. We upgraded both names in early July, at the same time we downgraded AMMB, which has a much higher LDR, and is also much more geared to wholesale funding. Overall we remain negative on Malaysia, given high valuations, pressure from disintermediation, and the likely increase in deposit competition going forward.

Deposit Growth (R)

Figure 172: Malaysia: Slower Growth in NFA Weights on Quasi-Money 22%

50%

20%

40%

18%

30%

16%

20%

14%

10%

12%

0%

10%

-10%

8%

-20%

6%

-30%

4%

-40%

Quasi-money Growth Y/Y

FX Reserves Growth Y/Y (RHS)

Source: CEIC.

Figure 173: Negative Real Rates Have Led to Deposit Exodus 6.00%

We’ve noted in the past that capital outflows have been a drag on liquidity creation in Malaysia. Deposit growth remains stuck at ~7%, a pace that is 200bps below that of loans. As in other ASEAN geographies, this lack of liquidity has pushed up LDRs, which are up 3% over the past year, to 81%; moreover, we think it partly reflects increasing deposit disintermediation, as savers become more sophisticated & sensitive to low rates. This is particularly the case in Malaysia, where real 1Y time deposit rates have declined from +1.4% one year ago to -0.1% today. Indeed, year-to-date growth in MYRdeposits is only 2%, and time deposits are basically flat, reflecting this fall in real deposit rates. In contrast, FXdeposits have surged +20% in the first 6 months of 2014, the fastest growth in ASEAN, and second only to China.

Loan Growth (R)

Source: CEIC.

Real Policy Rate

4.00% 2.00% 0.00% Average 2005-2013

-2.00% -4.00% -6.00%

Source: CEIC.

Figure 174: Capital Imports Remain Elevated on ETP-Related FAI 250

Index

230 210 190 170 150 130 110 90 70 50

Investment

Intermediate

Consumption

Source: CEIC.

41

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Philippines: Looking for ROE Expansion Figure 175: NIMs Begin to Stabilize on a Turn in Rates

Figure 179: Philippines: Credit Costs Lower on Better Macro

Quarterly NIM Annualized NIM

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

Quarterly Provisions Annualized 1Q14

2Q14

LLP

BDO

3.52% 3.33% 3.33% 3.45% 3.36% 3.25% 3.12% 3.17%

BDO

0.92% 0.36% 0.94% 1.04% 0.52% 0.82% 0.53% 0.49%

BPI

3.41% 3.42% 3.51% 3.55% 3.30% 3.00% 3.02%

n.a.

BPI

0.54% 0.50% 0.47% 0.47% 0.46% 0.48% 0.56%

EW

7.40% 7.32% 8.00% 8.40% 8.50% 8.70% 8.00% 8.20%

EW

3.68% 1.77% 4.84% 3.67% 3.09% 3.33% 2.93% 2.88%

MBT

3.65% 3.29% 3.96% 3.58% 4.34% 3.72% 3.92% 3.84%

MBT

1.08% 0.83% 0.84% 1.17% 0.85% 4.43% 0.73% 0.48%

PNB

2.40% 2.04% 2.80% 2.81% 3.01% 3.23% 3.53% 3.13%

PNB

0.41% 0.44% 0.35% 0.36% 0.50% 0.14% 0.41% 0.89%

SECB

3.82% 3.84% 3.60% 3.44% 3.64% 3.28% 3.54% 3.40%

SECB

0.00% 0.68% 0.09% 0.06% 0.07% 0.15% 0.32% 1.31%

Total

4.03% 3.87% 4.20% 4.20% 4.36% 4.20% 4.19% 4.35%

Total

1.11% 0.76% 1.26% 1.13% 0.91% 1.56% 0.91% 1.21%

Source: Company Reports.

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14 n.a.

Source: Company Reports.

Figure 176: Philippines: Lack of Bond Gains Drags Down Non-NII Fee Grow th (Y/Y)

Figure 180: Philippines: Releveraging Should Boost ROE Over Time

Non NII Grow th (Y/Y)

ROE

ROA

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

15%

20%

17%

6%

-29%

10%

-47%

4%

BDO

10.4% 11.2% 13.7% 13.8% 1.14% 1.11% 1.32% 1.34%

BPI

7%

18%

22%

n.a.

-5%

-2%

-55%

n.a.

BPI

14.4% 11.6% 12.2%

EW

31%

22%

31%

22%

-39%

9%

-35%

-14%

EW

9.7%

6.6%

MBT

11%

5%

-1%

11%

-13%

-24%

-67%

-32%

MBT

7.6%

5.5% 17.4% 10.3% 0.80% 0.55% 1.62% 0.95%

PNB

23%

40%

5%

10%

-28%

-82%

-58%

3%

PNB

3.3% -4.0%

SECB

37%

35%

-7%

13% 172%

-45%

-28%

743%

Total

21%

23%

11%

12%

-22%

-48%

141%

BDO

10%

Source: Company Reports.

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

n.a. 1.42% 1.07% 1.20%

n.a.

9.3% 11.7% 1.42% 0.95% 1.23% 1.53% 6.5%

8.5% 0.46% -0.53% 0.87% 1.20%

SECB

25.2%

8.3% 13.8% 20.4% 3.48% 1.08% 1.58% 2.29%

Total

11.8%

6.5% 12.1% 12.9% 1.45% 0.70% 1.30% 1.46%

Source: Company Reports.

Figure 177: Philippines: Loan Growth Remains Strong vs. Region Asset Grow th (Y/Y)

Figure 181: Philippines: Balance Sheet has Capacity for Leverage

Loan Grow th (Y/Y)

Reserves / Loans

NPL

Tier 1 Capital Ratio

A/E

3Q13

4Q13

1Q14

2Q14

3Q13

4Q13

1Q14

2Q14

BDO

28%

35%

33%

27%

17%

21%

26%

28%

BDO

2.80% 2.99% 3.01% 174% 14.6% 13.9% 13.5% 10.3 x

BPI

25%

21%

29%

n.a.

15%

21%

25%

n.a.

BPI

2.68% 2.76%

EW

31%

17%

30%

19%

44%

32%

38%

29%

EW

4.09% 4.42% 4.13%

MBT

31%

32%

37%

18%

19%

16%

19%

19%

MBT

2.65% 2.17% 2.08% 160% 15.0% 12.8% 12.1% 10.8 x

PNB

89%

87%

12%

7%

98%

90%

12%

17%

PNB

4.25% 4.24% 4.30% 117% 16.4% 16.1% 15.5%

7.1 x

SECB

9%

34%

46%

31%

34%

38%

39%

30%

SECB

1.51% 1.84% 2.05% 210% 15.3% 13.5% 13.2%

8.9 x

Total

36%

38%

31%

20%

38%

36%

27%

25%

Total

3.00% 3.07% 3.11% 147% 14.7% 13.8% 13.0%

9.0 x

Source: Company Reports.

4Q13

1Q14

2Q14 Cover n.a.

2Q14 Ratio n.a.

n.a.

76% 13.8% 11.3% 10.9%

n.a. 13.3% 15.2%

7.7 x

Figure 182: Philippines: Valuations Back to More Reasonable Levels

Quarterly Cost/Income

LC

LC

Mkt

Price Rating Target Cap

P/E 14E

P/B 15E

14E

OW 80.00 7,427 15.7 x 14.6 x

1.8 x

1.7 x

1.3% 1.3% 12.1% 11.9%

N 84.00 8,555 21.3 x 17.7 x

2.7 x

2.5 x

0.0 x

1.5 x

1.3 x

0.0% 0.0% 10.4% 12.3%

OW 85.00 5,407 16.2 x 14.5 x

1.8 x

1.7 x

0.9% 1.0% 11.5% 12.0%

N 85.00 2,499 17.7 x 12.2 x

1.1 x

1.0 x

0.0% 2.3%

OW 130.00 1,749 11.8 x 10.4 x

1.6 x

1.5 x

1.4% 1.5% 14.6% 15.0%

1.8 x 1.6 x

1.0% 1.4% 11.6% 12.4%

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

BDO

60%

66%

46%

61%

66%

61%

62%

62%

BDO

90.50

BPI

53%

60%

40%

53%

53%

62%

54%

n.a.

BPI

95.00

EW

65%

67%

56%

63%

61%

58%

62%

60%

EW

29.10

UW 26.00

753 15.5 x 11.6 x

MBT

59%

67%

46%

59%

61%

61%

64%

60%

MBT

85.95

PNB

46%

76%

52%

57%

76%

118%

68%

61%

PNB

87.30

SECB

55%

53%

54%

73%

39%

66%

48%

41%

SECB

126.60

Total

56%

65%

49%

61%

59%

71%

60%

57%

16.4 x 13.5 x

Source: Bloomberg, J.P. Morgan estimates. As of Aug 29, 2014.

15E

ROE

15E

3Q12

Total

Div Yield

14E

CIR

42

1Q14

Source: Company Reports.

Figure 178: Philippines: Substantial Room for Operating Leverage

Source: Company Reports.

4Q13

14E

15E

0.0 x 14.4% 14.6%

6.9% 8.8%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Philippines: BSP to Prevent Overheating Credit standards in the Philippines have been broadly supportive since late 2010, which is also the point at which loan growth began to accelerate from <10% to 15-20%. Indeed, loan growth has exceeded 20% Y/Y for the past 3 months, driven by retail & wholesale trade (+22%), which is related to increased domestic consumption, as well as credit to areas like construction (+46%) and real estate (+20%), which together account for 30% of system loans. Unlike other ASEAN markets, we haven’t had to worry too much about liquidity, particularly after deposits surged +21% in the back half of 2013 (not annualized), due regulatory changes that prohibited investment trusts from investing in SDAs.

Figure 183: PH: LDRs Remain Low as Loan Growth Hasn’t Surged 66%

45.0%

64%

40.0%

62%

35.0% 30.0%

60%

25.0%

58%

20.0%

56%

15.0%

54%

10.0%

52%

5.0%

50%

0.0%

LDR

That said, we now see policymakers taking a cautious view on inflation & financial systemic risks. Indeed, over the past 6 months, the central bank has raised RRRs twice, by 200bps in total (in March/May); raised SDA rates by +25bps (in June); and recently raised policy rates by +25bps (July). We pencil in another rate hike for 1Q15, but could see another hike as early as September. We’d note that the O/N reverse repo rate of 3.75% has become less relevant as the base rate in anchoring the money market terms structure, as the SDA rate is still much lower, at 2.25%, and is the rate at which the central bank sterilizes excess liquidity. In any case, rate hikes partly reflect a shift to a lower target range for inflation next year (from 4%±1% to 3%±1%); but they also reflect a more pre-emptive approach to today’s easy credit conditions. In fact, the BSP recently approved the adoption of a prudential real estate stress test limit for banks on their aggregate real estate exposure, requiring a minimum CET1 of 6% after a 25% write-off of mortgage & CRE exposure, which is almost 21% of loans on average for the sector. One development that likely prompted some tightening was the shift in deposit liquidity, with the Philippines seeing some signs of disintermediation. Like Malaysia, one of the side-effects of low interest rates has been the shift to FX deposits, which make up 19% of total funding. FX deposit growth reached +13% YTD, as the spread between PHP & USD savings rates collapsed to just 40bps. Like Indonesia, we’ve also seen a much greater shift to time vs. CASA deposits over the past 18 months, with the CASA mix dropping from 80% to 75% of total deposits. To be fair, LDRs remain low at 57% (or 77%, ex-RRR); but we’re still likely to see tighter liquidity at the margin going forward.

Loan Growth (R)

Deposit Growth (R)

Source: CEIC.

Figure 184: Construction Boom Prompting More Preventative Policy 60%

6MMA Credit Growth

50% 40% 30% 20% 10% 0% -10% -20% -30%

Construction

Household

Source: CEIC.

Figure 185: Rate Compression Relative to USD Deposits Creates Outflow FX Deposits, PHP in billions

1300 1250

Rate on Local vs. USD Savings Deposit

3.00% 2.50%

1200 2.00%

1150 1100

1.50%

1050

1.00%

1000 0.50%

950 900

0.00%

FX Deposits

PHP Saving Rate

USD Savings Rate

Source: CEIC. As of June 30, 2014.

From a banking sector perspective, we still like the Philippines as a long-term releveraging story. FAI/GDP is still just 21%, and the government is targeting a rise in that to 22% of GDP by 2016. Much of the shortfall has come from the fiscal side, with public FAI/GDP at 2.5%, well below the ASEAN average of 6%. Part of the investment cycle will be linked to external demand, which has also seen a pick-up of late. Overall exports were up a much stronger-than-expected +21% Y/Y in June, with electronics & non-electronics seeing strong growth.

Figure 186: Consumer Leverage Across the Region 80%

Consumer Loan/GDP

70%

MY

HK SG

60% 50%

TW

40% 30%

TH

20%

KR CH

IN ID

10%

PH

Per capital GDP (USD000)

0% -

10

20

30

40

50

60

Source: CEIC.

43

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

India: Lackluster FY1Q But Think Long-Term India banks are up +43% YTD, with both private banks (+43%) and PSUs (+44%) lifted by hopes running into the election, and then a decisive victory in the actual elections. The BJP ultimately won 282 seats, with the broader NDA alliance getting more than 330 seats, which represents one of the most decisive mandates in a national election since 1984. That’s not to say there won’t be constraints. First, while the NDA has an overwhelming majority in the Lok Sabha, it does not have a majority in the Rajya Sabha (upper house), which could constrain their ability to pursue reforms. Secondly, monetary & fiscal policy both remain constrained in the near term. The government is still focused on running a ~4.1 % deficit in FY14, while CPI is still stubbornly high, at 8.0% (core: +8.1%), and the latter could see further pressure given a weaker monsoon season, with rainfall still some 40% below normal at of mid August. That said, longer-term we do think India has the potential for an investment cycle by removing bottlenecks in the approval process, which in turn could drive the credit cycle & provide relief to NPLs in the existing backlog. We stick with our positive view, but as Indonesia, we would have a mix of higher quality names at this point in the cycle. A number of banks reported small earnings misses in FY1Q results, including HDFC Bank. The biggest factor behind this weakness was non-interest income, as tough comps & a stable rupee weighed on forex & derivatives income. This was certainly the case at ICICI & Axis, where fee income grew +8% & +5% Y/Y, respectively. That said, other areas were more consistent. NIMs rose +5bps Q/Q at ICICI, the fourth sequential increase, as CASA improved. Loan growth decelerated somewhat to +15% Y/Y, but Retail credit remains strong, growing +26% Y/Y (FY4Q: +23%), and now makes up 40% of the book. Perhaps the biggest improvement was in asset quality, with NPL slippages -4% Q/Q, driven by SME & mid-corporates, and incremental restructurings fell 35% sequentially. CET1 is 12.6% after the implementation of Basel 3, giving the bank room to further expand the balance sheet going forward. Axis Bank was also strong on the Retail side, with loans up +28% Y/Y and fees up +29%. NIMs were down just 1bp, but this was a victory given a substantial drop in the CASA ratio (-260bps, to 42.4%) due to seasonality. The disappointment at Axis was asset quality, as NPL slippages doubled Q/Q, driven by mid-corporates; but lower restructurings & strong overall coverage (68%) kept provisions to just 70bps. Finally, whereas last quarter ICICI missed on expense growth (FY4Q: +20% Y/Y), this quarter it was Axis, where costs rose +17% due to the continued branch build (250-300 in 2015). HDFC Bank also missed results, principally on the non-NII line, which fell 4% Y/Y due to a 29% contraction in forex & derivative income. Core fees were more impressive, up +9.5%, helped by strong loan growth in the quarter (+21%). Provisions proved another headwind, rising from 38bps to 63bps Q/Q, driven by weakness in agri, SME, and CVs in equal measure. That said, the NPL ratio only rose +4bps Q/Q to 1.07%, coverage is steady at 70%, and this is hardly a “scare” given provisions have fluctuated between 40-85bps over the past 5 quarters; indeed, our FY15 estimate for provisions is still 58bps for the bank. HDFC Limited also had solid results, with 15% AUM growth and stable spreads (2.29%), and we think they should benefit from the changes to funding credit to affordable housing via a broader definition. 44

Figure 187: India: Growth Shows Signs of a Turn in the Sector AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

Asset Grow th (Y/Y) 2Q14 3Q14 4Q14 1Q15 16% 13% 20% 14% 14% 22% 23% 18% 13% 9% 11% 7% 25% 20% 19% 23% 8% 0% 2% 5% 23% 17% 10% 9% 16% 19% 15% 14% 0% 2% 6% 6% n.a. n.a. n.a. n.a. 24% 29% 21% 18% 28% 34% 27% 23% 8% 11% 15% 14% 16% 18% 14% 12% 16% 16% 15% 13% 17% 13% 14% 12% 19% 23% 19% 17%

Loan Growth (Y/Y) 2Q14 3Q14 4Q14 1Q15 17% 18% 17% 16% 16% 23% 26% 21% 16% 16% 17% 15% 24% 24% 24% 24% 11% 6% 8% 13% 14% 15% 18% 23% 19% 19% 16% 15% 3% 0% 5% -5% 20% 19% 17% 17% 16% 18% 21% 19% 28% 25% 27% 23% 6% 10% 13% 14% 19% 17% 16% 13% 16% 16% 17% 16% 16% 17% 18% 19% 17% 18% 19% 17%

Source: Company reports.

Figure 188: India: NIMs Expand at Private Banks on Better Liquidity NIM AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

2Q13 3.45% 4.40% 3.00% 3.25% 4.63% 2.90% 3.79% 4.11% 2.10% 2.71% 2.42% 3.50% 3.33% 3.35% 3.60% 2.99%

3Q13 3.57% 4.30% 3.07% 3.46% 4.56% 3.00% 3.66% 4.25% 2.09% 2.65% 2.36% 3.47% 3.30% 3.36% 3.66% 2.95%

Quarterly NIM Annualized 4Q13 1Q14 2Q14 3Q14 3.70% 3.86% 3.79% 3.71% 4.50% 4.60% 4.30% 4.20% 3.33% 3.27% 3.31% 3.32% 3.70% 3.72% 3.65% 3.65% 4.69% 4.71% 4.88% 4.87% 3.00% 3.00% 2.90% 2.90% 4.53% 3.68% 3.56% 3.62% 3.88% 4.03% 4.11% 4.05% 2.45% 2.30% 2.22% 2.16% 2.51% 2.41% 2.32% 2.37% 2.46% 2.50% 2.39% 2.37% 3.51% 3.52% 3.47% 3.57% 3.16% 3.16% 3.20% 3.21% 3.49% 3.44% 3.39% 3.38% 3.82% 3.86% 3.81% 3.78% 2.91% 2.90% 2.85% 2.88%

4Q14 3.89% 4.40% 3.35% 3.75% 4.98% 3.00% 4.26% 3.91% 2.40% 2.29% 2.34% 3.20% 3.11% 3.45% 3.89% 2.74%

1Q15 3.88% 4.40% 3.40% 3.66% 5.00% 3.00% 3.79% 3.79% 2.19% 2.35% 2.16% 3.42% 3.13% 3.40% 3.89% 2.77%

Source: Company reports.

Figure 189: India: Less Provision Leverage Than is Typical Given NPLs LLP AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

2Q13 1.34% 0.70% 0.75% 0.51% 0.64% 0.31% 0.03% 0.23% 0.04% 1.06% 2.46% 1.54% 0.89% 0.81% 0.71% 1.49%

Source: Company reports.

Quarterly Provision Annualized 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 0.88% 1.13% 1.20% 1.30% 0.73% 1.07% 0.68% 0.50% 0.85% 0.59% 0.55% 0.38% 0.53% 0.64% 0.80% 0.81% 0.85% 0.85% 0.77% 0.75% 1.15% 0.54% 0.51% 0.54% 0.35% 0.30% 1.36% 0.57% 0.54% -0.05% 0.53% 0.86% 0.82% 0.56% 0.58% 0.55% 0.02% 0.01% 0.02% 0.01% 0.01% 0.02% 0.39% 1.21% 0.42% 0.36% 0.27% 3.45% 0.18% -0.02% 0.09% 0.17% -0.04% -0.10% 1.28% 1.68% 1.11% 1.12% 0.98% 0.88% 0.87% 1.52% 0.83% 1.28% 1.35% 1.24% 1.05% 1.60% 1.25% 1.86% 1.70% 2.53% 1.17% 1.67% 0.89% 1.12% 1.25% 2.20% 0.67% 0.91% 0.83% 0.79% 0.71% 1.04% 0.62% 0.70% 1.03% 0.73% 0.63% 0.56% 1.09% 1.62% 1.02% 1.34% 1.32% 1.71%

1Q15 0.70% 0.63% 0.85% 0.60% 0.10% 0.49% 0.02% 1.45% 0.04% 0.87% 1.04% 1.43% 1.34% 0.74% 0.56% 1.17%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

India: Lackluster FY1Q But Think Long-Term Yes Bank was also hit by the weak environment in non-NII, which dropped -4% Y/Y, driven by an 80% contraction in financial markets income. Loan growth picked up to +23% Y/Y, but this was offset by the drag in the credit substitutes book, which only grew +16% Y/Y. NIMs were also disappointing, despite the equity issuance and lower cost of funding, but mgmt indicated that margins would rise ~15bps in FY2Q. Net net, slower growth, weaker fees, and a lack of NIM expansion all left revenue growth at just +8% Y/Y. The problem is that the bank continues to invest in its branch franchise, and that took costs up 25% Y/Y (alongside IPL charges and an increase in wage scales). Moreover, credit costs remain somewhat elevated at 50bps, and incremental delinquencies doubled Q/Q to 0.8% – still low, but the coverage ratio fell from 85% to 78% as a result. One bank that has started to accelerate credit growth after a period of tightness is Kotak Bank. Here loans grew +15% Y/Y, up from +8% in the previous quarter. That growth is net of a continued contraction in the CV/CE book (-32% Y/Y, -6% Q/Q), and mgmt is now looking for 20% growth by year-end, and open to infra-lending post the RBI exemption on reserve requirements. Certainly they have the capital to do this, with CET1 at 18.1%. Unlike other banks, gross NPLs were actually down 7bps Q/Q, and restructureds are just 0.3% of the book. We certainly like this turnaround more than IndusInd, where mgmt has been growing aggressively throughout the cycle. Loan growth was 24% this half, in-line with the past few quarters, and driven increasingly by corporate, which is now 57% of loans, up from 51% this time last year. That in turn is weighed on NIM, which fell -9bps Q/Q. Trends at the PSUs were more mixed. Overall topline growth remains muted, with revenues up just +5% Y/Y for the sector, although cost growth has also come in, and averaged just +8% Y/Y. Margins improved at each bank save BOI, where NIMs were squeezed by 12bps from both sides of the balance sheet. NIMs were up 20bps at PNB, as delinquent accounts resumed paying; up +6bps at BOB, as funding costs fell; and up +12bps Q/Q at SBI. We expect the focus to continue to be on asset quality, which is why Bank of Baroda is our only OW within the space. Delinquencies rose from 1.2% to 2.0% Q/Q at BOB, but this still below the level of 4% at BOI, 3% at SBI, and 5% at PNB. Moreover, BOB also saw an acceleration in recoveries, which rose to 44% of NPLs, and remains a key focus for the bank. Asset quality was perhaps most weak at SBI, where NPL inflows rose +25% Q/Q, with the mid-corporate & SME the key weak spots. NPL coverage is now just 47%, and while mgmt saw no material deterioration of trends, a turnaround in asset quality could take some time. Another reason we prefer BOB is that it has a stronger capital base of 9.3%, above that of PNB (8.8%), and BOI (7.3%). To be fair, BOB has asked the gov't for a Rs12bn infusion in FY15 to stay on track with B3 deadlines, and the GOI stake is low at 56.3% ownership, which could lead to an offering in FY16 once the infusion is done. That said, we see far greater needs at Bank of India, where CET1 is now just 6.8%. The bank has announced a Rs25bn AT1 issuance, which should raise 25bps of capital, but this doesn’t mitigate the risk of add’l capital raises.

Figure 190: India: NPL Ratios Understate Restructured Issue NPL AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

2Q13 1.27% 0.91% 3.54% 1.03% 1.35% 0.24% 0.77% 0.28% 0.60% 1.98% 3.42% 4.66% 5.15% 1.94% 1.39% 3.80%

3Q13 1.27% 1.00% 3.31% 0.99% 1.22% 0.17% 0.75% 0.26% 0.74% 2.41% 3.08% 4.61% 5.30% 1.93% 1.33% 3.85%

Quarterly 4Q13 1Q14 1.22% 1.26% 0.97% 1.00% 3.22% 3.23% 1.03% 1.06% 1.08% 1.58% 0.20% 0.22% 0.70% 0.77% 0.15% 0.32% 0.61% 0.80% 2.40% 2.99% 2.99% 3.04% 4.27% 4.84% 4.75% 5.56% 1.81% 2.05% 1.29% 1.39% 3.60% 4.11%

NPL Ratio 2Q14 3Q14 1.36% 1.42% 1.10% 1.00% 3.08% 3.05% 1.11% 1.18% 1.63% 1.68% 0.28% 0.39% 0.79% 0.77% 0.32% 0.60% 0.73% 0.81% 3.15% 3.32% 2.93% 2.81% 5.14% 4.96% 5.64% 5.73% 2.10% 2.13% 1.43% 1.45% 4.22% 4.21%

4Q14 1.37% 1.00% 3.03% 1.12% 1.63% 0.31% 0.69% 0.60% 0.67% 2.94% 3.15% 5.25% 4.95% 2.05% 1.41% 4.07%

1Q15 1.50% 1.10% 3.05% 1.11% 1.56% 0.33% 0.70% 0.60% 0.80% 3.11% 3.28% 5.48% 4.90% 2.12% 1.44% 4.19%

Source: Company reports.

Figure 191: India: Capital, Reserve Top-Ups Still Needed at PSUs AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

Reserves / Loans NPL 3Q14 4Q14 1Q15 Cover 0.95% 0.92% 1.02% 68% 0.75% 0.72% 0.75% 70% 2.19% 2.13% 2.14% 68% 0.88% 0.79% 0.78% 70% 0.78% 0.76% 0.76% 93% 0.31% 0.27% 0.26% 78% n.a. n.a. n.a. n.a. 0.12% 0.19% 0.21% 50% 0.30% 0.28% 0.32% 39% 1.50% 1.47% 1.59% 50% 1.10% 1.20% 1.19% 36% 2.30% 2.57% 2.63% 47% 2.67% 2.52% 2.38% 47% 1.15% 1.15% 1.17% 60% 0.97% 0.93% 0.95% 75% 1.89% 1.94% 1.95% 45%

Tier 1 Capital Ratio 3Q14 4Q14 1Q15 11.5% 12.6% 12.6% 11.5% 11.8% 11.1% 12.7% 12.8% 12.6% 13.3% 12.7% 12.1% 17.9% 17.8% 18.1% 9.9% 9.8% 12.6% 13.3% 15.4% 15.6% 22.5% 20.1% 21.6% n.a. n.a. n.a. 8.8% 9.5% 9.3% 8.1% 7.6% 7.5% 8.5% 8.9% 8.8% 8.7% 9.7% 9.6% 12.2% 12.4% 12.6% 12.8% 12.9% 13.2% 8.5% 8.9% 8.8%

A/E Ratio 15.7 x 8.4 x 7.1 x 21.3 x 10.2 x 12.5 x 7.6 x 4.9 x 11.3 x 26.5 x 19.4 x 10.3 x 10.6 x 12.8 x 12.5 x 16.7 x

Source: Company reports.

Figure 192: India: Revenue Growth Muted Given Weaker Fees/Non-NII

AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

Revenue Growth (Y/Y) 2Q14 3Q14 4Q14 1Q15 20% 13% 15% 8% 18% 15% 14% 11% 15% 23% 22% 16% 34% 30% 27% 20% 21% 8% 3% 2% 40% 17% 15% 6% 11% 17% 12% 18% 5% 2% -4% -13% 31% 24% 19% 13% 5% 8% 11% 6% 17% 18% 11% 0% 8% 10% 9% 7% 8% 14% 17% 9% 18% 15% 13% 8% 25% 18% 16% 10% 10% 12% 12% 5%

Cost Grow th (Y/Y) 2Q14 3Q14 4Q14 1Q15 12% 15% 14% 17% 9% 4% 1% 5% 5% 16% 20% 13% 29% 22% 20% 23% 17% 13% 14% 23% 28% 31% 26% 25% 16% 17% 10% 5% 11% -4% -9% -60% 23% 17% 18% 17% 33% 26% 3% 12% 23% 20% 31% 7% 18% 22% 6% 9% 32% 31% 0% 3% 20% 18% 12% 8% 17% 17% 16% 18% 27% 25% 10% 8%

Source: Company reports.

45

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

India: Policy Likely to Remain Constrained

Figure 193: FX Reserves since early ‘08, Increasingly Borrowed ($bn) 400 USD bn

For much of last year, India was the poster-child for EM vulnerability, as twin deficits and an increasing dependence on portfolio flows led to a sharp selloff (-14%) in the Rupee between May and September. India's CAD was stuck above 5% for three consecutive quarters (4Q12-2Q13), with portfolio flows financing one-third of the deficit (and FDI, just 25%), while it also looked like the fiscal deficit would print above 6%. Yet much like the rest of ASEAN, India has seen a substantial external adjustment, such that the current account deficit narrowed to 2% by FY4Q, less than half the level seen one year ago (5.1%). Demand compression, export expansion, & timely policy actions by the central bank all helped this rebalancing, avoiding a left-tail risk for the currency. Despite this rebalancing, we expect policy conditions to remain tight. This is underscored by the recent rise in inflation, with CPI jumping to +8.0% Y/Y, from an upwardly revised +7.5% in June (vs. 7.3% previous). While much of this is due to the ~17% M/M surge in vegetable prices & the (lagged) effect of rising oil prices, these factors are still likely to push up inflation expectations, leading to a more general rise in prices. Moreover, in the July PMI print, input prices surged 4.1 point to 59.6 in July, even as output prices dipped 1.7 points, to 50.7. This dynamic suggests a significant squeeze on producer margins in July, which is likely to be passed along to consumers in the form of higher prices. Finally, we think policy is likely to remain tight because there are nascent signs of a recovery in domestic demand, which would weigh on the trade deficit. Indeed, the July trade deficit rose to $12.2bn, from $11.7bn in June. While exports are running +30% Q/Q annualized, this was offset by both the rising fuel bill (~+$1bn M/M) as well as non-oil, nongold imports, which increased ~5% M/M. This jump in domestic demand echoes data seen in the July PMI, with output rising to 53, the highest level in 17 months, and new orders rising to 55.9, even as exports took a breather. The new government’s first budget underscores a commitment to fiscal consolidation, targeting a deficit of 4.1% of GDP from 4.5% of last year, and a target of 3% within the next 2 years. This is not to say the gov’t is sitting on its hands; indeed, the budget allowed FDI limits to be hiked from 26% to 49% in the defense & insurance sector, and Modi has been focused on containing food prices via curbing exports and releasing stocks. Monetary policy is also likely to remain tight, and we expect the RBI to raise policy rates by at least once by the end of the year, particularly if the monsoon continues to disappoint (now 17% under expectations). That said, here too we see more constructive long-term policy, with the central bank issuing guidelines in mid-July that allowed banks to raise long-term bonds (>7 years, unsecured) for lending to infrastructure and affordable housing, without any CRR/SLR or PSL requirements. Tighter policy should keep loan growth muted, although we expect some acceleration in credit growth going forward, after registering just +13% Y/Y in June, the weakest pace since mid-09, and apart from that period, the weakest growth in a decade. One thing that will have to be addressed to accelerate growth will be the ~Rp2.3 trillion capital shortfall in the PSU sector (CET1 9.5%, 10.3% for SIBs). We think this will be achieved by a combination of gov’t injections; sell-down of gov’t stakes; and improving returns, although at 57% of today's market cap, it keeps us cautious on the sector as a whole. 46

0.0%

300

-1.0%

200 100

-2.0%

0

-3.0%

-100 -200

-4.0%

-300

-5.0%

-400 -500

-6.0%

FX Reserves

External Borrowing

Current Account

Source: CEIC.

Figure 194: India: Falling Gold Imports Have Seen Trade Deficit Halve 20 18

Trade Deficit, US$ bn

16 14 12 10 8 6 4 2 0 Trade Deficit ex-Gold Imports

Total Trade Deficit

Source: CEIC.

Figure 195: Stressed Assets at the PSUs 16% 14%

Gross NPLs Restructured Gross NPLs Restructured

12% 9.59% 9.51%

10% 4.88%

8% 6% 4% 2%

4.76%

4.66% 2.78% 5.73% 4.90%

2.81% 3.28%

4.96% 5.48%

0% 4Q13

2Q14

4Q13

BOI

2Q14

4Q13

SBIN

2Q14

PNB

Source: CEIC.

Figure 196: Bank Exposure and CASA Funding Mix at Year-End Axis ICICI HDFCB Kotak Induslnd Yes SBI PNB BOI BOB Source: Company Data.

Infra

Power

Textile

Retail

Rest’d

CASA

7.6% 11.2% 3.7% 2.5% 1.2% 7.2% 11.5% 15.9% 16.4% 11.4%

3.3% 5.4% 2.2% <2% 1.2% 3.1% 5.4% 10.6% 7.4% 7.0%

1.8% 0.7% 0.9% 0.0% 0.6% 0.4% 4.5% 1.6% 3.4% 4.7%

22% 36% 53% 35% 49% 18% 20% 10% 8% 17%

1.8% 1.7% 0.4% 0.2% 0.3% 0.5% 4.8% 10.2% 7.1% 5.2%

42% 44% 48% 32% 27% 15% 47% 36% 33% 27%

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Australia: Capital Demands Rising

Figure 197: Australia: Domestic Loan Growth Showed Improvement Asset Growth (Y/Y)

Aussie banks have outperformed the broader Asia-ex region each of the last 3 years. Much of that performance has been driven by multiple expansion, as retail chased yield in a period during which policy rates fell some 225bps, and growth remained lackluster. Playing to investor appetite, banks also increased dividend payouts (MQG, ANZ) and/or offered one-time dividends (WBC). Despite this performance, the stocks still don’t look excessively expensive to us, with forward multiples of 14x earnings, and dividend yields of 5%. That said, we can’t help but mention (again) that earnings growth is likely to remain <5% in the next 2 years, as credit costs reach a bottom and loan growth remains sluggish. Moreover, capital is increasingly tight as the banks guide for higher CET1 targets. Indeed, after years of aggressive payout ratios, the sector may find itself stretched on capital, which would threaten the one factor driving the sector. CBA reported in-line FY14 results, with mixed underlying trends. On the one hand, NIMs were better-than-expected, coming in flat H/H, as asset repricing (-5bps) was offset by falling funding costs (+5bps), and increased holdings of liquidity (-2bps) was offset by an increase in higher-yield lending (+2bps). Loan growth was also stronger (+7.1% annualized), while provisions remain near all-time lows (16bps). On the other hand, fee income & trading were both slightly weak, with non-NII up only +6% Y/Y, and a lower tax rate (26% vs. 28%) allow the bank to meet estimates. Perhaps the one factor that tilts this result towards a "beat" is that CET1 came in at 9.3%, up +76bps during the second half of FY14, driven by ~48bps of organic capital generation, and ~28bps of inorganic capital generation, as the bank reaped a $950mm gain from the sale of its CPA/CFX property platforms. After taking into account nearly ~65bps of upcoming capital deductions for conglomerates, CBA will still have a CET1 ratio of 8.65%, giving it room to rely on ~16bps of organic capital generation each of the next two years. Over the past year, NAB has enjoyed a significant tailwind from its UK business, where margins expanded +18bps Y/Y, and provisions fell sharply. Unfortunately, the third quarter update provided the downside to this exposure, with the company highlighting another A$400mm of UK redress charges due to PPI claims and interest rate hedging. Given the new management team, we see the potential for further strategic challenges such as NextGen, MLC, and Great Western (noting the downward revaluation of foreclosed properties this quarter). Moreover, the Group continues to struggle with revenue growth, which was down 1% in 3Q14, on stable customer margins (reported likely lower) and lower markets income, albeit somewhat offset by lower provisions. Indeed, last half we saw provisions touch 20bps, which is the lowest level since the GFC. Finally, capital is still challenged, with NAB’s 3Q14 CET1 position of 8.46% seeing headwinds from UK redress (-10bps), wealth de-gearing (-50bps) and ~50% of debt maturities by FY15. Fortunately, the gains from the UK "Chestnut" sale and ongoing 20% DRP participation should see CET1 reach 9.1% by 1H16, within the company's range of 8.75% to 9.25%.

Loan Growth (Y/Y)

2H12

1H13

2H13

1H14

2H12

1H13

2H13

1H14

ANZ

8%

10%

9%

10%

7%

9%

13%

12%

CBA

8%

3%

5%

8%

5%

4%

6%

8%

NAB

1%

1%

6%

11%

4%

2%

4%

7%

WBC

1%

4%

4%

7%

4%

3%

4%

8%

Total

4%

4%

6%

9%

5%

5%

7%

9%

Source: Company reports.

Figure 198: Australia: But NIM Pressures Continue Across Sector Quarterly NIM Annualized NIM

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

ANZ

2.50% 2.47%

2.45% 2.35%

2.28% 2.24% 2.19%

2.14%

CBA

2.05% 2.06%

2.17% 2.12%

2.06% 2.10% 2.17%

2.14%

NAB

2.25% 2.23%

2.28% 2.17%

2.06% 2.03% 2.03%

1.94%

WBC

2.17% 2.20%

2.24% 2.17%

2.18% 2.18% 2.13%

2.10%

Total

2.24% 2.24%

2.28% 2.20% 2.14%

2.14% 2.13% 2.08%

Source: Company reports.

Figure 199: Australia: Cost Lever Has Been Key to Profitability Revenue Growth (Y/Y)

Cost Growth (Y/Y)

2H12

1H13

2H13

1H14

2H12

1H13

2H13

1H14

ANZ

7%

1%

7%

7%

10%

-2%

-4%

6%

CBA

2%

0%

5%

8%

1%

-4%

-1%

6%

NAB

2%

-1%

7%

4%

4%

-7%

-4%

12%

WBC

7%

4%

3%

7%

7%

1%

1%

7%

Total

5%

1%

5%

6%

5%

-3%

-2%

8%

Source: Company reports.

Figure 200: Australia: Banks Demonstrating Cost Discipline Cost / Income Ratio 2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

ANZ

46%

47%

48%

47%

49%

45%

44%

45%

CBA

48%

47%

46%

46%

46%

44%

43%

43%

NAB

53%

50%

50%

49%

50%

46%

45%

50%

WBC

45%

44%

44%

44%

44%

43%

43%

43%

Total

48%

47%

47%

46%

47%

45%

44%

45%

Source: Company reports.

Figure 201: Australia: Credit Costs Reaching New Lows Post-GFC Quarterly Provision Annualized LLP

2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

ANZ

0.40%

0.35%

0.28%

0.26%

0.31%

0.26%

0.25%

0.21%

CBA

0.40%

0.29%

0.22%

0.21%

0.20%

0.25%

0.17%

0.16%

NAB

0.48%

0.40%

0.34%

0.54%

0.56%

0.42%

0.29%

0.20%

WBC

0.24%

0.19%

0.21%

0.24%

0.23%

0.17%

0.15%

0.12%

Total

0.38%

0.31%

0.26%

0.31%

0.33%

0.27%

0.21%

0.17%

Source: Company reports.

47

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Figure 203: Australia: Low EPS Growth, but High Returns

Australia: Capital Demands Rising

ROE

ANZ's 3Q14 trading update reinforced a few of the key themes across the region, including a slowdown in cross-border banking & trade finance, as well as weakness in global markets. Going forward, ANZ has guided to the “low end of the range” of 4-5% revenue growth (ccy) as well as 2% expense growth (ccy). Indeed, 3Q14 global markets income was ~A$490mm, some 20% lower vs. 3Q13, driven by an adverse ~A$130mm swing on trading & balance sheet income. The YTD runrate of A$5.2bn was slightly below our estimates for 2H14, although weakness on the topline was offset primarily by lower provisions (1H: 21bps), which are now expected to be down 12% Y/Y (vs. previous guidance of 10%). While the bank didn't release details on capital, we think that is another key overhang on the stock, particularly as the bank builds capital from its current CET1 of 8.33% to a newly guided target range of 8.5%-9.0%. Overall, we see higher capital needs re-activating the DRP, while also weighing on ROEs (15.5%), which keeps us UW the stock. In a sector that remains fully valued, Westpac’s solid earnings and capital position make this our top pick in the space. First half earnings came in ~4% better than expected, with preprovision profits growing at annualized pace of ~9%. NIMs were down just 1bp H/H, as improving funding costs (+4bps) and better returns in the Treasury book (+4bps) helped offset the drag from repricing in Australia/NZ (-7bps) and headwinds from the holding of excess liquidity (-1bp), as banks prepare to meet LCR requirements. While we expect margins to fall another 2bps in 2H14, the CFO was stated that spot margins were in-line with 1H averages, and lower funding costs would continue to provide a tailwind going forward. Asset quality also surprised to the upside in 1H, with emerging non-accruals declining 30bps to 1.21%, the lowest level in the sector. Trends improved in St. George in particular. While we expect provisions to normalize at a higher rate in 2H14, we’d note the bank already enjoys a larger buffer on specific provisioning coverage than peers (45% vs. 40%). Likewise, WBC’s CET1 ratio is 8.8%, above that of peers and will not be affected by the new APRA Conglomerates standards. This combination of better earnings growth & a more conservative balance sheet make this the only Overweight in a sector we otherwise rate Neutral. Figure 202: Australia: Capital at Risk of Higher Demands from APRA Reserves / Loans 1H13

2H13

ANZ

0.94%

0.89%

0.84%

CBA

0.87%

0.79%

NAB

0.83%

WBC Total

1H14 Cover

Core Tier 1 Ratio

A/E

1H13

2H13

1H14 Ratio

76%

8.2%

8.5%

8.3% 15.7 x

0.73%

65%

8.3%

8.2%

8.5% 16.6 x

0.77%

0.72%

47%

8.2%

8.4%

8.6% 17.8 x

0.73%

0.67%

0.61%

66%

8.7%

9.1%

8.8% 15.2 x

0.84%

0.78%

0.73%

63%

8.4%

8.6%

8.6% 16.3 x

Source: Company reports.

48

NPL

RORWA

2H12

1H13

2H13

ANZ

14.7%

15.5%

CBA

18.3%

NAB

1H14

2H12

1H13

2H13

1H14

15.2%

15.5% 1.95%

1.97%

1.95%

1.95%

18.2%

18.8%

18.9% 2.34%

2.49%

2.44%

2.55%

13.8%

14.7%

14.7%

15.1% 1.57%

1.64%

1.63%

1.72%

WBC

15.9%

16.0%

15.8%

16.4% 2.28%

2.28%

2.31%

2.34%

Total

15.6%

16.1%

16.1%

16.5%

2.09%

2.08%

2.14%

2.04%

Source: Company reports.

Figure 204: Australia: Banks Playing To Yield-Hungry Investors Quarterly Payout Ratio 2H10

1H11

2H11

1H12

2H12

1H13

2H13

1H14

ANZ

69%

61%

73%

61%

73%

63%

75%

65%

CBA

83%

61%

84%

61%

89%

70%

80%

69%

NAB

70%

68%

69%

71%

79%

76%

77%

74%

WBC

75%

72%

77%

78%

76%

76%

77%

74%

Total

74%

66%

76%

68%

79%

71%

77%

71%

Source: Company reports.

Figure 205: Deleveraging Continues On Weak Credit Demand 160%

18.0%

155%

16.0% 14.0%

150%

12.0%

145%

10.0%

140%

8.0%

135%

6.0% 4.0%

130%

2.0%

125%

0.0%

120%

-2.0%

LDR

Loan Growth (R )

Deposit Growth (R )

Source: CEIC.

Figure 206: Housing Approvals Coming Back, but Low First-Time Buyers 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

11000 10500 10000 9500 9000 8500 8000 7500 7000 6500 6000

Business Loan Growth Source: CEIC.

Housing Loan Growth

Housing Approvals

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

EPS Estimate Changes Across the Region Table 1: Australia: Changes In EPS Consensus Estimates ANZ CBA NAB WBC Total

Change 3w -0.3% 0.1% -2.9% -0.1% -0.8%

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. -0.8% 3.4% -1.1% 0.0% -0.6% 2.1% -0.2% 0.2% 5.0% -2.3% 0.6% 0.8% 4.9% -1.9% -2.6% -2.7% -0.9% -0.4% -0.5% -1.3% 0.1% -0.1% 4.0% -2.4% -0.1% 0.0% 3.6% -2.6% -0.8% 2.4% -1.7% 0.0% -0.1% 2.3% -1.1%

Source: Bloomberg, J.P. Morgan estimates.

Table 2: China H-shares: Changes In EPS Consensus Estimates ABC ICBC BOC CCB BoCom Citic CMB MSB CQRB Total

Change 3w 0.2% 0.1% 0.3% -0.1% -0.9% 0.1% 0.1% 0.9% -0.3% 0.1%

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. 0.7% 2.0% 1.6% 0.3% 1.0% -0.2% 7.1% -0.1% -0.4% 1.7% 0.2% -0.2% -3.2% 3.9% 0.5% 5.7% 4.9% 0.8% 1.4% 1.6% 6.0% 0.5% 2.1% 4.3% 0.0% 0.6% 0.2% 5.9% 0.1% 0.8% 2.2% -1.0% -0.5% -4.0% 3.4% 0.9% 12.5% 2.3% 0.3% 1.1% 11.8% 3.6% 0.4% 4.0% 0.8% 0.0% 0.2% 0.8% 0.5% 8.0% 4.8% -3.6% 0.6% 5.8% -2.4% -4.4% 0.7% 1.7% 1.1% 0.8% 1.2% -0.9% 2.4% 1.3% 3.7% 1.7% 0.2% 1.2% 0.4% 3.2%

Source: Bloomberg, J.P. Morgan estimates. JPMe YTD in this case refers to February 22, 2013, at which time coverage was transferred.

Table 6: Korea: Changes In EPS Consensus Estimates BFG DGB HFG IBK KBFG SFG Total

BEA BOCHK DSB DSF HSB Total

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. -0.8% 4.8% 1.9% 0.3% -1.2% 3.9% 1.7% 0.5% 3.4% -0.9% 0.3% 1.1% 3.3% 1.5% 0.6% -0.4% -0.6% -0.1% -0.3% -2.9% 0.0% 0.2% 2.7% 1.8% -0.1% -0.8% -1.3% 3.4% -0.2% 1.6% n/a -0.3% -0.4% -0.2% 6.2% -0.5% 1.6% -0.6% -0.5% -0.9% -0.2% 1.1%

Source: Bloomberg J.P. Morgan estimates.

Table 7: Malaysia: Changes In EPS Consensus Estimates AMMB CIMB HLB Maybank PBK RHBC Total

AXSB HDFCB ICICI IIB KMB YES HDFC IDFC LICHF BOB BOI PNB SBI Total Private PSU

in FY14 EPS 3m YTD 0.0% 2.8% 0.0% 0.9% 0.0% 1.6% 0.0% 2.8% 0.0% -3.0% 0.0% 0.0% 0.0% -2.1% 0.0% 1.0% 0.0% 2.4% 0.0% 0.3% 0.0% -5.2% 0.0% -10.4% 0.0% -9.8% 0.0% -1.4% 0.0% 0.8% 0.0% -6.3%

Table 5: Indonesia: Changes In EPS Consensus Estimates Change in FY14 EPS JPM vs Change in FY15 EPS 3w 3m YTD Cons. 3w 3m YTD 0.1% 0.6% 2.6% 11.0% 0.5% 1.3% 3.3% 0.1% 0.2% 8.0% -4.7% 0.1% 0.7% 5.5% 0.6% 1.8% 7.9% -3.3% 0.7% 1.3% 4.0% -4.3% -14.2% -19.5% 4.9% -4.6% -11.5% -16.7% -0.1% 0.9% 3.4% 1.3% 0.1% 1.4% 1.3% -0.7% -2.1% 0.5% 1.8% -0.6% -1.4% -0.5%

Source: Bloomberg, J.P. Morgan estimates.

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. 0.0% 0.3% 3.0% 0.0% 0.2% -2.9% 13.5% -3.4% -12.1% -3.9% 0.0% -5.3% -13.7% -5.6% -0.5% -0.4% -1.9% 0.0% 0.1% -0.3% 0.3% 0.0% -0.3% -0.5% 0.0% -0.6% -1.1% 0.4% -2.6% -6.4% 0.2% 0.0% -4.1% -8.3% 1.2% 0.6% 0.3% -7.1% 0.0% -2.0% -2.2% -9.2% -1.0% -3.1% -1.7% 0.0% -2.0% -4.7% 0.1%

Source: Bloomberg J.P. Morgan estimates.

Table 8: Philippines: Changes In EPS Consensus Estimates BDO BPI EW MBT PNB SECB Total

Change 3w 1.7% -2.0% -2.8% -2.5% 0.0% 0.8% -0.8%

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. 3.8% 12.8% -4.2% 0.4% 2.3% 8.4% -10.1% -4.9% -10.3% -9.3% -2.0% -15.2% -23.3% 100.7% -9.5% -7.4% -8.9% -2.0% -15.2% -23.3% -6.8% -1.7% -4.8% -9.6% 1.1% 2.2% -3.3% -12.0% 0.0% -10.4% -0.4% 1.9% 2.0% -6.5% -21.2% 0.2% -12.5% 12.1% -0.5% -0.1% -7.7% 10.5% -2.0% -5.4% -3.4% -0.2% -4.0% -9.3% 10.2%

Table 9: Singapore: Changes In EPS Consensus Estimates

JPM vs Change in FY15 EPS JPM vs Cons. 3w 3m YTD Cons. 1.9% 0.1% 1.2% 4.8% 2.6% -0.8% 0.0% -1.3% -0.6% 0.0% 2.6% 0.2% 0.7% 2.1% 1.5% 0.2% 0.0% 2.0% 6.9% -2.3% -13.3% 0.0% 1.6% -1.8% -7.6% 6.5% 0.0% 0.0% 0.0% -10.3% -1.2% -0.2% -1.3% -4.6% -2.6% 0.6% -2.6% -3.1% -12.0% -11.4% 0.1% -2.3% -3.1% 0.7% -6.6% 1.2% 0.9% 1.9% 2.2% 7.9% -22.2% -2.3% -2.3% -12.0% -12.6% -0.4% 1.9% 2.0% -6.5% -21.2% 38.7% 0.6% 6.0% -4.1% -4.2% 1.1% -0.3% 0.3% -1.9% -5.1% -0.5% 0.1% 0.7% 1.9% -2.7% 4.3% 0.3% 1.9% -5.1% -7.5%

Source: Bloomberg, J.P. Morgan estimates.

BBCA BBRI BBNI BDMN BMRI Total

Change 3w 0.0% 0.0% 0.0% 0.0% 0.2% 0.0% 0.0%

Source: Bloomberg J.P. Morgan estimates.

Table 4: India: Changes In EPS Consensus Estimates Change 3w 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. -1.1% -8.4% 5.1% -0.1% -1.0% -7.6% 4.1% -3.7% -13.3% -5.5% -0.3% -2.9% -8.7% -6.4% 0.3% -20.2% -10.0% 1.0% -2.0% -15.9% -15.0% 4.0% 2.2% -7.4% 1.9% 3.2% 3.1% -8.0% -1.9% -13.0% -8.6% 0.2% -2.4% -12.5% -9.9% -1.0% -5.7% 1.1% 0.2% -0.3% -7.9% 2.6% -0.6% -9.8% -4.2% 0.5% -0.9% -8.3% -5.4%

Source: Bloomberg, J.P. Morgan estimates.

Table 3: Hong Kong: Changes In EPS Consensus Estimates Change 3w -0.1% 0.0% 0.0% 0.0% -0.1% -0.3%

Change 3w 0.0% 0.2% 1.3% 2.2% 0.2% -0.1% 0.6%

JPM vs Cons. 14.1% -3.8% -11.8% -6.7% 1.8% -1.3%

DBS UOB Total

Change 3w 0.6% -0.6% 1.8%

in FY14 EPS JPM vs Change in FY15 EPS JPM vs 3m YTD Cons. 3w 3m YTD Cons. 1.3% 2.4% 7.4% -0.1% -0.1% -0.5% 6.0% 0.2% 0.9% -2.8% -0.9% -0.8% -0.5% -6.5% 2.5% 4.5% -2.6% 0.8% 0.8% 1.2% -3.5%

Source: Bloomberg.

Table 10: Taiwan: Changes In EPS Consensus Estimates Cathay Chinatrust ESun First Fubon Mega Shinkong Sinopac Taishin Total

Change in FY14 EPS 3w 3m YTD 2.6% 10.0% 20.3% 17.4% 33.8% 39.4% 0.2% 0.6% -3.3% 1.8% 5.1% 3.9% 0.8% 2.3% 11.2% 0.5% 3.8% 2.7% 0.0% -2.1% -9.1% 0.3% 1.0% 2.2% 0.2% 0.5% 9.6% 2.6% 6.1% 8.5%

JPM vs Change in FY15 EPS Cons. 3w 3m YTD 25.3% 1.0% 2.3% 12.9% 17.3% 4.4% 10.8% 11.1% -1.8% 1.0% 0.2% -4.6% -0.1% 1.8% 3.1% 4.7% 15.0% 0.5% 0.3% 8.2% 8.5% 0.3% 2.6% 0.2% -0.1% 0.5% -1.3% -4.9% 8.5% 0.6% -1.4% -2.5% 1.2% -0.1% -1.6% 8.0% 8.2% 1.1% 1.7% 3.7%

JPM vs Cons. 12.2% 3.8% 6.7% 0.1% 14.1% 10.5% 3.4% 17.7% 13.0% 9.1%

Source: Bloomberg, J.P. Morgan estimates.

Table 11: Thailand: Changes In EPS Consensus Estimates BAY BBL KBANK KTB SCB TMB TISCO TCAP KK Total

Change in FY14 EPS 3w 3m YTD 0.0% -4.3% -16.4% -0.1% -0.7% -6.5% -0.6% 1.5% -2.3% -4.2% -6.5% 3.5% 0.2% 3.0% -3.1% 0.0% 5.1% -0.5% 0.0% -3.4% -11.9% -1.1% -2.7% -12.8% 0.0% -15.7% -30.9% -0.6% -2.6% -9.0%

JPM vs Change in FY15 EPS JPM vs Cons. 3w 3m YTD Cons. 6.2% -0.2% -6.9% -17.9% 4.9% 4.2% -0.2% 0.1% -6.9% 2.4% 3.8% -1.5% 1.1% -3.5% 2.6% -12.6% -2.5% -5.1% 2.0% -13.6% 2.8% -0.1% 1.8% -3.5% 2.1% -2.7% 0.0% 2.0% -8.5% -2.0% 12.8% 0.0% -3.3% -11.9% 7.5% -0.1% -0.6% -4.4% -10.0% -12.1% 8.2% 0.0% -11.7% -24.7% -9.1% 2.5% -0.6% -2.9% -9.4% -1.9%

Source: Bloomberg, J.P. Morgan estimates.

49

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Monthly Statistics – Loan and Deposit Growth Table 12: Australia Australia Loan Growth Corporate Household Housing Total Loan Growth

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

-6.9% 17.0% 8.7% 5.2%

-3.4% 12.7% 7.5% 5.7%

3.4% 7.2% 4.4% 5.7%

2.6% 6.3% 4.5% 4.9%

1.2% 8.2% 5.3% 5.6%

1.1% 8.2% 5.3% 5.5%

1.1% 8.1% 5.3% 5.5%

1.6% 8.2% 5.5% 5.7%

2.0% 8.1% 5.6% 5.8%

1.9% 8.3% 5.8% 5.9%

1.9% 8.5% 5.9% 6.0%

2.8% 8.7% 6.1% 6.5%

Deposit Growth Demand Time Total Deposit Growth

1.6% 10.6% 0.6%

10.3% 14.6% 8.7%

8.0% 12.1% 7.9%

10.2% 11.5% 7.3%

16.9% 2.7% 7.0%

16.9% 2.6% 7.0%

16.9% 2.6% 7.6%

16.9% 2.6% 7.9%

16.7% 1.8% 7.3%

16.7% 1.8% 7.5%

16.7% 1.8% 7.3%

16.7% 1.8% 7.1%

Demand% LDR

41% 154%

42% 148%

42% 144%

43% 139%

46% 135%

46% 135%

46% 135%

46% 135%

47% 136%

47% 136%

47% 137%

47% 137%

Source: CEIC

Table 13: China China Loan Growth Corporate Household Total Loan Growth

2009

2010

2011

2012

2013

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-14

29.1% 43.3% 31.7%

15.3% 37.6% 19.9%

12.3% 20.9% 14.3%

13.8% 18.6% 15.0%

11.1% 23.1% 14.1%

11.4% 22.5% 14.3%

11.5% 21.9% 14.2%

11.3% 21.4% 13.9%

11.3% 20.4% 13.7%

11.8% 19.6% 13.9%

12.1% 19.3% 14.0%

11.6% 18.5% 13.4%

Deposit Growth CASA Time Total Deposit Growth

34.0% 21.9% 28.2%

27.4% 11.5% 20.2%

5.2% 22.8% 12.7%

11.1% 16.0% 13.4%

12.7% 14.9% 13.8%

8.1% 14.8% 11.3%

11.8% 13.3% 12.5%

10.8% 12.0% 11.4%

10.5% 11.2% 10.9%

9.8% 11.4% 10.6%

12.3% 12.9% 12.6%

9.4% 12.5% 10.9%

54% 67%

58% 67%

54% 68%

53% 69%

52% 69%

51% 71%

51% 70%

51% 69%

51% 70%

51% 70%

51% 68%

51% 70%

CASA% LDR Source: CEIC

Table 14: Hong Kong Hong Kong Loan Growth Corporate Manufacturing Construction & Property Wholesale and Retail

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

-5.6% -13.5% 0.2% -1.2%

25.6% 29.2% 20.9% 52.7%

14.5% 16.4% 10.8% 36.7%

5.9% -4.7% 1.0% 12.9%

12.4% 20.0% 6.9% 17.8%

12.4% 17.6% 7.0% 19.1%

12.4% 17.6% 7.0% 19.1%

12.4% 17.6% 7.0% 19.1%

19.1% 23.4% 10.6% 24.5%

19.1% 23.4% 10.6% 24.5%

19.1% 23.4% 10.6% 24.5%

19.0% 20.8% 7.9% 20.3%

Household Housing Total Loan Growth HK$ Foreign Currency Trade Finance Loans for Use in HK Loans for Use Outside HK

5.6% 7.8% 0.1% 2.0% -4.7% -6.1% -2.1% 12.0%

14.8% 14.5% 28.6% 17.6% 58.2% 56.7% 20.9% 50.9%

9.2% 6.8% 20.2% 11.9% 36.9% 28.0% 12.5% 42.5%

9.0% 7.5% 9.6% 5.5% 16.3% 9.1% 7.0% 19.8%

7.4% 3.9% 16.0% 8.2% 27.6% 43.8% 10.6% 21.7%

7.4% 3.9% 16.0% 8.2% 27.6% 43.8% 10.6% 21.7%

7.4% 3.9% 17.8% 8.9% 31.0% 49.6% 11.6% 24.0%

7.4% 3.9% 21.8% 14.5% 32.5% 47.9% 17.6% 24.7%

8.4% 3.1% 19.0% 11.5% 29.5% 35.4% 15.4% 22.4%

8.4% 3.1% 18.1% 10.6% 28.7% 23.7% 15.3% 22.7%

8.4% 3.1% 18.0% 11.0% 27.7% 21.0% 15.3% 23.2%

8.0% 3.9% 16.0% 11.4% 22.2% 11.7% 15.2% 19.3%

40.7% -18.2% 5.3%

9.0% 6.1% 7.5%

2.0% 20.8% 10.6%

18.6% 0.1% 9.3%

9.0% 12.3% 10.6%

9.0% 12.4% 10.7%

5.0% 10.4% 7.6%

8.0% 13.6% 10.6%

5.9% 14.7% 10.0%

6.3% 16.1% 10.8%

6.7% 15.9% 11.0%

12.1% 14.5% 13.3%

54% 52%

54% 62%

50% 67%

54% 67%

53% 70%

53% 70%

52% 73%

54% 74%

52% 74%

52% 73%

52% 73%

52% 74%

Deposit Growth CASA Time Total Deposit Growth CASA% LDR Source: CEIC

50

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 15: India India Loan Growth Corporate Industry Trade Real Estate Household Housing Auto Credit Card Total Loan Growth Deposit Growth CASA Time Total Deposit Growth CASA% LDR

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

15.4% 15.7% 13.0% 14.5%

29.2% 31.6% 17.3% 21.1%

16.8% 19.8% 12.1% 11.3%

15.0% 13.7% 23.1% 10.8%

13.9% 14.1% 18.9% 9.2%

13.9% 14.1% 18.9% 9.2%

15.7% 13.3% 18.1% 16.4%

15.5% 12.9% 16.5% 17.4%

16.8% 13.1% 17.0% 22.4%

13.8% 12.3% 17.1% 19.8%

12.2% 11.4% 13.4% 16.5%

12.4% 10.3% 15.4% 15.7%

-0.4% 7.5% -5.5% -25.3% 12.0%

16.7% 15.0% 29.8% -16.4% 26.8%

12.3% 12.1% 17.7% 6.2% 16.0%

16.5% 16.4% 22.2% 27.1% 15.3%

15.6% 17.6% 14.0% -1.6% 14.2%

15.6% 17.6% 14.0% -1.6% 14.2%

15.5% 16.9% 19.4% 0.2% 15.6%

15.8% 16.7% 18.3% -0.4% 15.6%

15.1% 17.6% 17.4% -0.2% 16.5%

13.9% 15.9% 17.4% 0.8% 13.8%

13.5% 15.8% 16.8% 14.2% 12.4%

14.1% 16.1% 18.0% 16.7% 12.7%

24.2% 14.4% 18.4%

27.2% 14.6% 17.9%

7.9% 23.2% 16.8%

10.9% 11.3% 11.1%

15.3%

15.3%

16.0%

16.5%

17.1%

14.7%

13.5%

11.7%

39% 68%

41% 73%

38% 72%

38% 75%

74%

74%

75%

75%

75%

74%

74%

75%

Source: CEIC

Table 16: Indonesia Indonesia Loan Growth Corporate Manufacturing Construction Trade, Hotel & Res Household Housing Auto Total Loan Growth Deposit Growth CASA Time Total Deposit Growth CASA% LDR

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

3.4% 4.4% 11.9% 20.6%

21.4% 10.8% 5.9% 10.6%

20.1% 27.6% 23.3% 21.1%

27.8% 28.2% 25.0% 32.5%

27.5% 22.8% 21.3% 26.2%

27.5% 22.8% 21.3% 26.2%

27.5% 24.1% 24.2% 27.0%

23.5% 23.3% 23.2% 26.4%

22.8% 23.8% 24.8% 24.4%

21.4% 23.9% 23.8% 23.0%

21.6% 22.2% 19.7% 23.7%

20.6% 22.8% 18.7% 17.8%

18.0%

25.3%

16.4%

22.2%

29.4% 32.9% 32.2% 23.3%

18.6% 22.4% -6.7% 24.0%

15.0% 26.5% 5.9% 19.2%

15.0% 26.5% 5.9% 19.2%

14.2% 25.3% 12.1% 19.1%

16.1% 24.2% 13.4% 18.5%

15.1% 22.6% 15.5% 18.3%

15.4% 20.3% 13.1% 17.7%

12.8% 28.8% 21.9% 16.5%

12.3% 21.3% 17.6% 15.5%

18.1% 9.2% 14.9%

22.1% 18.6% 22.1%

21.6% 15.4% 20.0%

18.9% 11.6% 14.7%

12.4% 13.9% 9.5%

12.4% 13.9% 9.5%

9.5% 13.8% 9.0%

9.6% 13.2% 9.2%

8.6% 12.3% 8.8%

8.6% 14.1% 9.5%

9.5% 12.3% 9.6%

10.5% 17.8% 13.0%

53% 77%

54% 77%

55% 79%

57% 86%

56% 93%

56% 93%

55% 94%

55% 94%

55% 95%

55% 94%

55% 95%

55% 94%

Source: CEIC

Table 17: Korea Korea Loan Growth Corporate Large Companies SMEs

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

2.9% -6.4% 4.8%

2.2% 15.7% -0.2%

7.6% 31.8% 2.6%

5.9% 23.5% 1.3%

5.9% 5.8% 5.9%

5.9% 5.8% 5.9%

6.9% 9.0% 6.2%

7.0% 9.6% 6.2%

6.8% 8.5% 6.3%

7.3% 9.4% 6.6%

7.7% 10.5% 6.8%

7.2% 9.7% 6.4%

Household Housing Total Loan Growth

5.2% 10.6% 2.2%

5.3% 7.7% 3.3%

5.6% 7.5% 6.9%

2.5% 3.5% 2.2%

3.0% 3.5% 3.9%

3.0% 3.5% 3.9%

3.2% 4.0% 4.6%

3.9% 4.7% 5.1%

4.1% 4.9% 5.1%

4.5% 5.7% 5.4%

4.4% 5.7% 5.6%

4.1% 5.4% 4.9%

Deposit Growth CASA Time Total Deposit Growth

14.1% 8.9% 13.8%

6.2% 25.2% 16.3%

3.5% 12.1% 7.1%

7.9% 2.1% 2.7%

8.7% -2.9% 2.3%

8.7% -2.9% 2.3%

9.9% -2.6% 2.9%

9.4% -0.8% 3.6%

7.6% 0.0% 3.8%

7.1% 0.1% 4.2%

7.7% 1.4% 5.2%

6.0% 2.2% 4.3%

CASA% LDR

47% 115%

42% 102%

41% 101%

42% 101%

45% 102%

45% 102%

44% 104%

44% 103%

44% 103%

44% 104%

44% 103%

45% 102%

Source: CEIC; Total and LDR numbers are corporate banks excluding specialized lenders.

51

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 18: Malaysia Malaysia Loan Growth Corporate Manufacturing W&R Trade Construction Real Estate

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

5.5% -7.1% -1.0% 6.1% 26.1%

11.9% 9.7% 7.5% 4.7% 21.0%

14.5% 9.8% 11.8% 4.8% 31.6%

9.0% 3.9% 12.1% 10.5% 22.3%

8.9% 1.8% 11.1% 12.0% 13.5%

8.9% 1.7% 11.3% 12.2% 13.1%

9.7% 2.5% 8.1% 13.9% 15.4%

9.4% 1.6% 6.8% 12.2% 16.9%

8.4% 1.3% 6.4% 12.5% 16.7%

7.9% 2.9% 6.3% 11.9% 16.1%

7.3% 1.6% 7.4% 11.7% 16.0%

6.5% 1.0% 6.4% 11.2% 17.7%

Household Housing Auto Credit Card Total Loan Growth

9.8% 8.7% 0.6% 4.5% 7.8%

13.4% 14.3% 4.8% 13.7% 12.7%

12.9% 13.8% 4.3% 7.9% 13.6%

11.6% 12.4% 5.8% 1.3% 10.4%

12.0% 11.7% 2.8% 5.2% 10.6%

12.0% 11.7% 2.8% 5.3% 10.6%

12.1% 11.6% 2.0% 4.7% 11.0%

11.7% 11.7% 1.6% 4.8% 10.7%

11.6% 11.5% 1.3% 4.8% 10.2%

11.6% 11.4% 1.4% 4.4% 10.0%

11.6% 11.5% 1.8% 5.3% 9.7%

11.5% 11.4% 1.9% 4.9% 9.3%

10.9% 6.6% 9.2%

8.0% 6.1% 7.0%

13.9% 11.5% 14.2%

10.8% 8.3% 8.2%

10.7% 9.9% 8.5%

10.7% 9.9% 8.3%

8.7% 5.7% 7.4%

9.3% 5.3% 7.1%

9.9% 4.8% 7.3%

9.8% 3.4% 7.3%

8.0% 1.7% 6.1%

8.8% 1.6% 6.8%

25% 74%

25% 78%

25% 77%

26% 79%

26% 80%

27% 80%

27% 81%

27% 81%

26% 81%

26% 81%

26% 81%

26% 81%

Deposit Growth CASA Time Total Deposit Growth CASA% LDR Source: CEIC

Table 19: Philippines Philippines Loan Growth Corporate Manufacturing Construction Wholesale Retail & Trade Real Estate

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

9.9% -16.7% -27.4% 4.6% 12.3%

10.1% 18.2% 15.6% 6.8% 12.2%

20.1% 32.1% 22.3% 57.8% 25.2%

16.6% 9.3% 51.3% 17.7% 29.7%

15.3% 15.5% 51.8% 16.9% 22.0%

15.3% 15.5% 51.8% 16.9% 22.0%

16.2% 12.7% 51.7% 16.2% 17.3%

17.8% 11.3% 41.6% 18.9% 20.2%

18.1% 14.1% 46.5% 21.9% 19.8%

18.9% 16.2% 40.7% 21.3% 19.8%

19.0% 15.9% 41.7% 23.0% 18.1%

17.7% 10.7% 39.9% 16.8% 15.4%

Household Credit Card Auto Total Loan Growth

11.0% 6.5% 27.8% 10.0%

8.9% 4.2% 24.6% 8.9%

17.3% 9.0% 26.4% 19.3%

14.1% 13.4% 14.0% 16.2%

8.3% 5.7% 13.7% 16.4%

8.3% 5.7% 13.7% 16.4%

8.9% 5.9% 11.6% 17.1%

9.2% 5.3% 12.1% 19.4%

11.7% 6.9% 12.5% 20.0%

10.7% 5.4% 11.9% 20.8%

10.8% 5.3% 12.7% 21.0%

16.2% 4.8% 14.2% 20.1%

Deposit Growth CASA Time Total Deposit Growth

19.8% -4.9% 11.4%

11.9% 8.0% 9.4%

13.3% -7.8% 5.4%

8.7% 12.4% 7.2%

33.6% 58.6% 34.1%

33.6% 58.6% 34.1%

38.0% 67.7% 38.3%

35.4% 74.7% 37.9%

34.0% 71.0% 36.8%

32.2% 59.2% 34.2%

24.5% 55.9% 29.0%

21.8% 46.8% 25.6%

74% 52%

74% 52%

78% 59%

77% 64%

74% 55%

74% 55%

75% 54%

75% 55%

76% 56%

77% 57%

75% 57%

75% 57%

CASA% LDR Source: CEIC

52

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 20: Singapore Singapore Loan Growth Corporate Manufacturing Building & Construction General Commerce

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

-1.3% -6.6% 1.0% 12.5%

12.0% 5.4% 5.5% 33.7%

27.5% 26.9% 20.1% 43.0%

9.0% 9.3% 14.2% 16.6%

22.1% 15.0% 16.2% 42.0%

22.3% 14.9% 16.2% 42.0%

20.4% 13.0% 16.2% 37.5%

20.0% 13.3% 12.1% 35.6%

18.9% 3.2% 9.5% 35.1%

19.0% 3.1% 9.5% 30.7%

17.2% 3.6% 8.9% 25.7%

18.0% 1.9% 8.9% 21.5%

Household Housing Auto Credit Card Total Loan Growth

8.4% 14.6% -3.7% 12.2% 1.2%

17.4% 22.2% -2.7% 11.8% 13.5%

15.9% 16.5% 9.1% 14.4% 24.2%

14.4% 15.2% -1.7% 13.7% 10.4%

12.8% 9.4% -14.6% 10.9% 19.5%

12.8% 9.5% -14.6% 10.9% 19.7%

12.1% 8.5% -16.0% 9.7% 18.2%

12.0% 8.4% -17.1% 7.8% 17.9%

13.0% 7.8% -17.9% 8.5% 17.3%

13.1% 7.3% -18.9% 9.0% 17.4%

12.2% 7.6% -19.7% 8.3% 15.9%

12.2% 7.4% -19.9% 6.9% 16.5%

Deposit Growth CASA Time Total Deposit Growth

23.3% 2.2% 12.7%

17.1% 3.3% 10.8%

14.9% 6.5% 11.4%

6.6% 8.1% 7.4%

7.2% -1.5% 3.6%

7.2% -1.5% 3.6%

7.3% -3.2% 2.9%

5.8% -3.8% 1.9%

6.6% -4.1% 2.4%

3.9% -4.1% 0.7%

3.4% -7.2% -0.7%

1.9% -3.4% 0.0%

54% 72%

57% 74%

59% 87%

58% 95%

60% 107%

60% 107%

61% 107%

61% 108%

62% 107%

62% 109%

62% 111%

62% 112%

CASA% LDR Source: CEIC

Table 21: Taiwan Taiwan Loan Growth Corporate Manufacturing Construction Wholesale & Retail Trade Real Estate Household Housing Auto Total Loan Growth Deposit Growth CASA Time Total Deposit Growth

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

2.1% -5.0% -5.2% -4.8% -0.6%

9.6% 7.3% -2.3% 10.5% 15.9%

8.5% 12.2% -8.2% 7.9% 19.8%

3.8% -0.2% 5.0% 6.4% 12.6%

3.3% 0.1% 6.4% 6.6% 6.2%

3.3% 0.1% 6.4% 6.6% 6.2%

4.6% 1.2% 7.0% 8.1% 7.3%

4.4% 0.2% 6.5% 6.9% 7.8%

4.6% -0.5% 6.1% 8.1% 8.5%

5.5% 0.4% 2.7% 8.5% 8.8%

5.8% 1.0% 2.5% 7.8% 8.3%

4.8% 0.4% 3.0% 6.5% 7.7%

-0.7% 2.4% -15.3% 1.0%

1.9% 6.1% 8.5% 6.7%

0.9% 3.2% 24.1% 5.8%

0.9% 2.8% 16.1% 2.8%

2.4% 4.2% 23.1% 3.0%

2.4% 4.2% 23.1% 3.0%

2.6% 4.1% 21.1% 3.9%

2.8% 4.3% 20.5% 3.9%

3.0% 4.6% 19.9% 4.1%

3.2% 4.7% 19.8% 4.7%

3.3% 4.8% 19.6% 5.0%

3.3% 4.9% 19.1% 4.3%

32.7% -6.9% 6.4%

8.9% 2.1% 5.6%

2.5% 8.0% 5.0%

4.4% 1.7% 3.2%

8.4% 0.8% 5.9%

8.4% 0.8% 5.9%

8.0% 0.7% 5.3%

8.9% 1.0% 6.2%

8.6% 0.6% 6.4%

9.3% 0.9% 6.6%

7.4% 0.8% 6.1%

6.7% 0.4% 5.5%

45% 79%

47% 79%

46% 80%

46% 80%

48% 77%

48% 77%

48% 78%

48% 77%

48% 77%

48% 77%

48% 77%

48% 77%

CASA% LDR Source: CEIC

Table 22: Thailand Thailand Loan Growth Corporate Household Total Loan Growth Deposit Growth CASA Time Total Deposit Growth CASA% LDR

2009

2010

2011

2012

2013

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

6.8% 6.7% 6.8%

14.7% 16.6% 15.3%

4.0% 15.6% 7.9%

17.8% 22.2% 19.4%

7.7% 14.0% 10.0%

7.7% 14.0% 10.0%

1.8% 12.9% 5.8%

4.2% 12.2% 7.1%

1.4% 11.2% 4.9%

3.7% 10.6% 6.2%

2.9% 9.8% 5.4%

-0.3% 8.7% 3.0%

20.0% -16.0% 1.3%

13.8% -4.1% 8.5%

6.3% 7.2% 12.9%

19.6% 38.9% 10.5%

5.8% 13.5% 7.2%

5.8% 13.6% 7.2%

6.4% 12.2% 7.0%

8.2% 12.7% 8.3%

8.6% 9.2% 6.5%

11.0% 4.3% 5.8%

9.7% 1.1% 3.8%

11.6% -0.5% 3.8%

53% 82%

57% 90%

57% 91%

53% 85%

51% 85%

51% 85%

52% 83%

53% 83%

53% 84%

54% 86%

55% 88%

54% 85%

Source: CEIC

53

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

PB vs. ROE Chart for the Region FY14E 2.5 x

PE = 10x

PB

BMRI 2.3 x

BAY SCB

HSB

ICICI WBC

AXSB

2.1 x

YES

KBANK

TMB BDO HLBKANZ

1.9 x

Maybank

BBNI

MBT NAB

1.7 x

Cathay

SECB

BOCHK AMMB

EW

1.5 x

IDFC

KTB

UOB

Fubon Chinatrust TISCO

1.3 x E.Sun Mega SBI First 1.1 x

Taishin DBS

BEA HSBC SFG

PNB.PM

IBK

0.9 x

BDMN

CMB

STAN KKDSBG Sinopac PNB.IN

CCB

DSF

BOC BoComm

0.7 x

Minsheng ICBC

ABC

BOB

TCAP

DGB

Shinkong

BBL

Citic CRCB

KBFG BOI

ROE

0.5 x 5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

Source: J.P. Morgan estimates, as of Aug 29, 2014..

Figure 207: The Small Cap (<$2bn) Universe FY14E PB vs. ROE 1.9 x

PB HDFC

5.5 x

1.7 x

SECB EW

1.5 x

5.0 x

TISCO

4.5 x

1.3 x 1.1 x

DSF

HDFCB

4.0 x

KK

0.9 x

KMB

BBCA

3.5 x

TCAP

0.7 x

IIB

3.0 x ROE

0.5 x 5%

7%

9%

11%

Source: J.P. Morgan estimates, as of Aug 29, 2014..

54

Figure 208: The Premium Names Trading Above 2.5x FY14E Book 6.0 x

PB

13%

15%

17%

19%

21%

23%

25%

BPI

2.5 x 12%

14%

16%

CBA 18%

Source: J.P. Morgan estimates, as of Aug 29, 2014..

BBRI ROE

Public Bank 20%

22%

24%

26%

28%

30%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Country Dupont Summary Table 23: Australia Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Effective Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.07% 86% 1.8% 0.9% 2.7% 48% 1.3% 1.41% 0.46% 71% 1.08% 26% 0.84% 55% 1.53% 3.8% 22.2%

2009 2.21% 90% 2.0% 0.9% 2.9% 45% 1.3% 1.61% 0.83% 72% 1.02% 29% 0.62% 50% 1.24% 4.3% 14.5%

2010 2.25% 86% 1.9% 0.9% 2.9% 45% 1.3% 1.56% 0.43% 72% 1.24% 29% 0.85% 49% 1.75% 4.7% 18.1%

2011 2.25% 85% 1.9% 0.8% 2.8% 46% 1.3% 1.49% 0.29% 71% 1.29% 29% 0.92% 46% 2.01% 4.7% 19.7%

2012 2.17% 86% 1.9% 0.8% 2.7% 45% 1.2% 1.49% 0.32% 70% 1.27% 29% 0.82% 44% 1.87% 4.7% 17.6%

2013 2.13% 86% 1.8% 0.8% 2.7% 45% 1.2% 1.47% 0.25% 71% 1.30% 29% 0.89% 45% 2.01% 4.8% 18.8%

2014E 2.06% 88% 1.8% 0.8% 2.6% 45% 1.2% 1.46% 0.19% 71% 1.32% 29% 0.93% 45% 2.08% 4.7% 19.8%

2015E 2.03% 87% 1.8% 0.8% 2.6% 44% 1.1% 1.45% 0.20% 71% 1.30% 29% 0.95% 45% 2.12% 4.6% 20.5%

2009 2.29% 100% 2.3% 0.6% 2.9% 43% 1.3% 1.65% 0.59% 50% 1.37% 21% 1.07% 54% 1.99% 5.6% 19.2%

2010 2.44% 98% 2.4% 0.6% 3.0% 41% 1.2% 1.80% 0.52% 52% 1.54% 23% 1.17% 55% 2.13% 5.7% 20.7%

2011 2.63% 97% 2.5% 0.7% 3.3% 39% 1.3% 2.01% 0.58% 52% 1.71% 23% 1.29% 56% 2.30% 6.0% 21.4%

2012 2.64% 97% 2.6% 0.7% 3.3% 40% 1.3% 1.98% 0.52% 52% 1.72% 23% 1.31% 57% 2.30% 6.2% 21.0%

2013 2.58% 97% 2.5% 0.8% 3.3% 39% 1.3% 1.99% 0.52% 52% 1.72% 23% 1.31% 61% 2.13% 6.5% 20.3%

2014E 2.60% 96% 2.5% 0.8% 3.3% 39% 1.3% 2.01% 0.56% 54% 1.71% 23% 1.30% 66% 1.97% 6.7% 19.5%

2015E 2.58% 96% 2.5% 0.8% 3.3% 39% 1.3% 1.99% 0.55% 55% 1.69% 23% 1.29% 67% 1.93% 6.9% 18.7%

2009 1.80% 91% 1.6% 0.8% 2.4% 38.4% 0.9% 1.50% 0.23% 46% 1.40% 16% 1.15% 49% 2.33% 7.5% 15.3%

2010 1.65% 90% 1.5% 0.7% 2.2% 41.1% 0.9% 1.28% 0.05% 46% 1.47% 15% 1.21% 47% 2.59% 7.7% 15.7%

2011 1.52% 96% 1.5% 0.6% 2.0% 41.9% 0.9% 1.19% 0.08% 46% 1.49% 15% 1.23% 44% 2.79% 7.7% 16.0%

2012 1.67% 89% 1.5% 0.7% 2.2% 39.9% 0.9% 1.30% 0.11% 47% 1.53% 14% 1.27% 43% 2.96% 8.1% 15.7%

2013 1.78% 88% 1.6% 0.7% 2.3% 38.0% 0.9% 1.41% 0.12% 48% 1.66% 13% 1.41% 45% 3.15% 8.4% 16.7%

2014E 1.79% 89% 1.6% 0.7% 2.3% 37.2% 0.8% 1.43% 0.16% 50% 1.43% 17% 1.16% 47% 2.48% 8.5% 13.6%

2015E 1.82% 89% 1.6% 0.7% 2.3% 36.2% 0.8% 1.47% 0.16% 51% 1.47% 17% 1.19% 48% 2.49% 8.6% 13.8%

Source: Company reports and J.P. Morgan estimates.

Table 24: China Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Effective Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 3.01% 98% 3.0% 0.6% 3.5% 41% 1.5% 2.08% 0.89% 50% 1.64% 18% 1.12% 55% 2.03% 4.6% 24.3%

Source: Company reports and J.P. Morgan estimates.

Table 25: Hong Kong Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.08% 91% 1.9% 0.6% 2.5% 37.5% 0.9% 1.55% 0.37% 45% 0.82% 14% 0.72% 52% 1.39% 7.4% 9.6%

Source: Company reports and J.P. Morgan estimates. 55

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 26: India Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.89% 95% 2.8% 1.4% 4.1% 47% 1.9% 2.2% 1.0% 60.2% 1.8% 33.7% 1.18% 71.25% 1.66% 7.4% 15.9%

2009 2.81% 96% 2.7% 1.3% 4.0% 46% 1.9% 2.2% 1.0% 60.7% 1.7% 32.2% 1.14% 67.94% 1.68% 7.4% 15.5%

2010 3.18% 96% 3.1% 1.3% 4.3% 45% 1.9% 2.4% 1.1% 61.7% 1.7% 33.9% 1.15% 67.98% 1.70% 7.3% 15.8%

2011 3.26% 96% 3.1% 1.5% 4.6% 46% 2.1% 2.5% 1.1% 63.2% 1.8% 30.4% 1.24% 68.68% 1.80% 7.3% 17.0%

2012 3.17% 96% 3.0% 1.3% 4.38% 48% 2.1% 2.3% 1.1% 64.2% 1.7% 27.1% 1.22% 68.74% 1.78% 7.5% 16.2%

2013 3.09% 96% 3.0% 1.4% 4.35% 49% 2.1% 2.2% 1.2% 65.0% 1.5% 30.0% 1.06% 68.34% 1.55% 7.6% 14.0%

2014E 3.18% 96% 3.1% 1.3% 4.40% 48% 2.1% 2.3% 1.2% 66.0% 1.6% 30.2% 1.09% 67.74% 1.61% 7.4% 14.6%

2015E 3.23% 96% 3.1% 1.3% 4.43% 47% 2.1% 2.4% 1.1% 66.5% 1.7% 30.4% 1.15% 66.99% 1.72% 7.2% 16.0%

2009 7.0% 87% 6.1% 1.8% 7.8% 46.7% 3.7% 4.2% 2.6% 53.9% 2.9% 28.4% 2.04% 55.91% 3.65% 9.2% 22.2%

2010 7.2% 86% 6.2% 2.3% 8.4% 45.7% 3.9% 4.6% 2.1% 55.3% 3.4% 25.7% 2.52% 61.23% 4.12% 10.1% 25.0%

2011 6.9% 85% 5.9% 2.2% 8.0% 47.3% 3.8% 4.2% 1.2% 57.5% 3.6% 21.5% 2.79% 67.43% 4.14% 11.2% 24.8%

2012 6.7% 87% 5.8% 2.1% 7.93% 47.1% 3.7% 4.2% 1.0% 60.6% 3.7% 21.5% 2.87% 69.57% 4.13% 12.1% 23.7%

2013 6.8% 88% 6.0% 2.1% 8.12% 45.6% 3.7% 4.4% 1.1% 64.7% 3.8% 21.9% 2.94% 71.90% 4.09% 12.6% 23.4%

2014E 7.0% 88% 6.2% 2.0% 8.16% 45.9% 3.7% 4.4% 1.3% 67.0% 3.7% 21.4% 2.86% 74.27% 3.85% 13.0% 22.0%

2015E 7.2% 88% 6.3% 1.9% 8.28% 44.5% 3.7% 4.6% 1.5% 67.3% 3.7% 21.4% 2.88% 74.76% 3.85% 13.3% 21.7%

2009 2.28 90% 2.1% 0.8% 2.8% 57% 1.6% 1.2% 1.00 71.0% 0.5% 25.4% 0.37% 70.84% 0.52% 5.9% 6.2%

2010 2.55 92% 2.3% 0.9% 3.3% 53% 1.7% 1.5% 1.11 71.6% 0.7% 23.5% 0.55% 70.23% 0.78% 6.5% 8.4%

2011 2.70 92% 2.5% 1.0% 3.5% 50% 1.8% 1.7% 0.75 71.8% 1.2% 23.9% 0.87% 68.86% 1.26% 7.2% 12.0%

2012 2.56 91% 2.3% 0.9% 3.3% 55% 1.8% 1.5% 0.77 71.4% 0.9% 22.0% 0.68% 67.81% 1.00% 7.7% 8.8%

2013 2.31 90% 2.1% 0.7% 2.8% 58% 1.6% 1.2% 0.68 70.7% 0.7% 24.8% 0.49% 65.34% 0.75% 7.7% 6.4%

2014E 2.36 90% 2.1% 0.8% 3.0% 60% 1.8% 1.2% 0.63 70.5% 0.8% 24.5% 0.54% 63.31% 0.86% 7.8% 7.0%

2015E 2.32 71% 1.6% 0.7% 2.3% 60% 1.4% 0.9% 0.58 70.3% 0.5% 24.5% 0.38% 63.34% 0.59% 7.8% 4.8%

Source: Company reports and J.P. Morgan estimates.

Table 27: Indonesia Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 6.4% 90% 5.8% 1.8% 7.6% 48.8% 3.7% 3.9% 2.5% 50.6% 2.7% 31.3% 1.82% 51.92% 3.51% 9.2% 19.9%

Source: Company reports and J.P. Morgan estimates.

Table 28: Korea Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.65 90% 2.4% 0.9% 3.2% 53% 1.7% 1.5% 0.93 71.0% 0.9% 32.9% 0.57% 71.23% 0.80% 5.9% 9.6%

Source: Company reports and J.P. Morgan estimates.

56

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 29: Malaysia Du Pont NIM IEA/Assets NII/Assets Non-II/Assets Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.48% 93% 2.3% 1.1% 3.5% 44% 1.5% 1.94% 0.68% 59% 1.52% 25% 1.11% 64.81% 1.72% 7.1% 15.6%

2009 2.72% 93% 2.5% 1.0% 3.6% 46% 1.6% 1.93% 0.69% 61% 1.48% 23% 1.11% 64.56% 1.72% 7.3% 15.1%

2010 2.76% 95% 2.6% 1.1% 3.8% 46% 1.7% 2.04% 0.52% 63% 1.73% 24% 1.28% 63.03% 2.03% 7.6% 16.9%

2011 2.56% 93% 2.4% 1.0% 3.4% 46% 1.6% 1.83% 0.24% 64% 1.71% 24% 1.28% 61.77% 2.07% 7.5% 16.9%

2012 2.51% 96% 2.4% 1.0% 3.5% 48% 1.6% 1.81% 0.17% 64% 1.73% 23% 1.30% 60.57% 2.15% 7.8% 16.7%

2013 2.40% 95% 2.3% 1.1% 3.3% 48% 1.6% 1.74% 0.22% 65% 1.66% 23% 1.25% 59.79% 2.09% 8.1% 15.5%

2014E 2.38% 95% 2.3% 1.1% 3.4% 47% 1.6% 1.77% 0.30% 66% 1.60% 23% 1.20% 60.56% 1.99% 8.2% 14.6%

2015E 2.49% 95% 2.4% 1.1% 3.5% 46% 1.6% 1.90% 0.40% 67% 1.67% 23% 1.25% 61.85% 2.03% 8.3% 15.2%

2009 3.78% 89% 3.4% 1.9% 5.3% 63% 3.3% 1.96% 1.43% 49.4% 1.28% 24% 0.94% 70.27% 1.33% 8.48% 11.0%

2010 3.67% 87% 3.2% 2.3% 5.5% 59% 3.2% 2.25% 1.32% 49.6% 1.65% 19% 1.29% 67.14% 1.91% 9.01% 14.3%

2011 3.62% 88% 3.2% 2.1% 5.3% 60% 3.2% 2.14% 0.78% 52.0% 1.75% 17% 1.39% 67.21% 2.07% 9.71% 14.4%

2012 3.57% 87% 3.1% 2.3% 5.4% 59% 3.2% 2.24% 0.72% 55.2% 1.94% 14% 1.60% 69.84% 2.29% 10.70% 14.9%

2013 3.57% 86% 3.1% 2.2% 5.3% 57% 3.0% 2.27% 0.98% 53.2% 1.99% 16% 1.62% 65.62% 2.47% 10.51% 15.4%

2014E 3.39% 92% 3.1% 1.5% 4.6% 59% 2.7% 1.90% 0.68% 52.8% 1.54% 18% 1.21% 66.51% 1.82% 10.04% 12.1%

2015E 3.45% 92% 3.2% 1.5% 4.7% 57% 2.6% 2.01% 0.79% 56.0% 1.56% 18% 1.23% 71.41% 1.73% 9.94% 12.4%

2009 2.18% 80% 1.7% 0.9% 2.7% 38% 1.0% 1.65% 0.84% 49.9% 1.2% 15.5% 0.94% 61% 1.53% 8.4% 11.1%

2010 1.95% 81% 1.6% 1.0% 2.6% 41% 1.1% 1.54% 0.41% 50.8% 1.2% 16.3% 0.96% 57% 1.70% 9.1% 10.6%

2011 1.84% 82% 1.5% 0.9% 2.4% 43% 1.0% 1.35% 0.32% 53.8% 1.2% 14.5% 0.97% 55% 1.76% 8.7% 11.2%

2012 1.77% 83% 1.5% 0.9% 2.4% 43% 1.0% 1.38% 0.23% 56.3% 1.4% 13.1% 1.21% 54% 2.22% 8.6% 14.1%

2013 1.65% 85% 1.4% 0.9% 2.3% 43% 1.0% 1.32% 0.26% 58.0% 1.2% 15.2% 0.98% 54% 1.83% 8.2% 12.0%

2014E 1.67% 86% 1.4% 0.9% 2.3% 42% 1.0% 1.32% 0.26% 59.4% 1.2% 16.1% 0.98% 54% 1.80% 8.1% 12.1%

2015E 1.73% 87% 1.5% 0.9% 2.4% 41% 1.0% 1.39% 0.36% 60.3% 1.2% 16.5% 0.95% 55% 1.73% 8.3% 11.4%

Source: Company reports and J.P. Morgan estimates.

Table 30: Philippines Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 3.47% 89% 3.1% 1.7% 4.8% 69% 3.3% 1.48% 1.03% 46.4% 1.04% 33% 0.66% 45.65% 1.44% 9.18% 7.2%

Source: Company reports and J.P. Morgan estimates.

Table 31: Singapore Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 2.18% 81% 1.8% 0.8% 2.6% 42% 1.1% 1.49% 0.49% 48.7% 1.2% 16.7% 0.93% 67% 1.40% 8.2% 11.4%

Source: Company reports and J.P. Morgan estimates.

57

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Table 32: Taiwan Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 1.08% 87% 0.9% 0.1% 1.9% 68% 1.3% 0.61% 0.75% 51% 0.15% 14% 0.10% 45% 0.21% 5.7% 1.7%

2009 1.04% 87% 0.9% 0.5% 1.9% 62% 1.2% 0.72% 0.68% 49% 0.41% 27% 0.30% 41% 0.74% 5.4% 5.7%

2010 1.06% 87% 0.9% 0.2% 1.7% 65% 1.1% 0.58% 0.39% 46% 0.44% 19% 0.38% 38% 0.99% 5.5% 6.9%

2011 1.18% 88% 1.0% 0.2% 1.7% 63% 1.1% 0.61% 0.28% 47% 0.56% 15% 0.48% 39% 1.23% 5.5% 8.8%

2012 1.28% 88% 1.1% 0.2% 1.8% 59% 1.0% 0.72% 0.18% 47% 0.68% 14% 0.56% 40% 1.40% 5.6% 10.0%

2013 1.26% 88% 1.1% 0.4% 1.8% 55% 1.0% 0.79% 0.27% 46% 0.69% 14% 0.61% 40% 1.51% 5.8% 10.6%

2014E 1.29% 88% 1.1% 0.4% 1.8% 52% 0.9% 0.85% 0.22% 45% 0.82% 13% 0.75% 40% 1.90% 6.0% 12.6%

2015E 1.33% 88% 1.2% 0.4% 1.8% 52% 0.9% 0.85% 0.26% 45% 0.75% 15% 0.67% 38% 1.74% 6.1% 10.9%

2009 2.90% 97% 2.8% 1.5% 4.3% 52% 2.3% 2.1% 0.84% 71% 1.57% 27% 1.11% 70.3% 1.58% 9.5% 11.7%

2010 2.98% 96% 2.9% 1.5% 4.4% 51% 2.2% 2.2% 0.70% 69% 1.81% 29% 1.20% 69.5% 1.73% 9.4% 12.8%

2011 3.11% 96% 3.0% 1.5% 4.5% 49% 2.2% 2.3% 0.85% 70% 1.84% 27% 1.29% 68.1% 1.89% 9.0% 14.3%

2012 3.00% 97% 2.9% 1.5% 4.5% 47% 2.1% 2.4% 0.84% 69% 1.86% 21% 1.40% 66.9% 2.09% 9.0% 15.6%

2013 2.99% 97% 2.9% 1.6% 4.5% 45% 2.0% 2.5% 0.99% 69% 2.02% 20% 1.53% 66.2% 2.31% 9.2% 16.7%

2014E 3.02% 97% 2.9% 1.6% 4.6% 45% 2.0% 2.5% 0.86% 69% 1.96% 20% 1.51% 66.2% 2.28% 9.4% 16.0%

2015E 3.01% 98% 2.9% 1.7% 4.6% 45% 2.1% 2.6% 0.85% 69% 2.01% 20% 1.55% 66.1% 2.34% 9.7% 15.9%

2009 2.13% 94.9% 2.02% 0.87% 2.9% 46% 1.34% 1.55% 0.99% 57% 1.03% 26% 0.78% 53.67% 1.45% 5.5% 14.1%

2010 2.25% 92.7% 2.09% 0.83% 2.9% 46% 1.34% 1.58% 0.67% 58% 1.25% 26% 0.95% 53.84% 1.77% 5.9% 16.1%

2011 2.36% 95.3% 2.25% 0.88% 3.1% 45% 1.41% 1.72% 0.59% 57% 1.44% 25% 1.07% 53.82% 1.99% 6.2% 17.4%

2012 2.34% 93.9% 2.20% 0.85% 3.0% 45% 1.37% 1.68% 0.53% 57% 1.42% 26% 1.06% 53.80% 1.98% 6.4% 16.7%

2013 2.29% 95.4% 2.18% 0.85% 3.0% 44% 1.35% 1.69% 0.51% 57% 1.44% 25% 1.07% 56.42% 1.90% 6.6% 16.3%

2014E 2.31% 95.5% 2.20% 0.86% 3.1% 44% 1.35% 1.71% 0.50% 59% 1.44% 25% 1.08% 59.25% 1.83% 6.7% 16.1%

2015E 2.32% 94.2% 2.18% 0.85% 3.0% 44% 1.32% 1.71% 0.50% 58% 1.44% 25% 1.09% 59.85% 1.82% 6.9% 15.9%

Source: Company reports and J.P. Morgan estimates.

Table 33: Thailand Du Pont NIM IEA/Assets NII/Assets Non-Interest Income/Assets Total Revenue/Assets CIR Cost/Assets OpROA LLP/Loans Loan/Assets Pre-Tax ROA Eff Tax rate ROA RWA/Assets RoRWA Equity/Assets ROE

2008 3.29% 97% 3.2% 1.3% 4.5% 49% 2.2% 2.3% 0.93% 73% 1.57% 28% 1.12% 69.8% 1.61% 9.5% 11.8%

Source: Company reports and J.P. Morgan estimates.

Table 34: Asia xJ Du Pont NIM IEA/Assets NII/Assets Non-II/Assets Total Revenue/Assets CIR Cost/Assets OpRoA LLP/Loans Loan/Assets Pre-Tax RoA Eff Tax Rate RoA RWA/Assets RoRWA Equity/Assets RoE

2008 2.43% 101.2% 2.45% 0.89% 3.3% 47% 1.56% 1.78% 1.03% 55% 1.28% 35% 0.80% 55.17% 1.45% 5.1% 15.6%

Source: Company reports and J.P. Morgan estimates.

58

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Loan Growth Table 35: Loan growth – Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 6.5% 12.9% 11.8% 17.8% 22.1% 4.4% 11.3% 24.9% 17.5% 6.2% 10.5% 8.1% 2.4% 10.7%

2014E 7.1% 12.9% 12.9% 17.3% 14.5% 5.7% 12.0% 20.1% 12.5% 10.6% 7.6% 2.9% 7.5% 10.7%

2015E 5.2% 12.8% 11.0% 17.9% 14.7% 5.1% 12.6% 21.8% 9.5% 6.7% 8.0% 2.6% 7.9% 10.2%

Australia ANZ CBA NAB WBC

2013 12.9% 5.9% 4.2% 4.2%

2014E 9.2% 7.1% 4.4% 7.7%

2015E 6.8% 4.7% 4.6% 4.6%

6.5%

7.1%

5.2%

HK BOC-HK BEA DSBG DSF HSB

2013 10.3% 15.6% 13.7% 13.7% 9.3%

2014E 14.4% 13.1% 11.0% 11.0% 12.8%

2015E 12.0% 11.6% 11.4% 11.4% 10.1%

11.0%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 15.9% 26.3% 16.2% 15.6% 10.4% 5.8% 16.9% 21.4% 13.8% 28.4% 24.4% 17.8%

2014E 18.8% 21.1% 18.3% 17.1% 12.9% 0.8% 18.3% 18.1% 16.4% 15.3% 24.4% 17.3%

HK

11.8%

12.9%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 8.5% NR 4.9% 2.7% NR 2.8%

2014E 9.2% NR 4.9% 5.0% NR 5.0%

2015E 9.2% NR 4.9% 5.0% NR 5.0%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 5.3% NR 7.3% 13.7% 11.8% NR

Korea

4.4%

5.7%

5.1%

Malaysia

Singapore DBS UOB

2013 17.9% 16.8%

2014E 7.5% 10.3%

2015E 9.0% 10.5%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

Singapore

17.5%

12.5%

9.5%

Aus

Taiwan

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 15.4% 13.7% 10.8% 10.8% 14.3% 12.7% 16.7% 12.3% 18.3%

2014E 14.5% 16.1% 9.6% 13.4% 14.5% 12.9% 13.4% 12.9% 17.7%

2015E 14.5% 16.1% 9.8% 13.4% 14.5% 11.8% 13.4% 12.9% 17.7%

China

12.9%

12.9%

12.8%

2015E 19.3% 21.9% 18.6% 17.2% 17.2% -0.1% 23.1% 18.3% 15.6% 15.6% 24.3% 17.9%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 21.4% 23.9% 21.7% 15.1% 24.8%

2014E 14.9% 16.5% 14.5% 9.0% 12.9%

2015E 15.1% 16.9% 14.6% 10.0% 12.7%

Indonesia

22.1%

14.5%

14.7%

2014E 11.5% NR 10.0% 12.3% 10.6% NR

2015E 11.7% NR 10.0% 12.4% 10.7% NR

Philippines MBT BDO BPI PNB SECB

2013 15.9% 20.2% 20.5% 81.4% 37.2%

2014E 19.7% 17.9% 24.1% 20.1% 14.8%

2015E 19.8% 22.0% 24.1% 20.5% 19.7%

11.3%

12.0%

12.6%

Philippines

24.9%

20.1%

21.8%

2013 9.7% 13.6% 7.8% 4.6% 3.4% 10.4% -0.3% 12.6%

2014E 5.6% 47.4% 8.2% 5.5% 7.5% 6.8% 5.7% 9.8%

2015E 6.2% 7.1% 7.5% 5.5% 6.6% 7.8% 5.9% 10.0%

6.2%

10.6%

6.7%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 13.6% 9.2% 8.5% 12.9% 11.7% 4.7% 12.2% 17.7% 10.3% 10.5%

2014E 7.5% 7.0% 8.0% 8.0% 9.6% 3.1% 7.9% 9.8% 6.5% 7.6%

2015E 7.6% 7.1% 8.1% 8.0% 10.1% 5.9% 8.1% 9.9% 6.8% 8.0%

Source: Company, J.P. Morgan estimates

59

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Loan to Deposits Table 36: Loan to Deposits – Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 123% 70% 70% 89% 86% 122% 89% 67% 86% 83% 98% 73% 78% 80%

2014E 122% 72% 72% 88% 89% 122% 91% 71% 89% 83% 98% 72% 79% 81%

2015E 123% 74% 73% 88% 90% 124% 92% 75% 90% 84% 98% 71% 80% 82%

Australia ANZ CBA NAB WBC

2013 125% 121% 117% 127%

2014E 124% 122% 116% 129%

2015E 123% 123% 116% 129%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 79% 73% 75% 79% 70% 68% 73% 61% 59%

2014E 81% 76% 75% 79% 74% 70% 72% 63% 59%

2015E 82% 78% 75% 79% 77% 73% 71% 65% 59%

Aus

123%

122%

123%

China

70%

72%

74%

HK BOC-HK BEA DSBG DSF HSB

2013 65% 76% 75% 76% 71%

2014E 66% 77% 75% 76% 74%

2015E 67% 79% 76% 77% 77%

2015E 93% 91% 80% 122% 86%

73%

2015E 360% 79% 95% 88% 104% n.a. 81% 72% 85% 80% 88% 88%

2014E 90% 91% 78% 125% 86%

72%

2014E 352% 81% 99% 89% 107% n.a. 83% 71% 82% 80% 90% 88%

2013 85% 89% 76% 123% 86%

70%

2013 348% 83% 104% 90% 113% n.a. 83% 71% 79% 79% 92% 89%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

86%

89%

90%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 103% NR 224% 111% NR 121%

2014E 104% NR 220% 111% NR 122%

2015E 105% NR 217% 111% NR 122%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 100% NR 79% 91% 88% NR

2014E 101% NR 80% 91% 88% NR

2015E 103% NR 82% 91% 88% NR

Philippines MBT BDO BPI PNB SECB

2013 62% 71% 66% 62% 81%

2014E 64% 75% 70% 63% 84%

2015E 66% 83% 75% 64% 86%

Korea

122%

122%

124%

Malaysia

89%

91%

92%

Philippines

67%

71%

75%

Singapore DBS UOB

2013 86% 85%

2014E 88% 90%

2015E 90% 93%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 106% 76% 74% 76% 83% 87% 84% 73%

2014E 106% 78% 75% 77% 84% 87% 85% 75%

2015E 107% 79% 76% 78% 85% 87% 86% 77%

Singapore

86%

89%

90%

83%

83%

84%

2013 124% 91% 94% n.a. 91% n.a. 95% 90% 95% 98%

2014E 123% 91% 94% n.a. 92% n.a. 95% 91% 94% 98%

2015E 123% 91% 94% n.a. 93% n.a. 95% 92% 94% 98%

Source: Company, J.P. Morgan estimates

60

Taiwan

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Loan to Assets Table 37: Loan to Assets – Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 71% 53% 48% 66% 67% 71% 65% 52% 59% 45% 69% 41% 44% 55%

2014E 71% 54% 51% 66% 67% 70% 66% 55% 60% 45% 69% 42% 45% 56%

2015E 71% 55% 52% 67% 67% 71% 68% 58% 61% 44% 69% 42% 47% 57%

Australia ANZ CBA NAB WBC

2013 69% 74% 64% 77%

2014E 70% 75% 63% 78%

2015E 70% 75% 63% 78%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 55% 49% 55% 55% 56% 52% 53% 50% 41%

2014E 57% 51% 55% 55% 58% 53% 53% 51% 40%

2015E 58% 52% 55% 56% 61% 54% 53% 52% 39%

Aus

71%

71%

71%

China

53%

54%

55%

HK BOC-HK BEA DSBG DSF HSB

2013 42% 54% 59% 54% 51%

2014E 45% 55% 59% 55% 54%

2015E 46% 57% 60% 56% 56%

HK

48%

51%

52%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 88% 62% 58% 69% 64% 81% 61% 61% 65% 66% 64% 66%

2014E 87% 62% 58% 69% 64% 79% 61% 63% 67% 69% 65% 66%

2015E 88% 62% 58% 69% 64% 78% 61% 63% 68% 69% 65% 67%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 64% 72% 63% 73% 65%

2014E 65% 72% 64% 73% 64%

2015E 66% 72% 65% 70% 64%

Indonesia

67%

67%

67%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 71% NR 74% 76% NR 67%

2014E 72% NR 73% 76% NR 66%

2015E 73% NR 72% 76% NR 66%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 67% NR 59% 64% 72% NR

2014E 67% NR 61% 65% 72% NR

2015E 69% NR 62% 65% 72% NR

Philippines MBT BDO BPI PNB SECB

2013 46% 57% 54% 46% 48%

2014E 47% 61% 58% 47% 51%

2015E 49% 67% 62% 48% 54%

Korea

71%

70%

71%

Malaysia

65%

66%

68%

Philippines

52%

55%

58%

Singapore DBS UOB

2013 63% 64%

2014E 63% 65%

2015E 64% 67%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 28% 54% 24% 57% 65% 54% 65% 61%

2014E 27% 53% 24% 58% 66% 54% 66% 62%

2015E 27% 53% 24% 58% 67% 55% 67% 64%

Taiwan

45%

45%

44%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 80% 68% 63% 77% 68% 75% 69% 81% 65% 69%

2014E 80% 67% 62% 78% 69% 74% 69% 82% 66% 69%

2015E 80% 66% 62% 79% 70% 75% 69% 82% 66% 69%

Singapore

59%

60%

61%

Source: Company, J.P. Morgan estimates

61

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

NPL Ratio Table 38: NPL Ratios - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 1.33% 1.00% 0.31% 3.42% 1.56% 1.62% 1.84% 1.95% 1.04% 0.27% 2.87% 3.33% 2.26% 1.44%

2014E 1.09% 1.08% 0.33% 3.64% 1.94% 1.76% 1.91% 1.83% 1.00% 0.28% 3.10% 3.44% 2.24% 1.48%

2015E 1.02% 1.14% 0.33% 3.75% 2.39% 26.71% 1.99% 1.82% 1.23% 0.33% 3.25% 3.48% 2.21% 2.85%

Australia ANZ CBA NAB WBC

2013 1.25% 1.18% 1.69% 1.23%

2014E 0.99% 1.06% 1.43% 0.88%

2015E 0.88% 1.04% 1.24% 0.93%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 0.83% 0.85% 0.96% 1.05% 0.99% 0.94% 1.03% 1.22% 0.80%

2014E 1.04% 0.96% 1.02% 1.21% 1.03% 1.05% 1.11% 1.25% 0.96%

2015E 1.17% 1.01% 1.05% 1.26% 1.07% 1.13% 1.16% 1.27% 1.12%

Aus

1.33%

1.09%

1.02%

China

1.00%

1.08%

1.14%

HK BOC-HK BEA DSBG DSF HSB

2013 0.28% 0.39% 0.40% 0.40% 0.22%

2014E 0.31% 0.45% 0.46% 0.46% 0.21%

2015E 0.32% 0.45% 0.48% 0.48% 0.20%

2015E 2.76% 2.88% 0.75% 3.16% 2.47%

0.33%

2015E 0.69% 0.95% 2.94% 4.87% 1.88% 1.10% 1.75% 3.71% 6.49% 3.90% 1.88% 3.75%

2014E 2.17% 2.36% 0.56% 2.47% 2.19%

0.33%

2014E 0.69% 1.06% 2.99% 4.80% 1.65% 1.00% 1.65% 3.53% 5.91% 3.61% 1.54% 3.64%

2013 1.90% 1.55% 0.44% 1.89% 2.17%

0.31%

2013 0.69% 0.98% 3.04% 4.72% 1.32% 0.57% 1.36% 2.94% 5.25% 3.15% 1.12% 3.42%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

1.56%

1.94%

2.39%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 1.00% NR 1.35% 1.77% NR 1.23%

2014E 1.49% NR 1.28% 1.73% NR 1.21%

2015E 1.62% NR 0.50% 1.71% NR 1.11%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 1.86% NR 1.40% 1.48% 0.67% NR

2014E 1.76% NR 1.36% 1.68% 0.74% NR

2015E 1.84% NR 1.33% 1.85% 0.85% NR

Philippines MBT BDO BPI PNB SECB

2013 1.24% 1.84% 1.77% 3.72% 0.91%

2014E 1.21% 1.73% 1.51% 3.43% 0.97%

2015E 1.22% 1.75% 1.45% 3.26% 0.98%

Korea

1.62%

1.76%

26.71%

Malaysia

1.84%

1.91%

1.99%

Philippines

1.95%

1.83%

1.82%

Singapore DBS UOB

2013 1.14% 1.14%

2014E 0.92% 1.44%

2015E 1.21% 1.71%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.18% 0.39% 0.13% 0.37% 0.06% 0.18% 0.47% 0.21%

2014E 0.19% 0.33% 0.15% 0.44% 0.07% 0.13% 0.55% 0.20%

2015E 0.22% 0.37% 0.20% 0.49% 0.09% 0.18% 0.60% 0.23%

Singapore

1.04%

1.00%

1.23%

Taiwan

0.27%

0.28%

0.33%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 2.77% 2.46% 2.34% 3.82% 3.31% 4.44% 2.30% 1.64% 4.42% 2.87%

2014E 3.26% 2.58% 2.53% 4.23% 3.75% 4.81% 2.32% 1.79% 4.40% 3.10%

2015E 3.72% 2.68% 2.71% 4.61% 3.86% 5.04% 2.33% 1.78% 4.59% 3.25%

Source: Company, J.P. Morgan estimates

62

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

LLR / Loans Table 39: NPL Coverage - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 0.78% 2.74% 0.36% 1.85% 2.92% 2.16% 1.77% 2.72% 1.39% 1.18% 3.97% 1.38% 1.15% 2.10%

2014E 0.70% 2.78% 0.40% 2.09% 2.95% 2.10% 1.74% 2.68% 1.31% 1.24% 4.57% 1.40% 1.12% 2.15%

2015E 0.66% 2.82% 0.43% 2.26% 3.11% 11.51% 1.79% 2.71% 1.38% 1.34% 5.09% 1.43% 1.09% 2.72%

Australia ANZ CBA NAB WBC

2013 0.89% 0.80% 0.77% 0.67%

2014E 0.80% 0.71% 0.69% 0.59%

2015E 0.77% 0.68% 0.63% 0.57%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 2.22% 2.21% 2.21% 2.24% 2.66% 2.43% 2.13% 4.46% 3.46%

2014E 2.36% 2.39% 2.23% 2.34% 2.71% 2.46% 2.23% 4.47% 3.50%

2015E 2.48% 2.40% 2.25% 2.38% 2.72% 2.54% 2.40% 4.42% 3.52%

Aus

0.78%

0.70%

0.66%

China

2.74%

2.78%

2.82%

HK BOC-HK BEA DSBG DSF HSB

2013 0.49% 0.25% 0.45% 0.45% 0.25%

2014E 0.51% 0.29% 0.57% 0.57% 0.26%

2015E 0.54% 0.33% 0.63% 0.63% 0.28%

2015E 3.54% 3.16% 2.29% 3.44% 3.11%

0.43%

2015E 0.00% 0.71% 2.02% 2.63% 1.00% 3.01% 1.22% 2.08% 3.90% 2.07% 1.33% 2.26%

2014E 3.52% 3.11% 2.06% 2.80% 2.74%

0.40%

2014E 0.00% 0.79% 2.05% 2.45% 0.87% 3.10% 1.14% 1.85% 3.37% 1.70% 1.08% 2.09%

2013 3.50% 3.39% 1.79% 2.41% 2.67%

0.36%

2013 0.00% 0.71% 2.08% 2.36% 0.69% 2.34% 0.91% 1.53% 2.52% 1.16% 0.79% 1.85%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

2.92%

2.95%

3.11%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 1.09% NR 1.44% 2.36% NR 2.26%

2014E 1.00% NR 1.33% 2.22% NR 2.21%

2015E 0.88% NR 1.21% 1.98% NR 2.12%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 2.37% NR 1.84% 1.59% 0.80% NR

2014E 2.03% NR 1.51% 1.73% 0.83% NR

2015E 1.81% NR 1.46% 1.85% 0.93% NR

Philippines MBT BDO BPI PNB SECB

2013 2.65% 2.80% 1.95% 4.56% 1.51%

2014E 2.36% 2.46% 2.19% 4.95% 1.49%

2015E 2.17% 2.26% 2.44% 5.37% 1.53%

Korea

2.16%

2.10%

11.51%

Malaysia

1.77%

1.74%

1.79%

Philippines

2.72%

2.68%

2.71%

Singapore DBS UOB

2013 1.40% 1.72%

2014E 1.35% 1.68%

2015E 1.56% 1.64%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.96% 1.42% 1.22% 1.09% 1.04% 1.30% 1.23% 1.27%

2014E 1.00% 1.03% 1.22% 1.23% 1.16% 1.38% 1.45% 1.28%

2015E 1.05% 1.08% 1.25% 1.37% 1.32% 1.46% 1.64% 1.28%

Singapore

1.39%

1.31%

1.38%

Taiwan

1.18%

1.24%

1.34%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 3.90% 5.27% 3.13% 3.81% 3.60% 3.88% 3.47% 2.18% 6.29% 3.97%

2014E 7.17% 5.21% 3.50% 4.69% 3.90% 4.56% 3.68% 2.96% 6.89% 4.57%

2015E 10.20% 5.15% 3.85% 5.51% 4.13% 5.08% 3.87% 3.81% 7.29% 5.09%

Source: Company, J.P. Morgan estimates

63

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

NPL Coverage Table 40: NPL Coverage - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 59% 273% 117% 52% 187% 133% 96% 139% 134% 442% 138% 42% 51% 146%

2014E 64% 257% 121% 55% 152% 119% 91% 146% 131% 435% 148% 41% 50% 145%

2015E 65% 248% 129% 58% 130% 43% 90% 149% 113% 413% 157% 41% 49% 95%

Australia ANZ CBA NAB WBC

2013 72% 68% 46% 55%

2014E 81% 67% 48% 67%

2015E 87% 66% 51% 61%

Aus

59%

64%

65%

HK BOC-HK BEA DSBG DSF HSB

2013 174% 65% 112% 112% 110%

2014E 164% 64% 124% 124% 126%

2015E 170% 73% 130% 130% 140%

HK

117%

121%

129%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 n.a. 73% 69% 50% n.a. n.a. 67% 52% 48% 37% 70% 52%

2014E n.a. 75% 69% 51% n.a. n.a. 69% 53% 57% 47% 70% 55%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 169% NR 181% 136% NR 185%

2014E 120% NR 178% 131% NR 182%

2015E 107% NR 315% 118% NR 190%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 127% NR 131% 107% 119% NR

Korea

133%

119%

43%

Malaysia

Singapore DBS UOB

2013 122% 150%

2014E 146% 117%

2015E 128% 96%

Singapore

134%

131%

113%

Source: Company, J.P. Morgan estimates

64

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun Taiwan

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 266% 260% 229% 214% 268% 257% 207% 367% 431%

2014E 226% 250% 219% 194% 263% 234% 202% 357% 366%

2015E 211% 237% 214% 189% 253% 224% 207% 347% 316%

China

273%

257%

248%

2015E n.a. 75% 69% 54% n.a. n.a. 70% 56% 60% 53% 70% 58%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 184% 218% 407% 127% 123%

2014E 162% 132% 368% 113% 125%

2015E 128% 110% 305% 109% 126%

Indonesia

187%

152%

130%

2014E 115% NR 111% 103% 112% NR

2015E 98% NR 110% 100% 110% NR

Philippines MBT BDO BPI PNB SECB

2013 213% 152% 110% 123% 165%

2014E 196% 142% 146% 144% 154%

2015E 179% 129% 168% 165% 156%

96%

91%

90%

Philippines

139%

146%

149%

2013 525% 365% 961% 293% 1634% 741% 263% 599%

2014E 530% 310% 810% 280% 1640% 1060% 265% 630%

2015E 480% 290% 620% 280% 1440% 810% 275% 550%

442%

435%

413%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 141% 214% 134% 99% 109% 87% 151% 132% 142% 138%

2014E 220% 202% 138% 110% 104% 95% 159% 165% 156% 148%

2015E 274% 192% 142% 119% 107% 101% 166% 214% 159% 157%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Core Tier-1 Ratios Table 41: Core Tier-1 - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 9.5% 10.1% 11.6% 10.0% 14.6% 10.3% 11.8% 14.4% 12.8% 9.4% 12.0% 12.3% 11.7% 10.4%

2014E 9.7% 10.1% 11.1% 9.8% 14.3% 10.6% 12.5% 13.4% 13.2% 10.0% 12.7% 11.4% 11.9% 10.5%

2015E 9.8% 10.3% 11.1% 9.7% 14.4% 11.1% 12.4% 12.8% 13.3% 10.2% 13.2% 11.7% 12.1% 10.6%

Australia ANZ CBA NAB WBC

2013 8.5% 10.0% 9.1% 10.4%

2014E 8.5% 10.5% 9.8% 10.1%

2015E 8.6% 10.5% 9.9% 10.1%

9.5%

9.7%

9.8%

HK BOC-HK BEA DSBG DSF HSB

2013 11.0% 12.1% 10.1% 10.1% 13.8%

2014E 10.9% 10.7% 10.0% 10.0% 12.6%

2015E 11.0% 10.8% 9.9% 9.9% 12.6%

11.1%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 13.8% 11.8% 12.8% 9.7% 15.6% 22.2% 9.0% 5.9% 8.9% 7.2% 11.1% 10.0%

2014E 11.6% 11.6% 12.4% 9.5% 15.5% 23.0% 8.8% 6.1% 8.2% 8.3% 9.9% 9.8%

HK

11.6%

11.1%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 11.6% NR 8.7% 12.8% NR 10.7%

2014E 10.7% NR 9.0% 12.3% NR 11.6%

2015E 10.8% NR 9.2% 12.6% NR 12.0%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 11.6% NR 12.3% 13.1% 11.1% NR

Korea

10.3%

10.6%

11.1%

Malaysia

Singapore DBS UOB

2013 13.4% 11.9%

2014E 13.5% 12.2%

2015E 13.4% 12.2%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

Singapore

12.8%

13.2%

13.3%

Taiwan

Aus

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 9.3% 8.7% 9.7% 9.8% 10.8% 10.6% 8.8% 0.0% 11.9%

2014E 9.9% 8.8% 10.1% 9.5% 11.2% 10.7% 8.8% 9.3% 10.7%

2015E 10.1% 8.6% 10.3% 9.5% 11.6% 10.8% 8.7% 9.6% 10.1%

China

10.1%

10.1%

10.3%

2015E 11.5% 11.6% 11.8% 9.2% 15.2% 25.1% 8.9% 6.1% 8.9% 8.8% 9.2% 9.7%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 13.1% 15.8% 15.0% 17.3% 13.8%

2014E 13.1% 15.3% 15.1% 16.2% 12.9%

2015E 13.4% 15.3% 15.9% 15.2% 12.8%

Indonesia

14.6%

14.3%

14.4%

2014E 11.5% NR 13.0% 11.8% 13.3% NR

2015E 11.5% NR 13.5% 11.5% 13.2% NR

Philippines MBT BDO BPI PNB SECB

2013 14.2% 14.1% 13.3% 16.4% 15.3%

2014E 13.3% 11.4% 15.9% 15.5% 12.7%

2015E 12.6% 11.2% 14.5% 14.5% 12.6%

11.8%

12.5%

12.4%

Philippines

14.4%

13.4%

12.8%

2013 10.0% 11.1% 10.4% 9.7% 7.5% 9.4% 8.9% 8.4%

2014E 10.5% 14.2% 11.0% 10.4% 7.8% 9.5% 9.1% 9.5%

2015E 11.2% 14.1% 11.2% 11.0% 8.0% 9.3% 9.3% 9.6%

9.4%

10.0%

10.2%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 11.8% 15.1% 12.6% 13.1% 10.2% 9.5% 11.7% 9.3% 11.1% 12.0%

2014E 11.9% 15.1% 13.9% 12.2% 10.9% 9.9% 12.8% 9.1% 12.1% 12.7%

2015E 12.2% 15.2% 15.2% 11.5% 11.2% 10.1% 13.9% 9.2% 12.7% 13.2%

Source: Company, J.P. Morgan estimates

65

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Tier-1 Ratios Table 42: Tier-1 - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 10.4% 10.1% 11.6% 10.7% 14.6% 10.4% 11.9% 14.7% 13.8% 9.5% 12.0% 12.3% 11.7% 10.6%

2014E 10.6% 10.1% 11.1% 10.5% 14.3% 10.7% 12.5% 13.7% 13.9% 10.1% 12.7% 11.4% 11.9% 10.6%

2015E 10.7% 10.3% 11.1% 10.4% 14.4% 11.3% 12.5% 13.0% 13.9% 10.3% 13.2% 11.7% 12.1% 10.8%

Australia ANZ CBA NAB WBC

2013 10.4% 10.3% 10.4% 10.7%

2014E 10.4% 10.7% 11.0% 10.3%

2015E 10.4% 10.8% 11.1% 10.3%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 9.3% 8.7% 9.7% 9.8% 10.8% 10.6% 8.8% 0.0% 11.9%

2014E 9.9% 8.8% 10.1% 9.5% 11.2% 10.7% 8.8% 9.3% 10.7%

2015E 10.1% 8.6% 10.3% 9.5% 11.6% 10.8% 8.7% 9.6% 10.1%

Aus

10.4%

10.6%

10.7%

China

10.1%

10.1%

10.3%

HK BOC-HK BEA DSBG DSF HSB

2013 11.0% 12.1% 10.1% 10.1% 13.8%

2014E 10.9% 10.7% 10.0% 10.0% 12.6%

2015E 11.0% 10.8% 9.9% 9.9% 12.6%

2015E 13.4% 15.3% 15.9% 15.2% 12.8%

11.1%

2015E 11.5% 11.6% 11.8% 9.2% 15.7% 25.1% 11.9% 9.0% 8.9% 8.8% 10.7% 10.4%

2014E 13.1% 15.3% 15.1% 16.2% 12.9%

11.1%

2014E 11.6% 11.6% 12.4% 9.5% 16.1% 23.0% 12.2% 9.1% 8.2% 8.3% 11.5% 10.5%

2013 13.1% 15.8% 15.0% 17.3% 13.8%

11.6%

2013 13.8% 11.8% 12.8% 9.7% 16.3% 22.2% 12.6% 9.3% 8.9% 7.2% 12.7% 10.7%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

14.6%

14.3%

14.4%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 11.6% NR 9.1% 12.8% NR 11.3%

2014E 10.7% NR 9.3% 12.3% NR 12.2%

2015E 10.8% NR 9.6% 12.6% NR 12.5%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 11.6% NR 12.3% 13.1% 11.1% NR

2014E 11.5% NR 13.0% 11.8% 13.3% NR

2015E 11.5% NR 13.5% 11.5% 13.2% NR

Philippines MBT BDO BPI PNB SECB

2013 15.0% 14.6% 13.3% 16.4% 15.3%

2014E 13.9% 11.8% 15.9% 15.5% 12.7%

2015E 13.1% 11.5% 14.5% 14.5% 12.6%

Korea

10.4%

10.7%

11.3%

Malaysia

11.9%

12.5%

12.5%

Philippines

14.7%

13.7%

13.0%

Singapore DBS UOB

2013 13.7% 13.2%

2014E 13.8% 13.4%

2015E 13.7% 13.4%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 10.0% 11.1% 10.4% 9.7% 8.4% 9.4% 8.9% 8.4%

2014E 10.5% 14.2% 11.0% 10.4% 8.6% 9.5% 9.1% 9.5%

2015E 11.2% 14.1% 11.2% 11.0% 8.8% 9.3% 9.3% 9.6%

Singapore

13.8%

13.9%

13.9%

Taiwan

9.5%

10.1%

10.3%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 11.8% 15.1% 12.6% 13.1% 10.2% 9.5% 11.7% 9.3% 11.1% 12.0%

2014E 11.9% 15.1% 13.9% 12.2% 10.9% 9.9% 12.8% 9.1% 12.1% 12.7%

2015E 12.2% 15.2% 15.2% 11.5% 11.2% 10.1% 13.9% 9.2% 12.7% 13.2%

Source: Company, J.P. Morgan estimates

66

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

NIMs Table 43: NIM - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 2.13% 2.58% 1.78% 3.09% 6.85% 2.31% 2.40% 3.57% 1.65% 1.26% 2.99% 1.40% 1.83% 2.29%

2014E 2.06% 2.60% 1.79% 3.18% 7.04% 2.36% 2.38% 3.39% 1.67% 1.29% 3.02% 1.35% 1.80% 2.31%

2015E 2.03% 2.58% 1.82% 3.23% 7.17% 2.32% 2.49% 3.45% 1.73% 1.33% 3.01% 1.40% 1.79% 2.32%

Australia ANZ CBA NAB WBC

2013 2.22% 2.13% 2.03% 2.15%

2014E 2.13% 2.12% 1.93% 2.09%

2015E 2.08% 2.10% 1.89% 2.07%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 2.70% 2.49% 2.23% 2.39% 2.74% 2.57% 2.60% 2.79% 3.40%

2014E 2.72% 2.62% 2.25% 2.34% 2.75% 2.60% 2.56% 2.84% 3.28%

2015E 2.67% 2.51% 2.23% 2.31% 2.73% 2.59% 2.54% 2.84% 3.13%

Aus

2.13%

2.06%

2.03%

China

2.58%

2.60%

2.58%

HK BOC-HK BEA DSBG DSF HSB

2013 1.68% 1.88% 1.79% 1.79% 1.89%

2014E 1.72% 1.81% 1.79% 1.79% 1.92%

2015E 1.75% 1.83% 1.79% 1.79% 1.96%

2015E 6.03% 8.82% 6.95% 8.66% 6.16%

1.82%

2015E 4.01% 4.28% 3.31% 3.33% 4.62% 3.57% 3.51% 2.11% 3.16% 2.18% 3.85% 3.23%

2014E 5.84% 8.75% 6.66% 8.76% 6.29%

1.79%

2014E 3.94% 4.28% 3.23% 3.23% 4.62% 3.64% 3.51% 2.15% 3.14% 2.14% 3.89% 3.18%

2013 5.57% 8.55% 6.20% 9.61% 6.11%

1.78%

2013 3.76% 4.39% 3.11% 3.08% 4.52% 3.74% 3.40% 2.03% 3.22% 2.20% 3.75% 3.09%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

6.85%

7.04%

7.17%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 2.87% NR 2.23% 2.42% NR 2.39%

2014E 2.93% NR 2.47% 2.44% NR 2.41%

2015E 2.95% NR 2.47% 2.46% NR 2.45%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 2.69% NR 1.63% 2.40% 2.26% NR

2014E 2.77% NR 1.74% 2.30% 2.19% NR

2015E 2.86% NR 1.81% 2.31% 2.28% NR

Philippines MBT BDO BPI PNB SECB

2013 3.90% 3.20% 3.31% 3.41% 3.49%

2014E 3.62% 3.12% 3.11% 3.21% 3.15%

2015E 3.60% 3.21% 3.13% 3.36% 3.38%

Korea

2.31%

2.36%

2.32%

Malaysia

2.40%

2.38%

2.49%

Philippines

3.57%

3.39%

3.45%

Singapore DBS UOB

2013 1.62% 1.72%

2014E 1.65% 1.71%

2015E 1.74% 1.74%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 1.18% 1.51% 1.73% 1.09% 1.15% 1.02% 1.19% 1.00%

2014E 1.22% 1.45% 1.85% 1.12% 1.18% 1.10% 1.24% 1.03%

2015E 1.25% 1.37% 1.91% 1.15% 1.21% 1.13% 1.28% 1.06%

Singapore

1.65%

1.67%

1.73%

Taiwan

1.26%

1.29%

1.33%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 4.18% 2.23% 3.48% 3.69% 2.76% 2.66% 3.14% 2.78% 3.00% 2.99%

2014E 4.18% 2.25% 3.56% 3.59% 2.76% 2.67% 3.20% 2.77% 3.03% 3.02%

2015E 4.11% 2.26% 3.52% 3.60% 2.74% 2.66% 3.19% 2.75% 3.03% 3.01%

Source: Company, J.P. Morgan estimates

67

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Fee income growth Table 44: Fee income growth - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 2.3% 16.8% 16.6% 15.9% 19.1% -4.3% 16.6% 14.6% 16.0% 12.5% 18.9% 0.0% 0.5% 11.9%

2014E 5.4% 14.0% 9.5% 13.5% 11.8% 2.6% 12.1% 15.1% 6.1% 29.1% 11.4% -1.6% 6.2% 10.7%

2015E 3.9% 15.8% 10.1% 14.3% 13.8% 4.7% 12.9% 15.3% 11.3% 11.3% 12.3% 2.7% 7.2% 12.4%

Australia ANZ CBA NAB WBC

2013 4.4% 1.6% 0.0% 3.5%

2014E 1.5% 7.0% 3.9% 8.2%

2015E 5.2% 4.1% 2.8% 3.6%

Aus

2.3%

5.4%

3.9%

HK BOC-HK BEA DSBG DSF HSB

2013 15.5% 18.1% 32.3% 31.7% 15.7%

2014E 8.7% 12.7% 14.9% 16.5% 7.8%

2015E 9.8% 11.0% 11.8% 12.9% 10.0%

HK

16.6%

9.5%

10.1%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 26.5% 11.5% 19.3% 13.8% 17.1% n.a. 21.5% 13.3% 8.0% 20.7% 40.1% 15.9%

2014E 16.8% 8.0% 17.3% 12.8% 18.1% n.a. 12.0% 15.8% 10.0% 14.7% 28.0% 13.5%

2013 -0.2% NR -12.3% -7.1% NR -12.0%

2014E -3.2% NR 11.4% 0.2% NR 1.8%

2015E 9.1% NR 7.4% 5.9% NR 1.8%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 13.2% NR -0.8% 11.7% 9.4% NR

Korea

-4.3%

2.6%

4.7%

Malaysia

Singapore DBS UOB

2013 19.4% 14.8%

2014E 7.5% 0.0%

2015E 15.0% 8.0%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

Singapore

16.0%

6.1%

11.3%

Taiwan

Korea Daegu Hana IBK KB Fin Busan Shinhan

Source: Company, J.P. Morgan estimates

68

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 3.2% 46.0% 17.4% 24.4% 11.5% 15.3% 50.0% 11.1% 56.0%

2014E 41.7% 16.2% 11.5% 14.5% 11.1% 15.0% 27.3% 12.2% 31.0%

2015E 37.9% 24.8% 18.0% 16.4% 11.6% 14.5% 16.4% 14.5% 26.1%

China

16.8%

14.0%

15.8%

2015E 15.1% 13.6% 15.3% 13.6% 12.5% n.a. 13.0% 15.8% 10.0% 14.7% 28.0% 14.3%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 18.8% 23.7% 15.7% 10.0% 28.3%

2014E 9.0% 12.0% 12.0% 12.0% 20.0%

2015E 12.0% 15.0% 15.0% 15.0% 15.0%

Indonesia

19.1%

11.8%

13.8%

2014E 12.0% NR 16.3% 11.3% 11.5% NR

2015E 10.9% NR 9.4% 10.0% 11.6% NR

Philippines MBT BDO BPI PNB SECB

2013 6.4% 13.5% 15.1% 29.8% 22.9%

2014E 10.0% 13.0% 20.0% 20.0% 20.0%

2015E 10.0% 13.0% 20.0% 20.0% 20.0%

16.6%

12.1%

12.9%

Philippines

14.6%

15.1%

15.3%

2013 -65.6% -2.5% -48.7% 15.2% 9.9% 6.2% 7.8% 22.1%

2014E 675.3% 20.8% -103.8% 15.7% 11.4% 14.3% 9.4% 22.3%

2015E 21.8% 14.9% -589.0% 9.4% 10.5% 9.6% 7.4% 16.4%

12.5%

29.1%

11.3%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 14.3% 11.1% 23.2% 91.1% 18.9% 13.3% 16.4% 25.7% 19.3% 18.9%

2014E 12.0% 10.0% 15.0% 9.7% 7.0% 2.3% 12.0% 16.6% 10.0% 11.4%

2015E 15.0% 10.0% 15.0% 8.4% 12.0% 7.9% 12.0% 10.0% 10.0% 12.3%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Revenue / Assets Table 45: Revenue / Assets - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 2.6% 3.1% 2.2% 4.0% 7.6% 2.8% 3.2% 4.5% 2.2% 1.8% 4.3% 2.4% 2.8% 2.9%

2014E 2.5% 3.1% 2.2% 4.1% 7.7% 2.9% 3.2% 4.2% 2.2% 1.9% 4.4% 2.3% 2.6% 2.9%

2015E 2.5% 3.1% 2.2% 4.1% 7.7% 2.9% 3.3% 4.3% 2.3% 1.8% 4.5% 2.2% 2.5% 2.9%

Australia ANZ CBA NAB WBC

2013 2.6% 2.8% 2.3% 2.7%

2014E 2.6% 2.8% 2.2% 2.7%

2015E 2.5% 2.8% 2.2% 2.6%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 3.3% 3.6% 2.9% 2.7% 3.3% 3.1% 2.9% 3.2% 3.2%

2014E 3.5% 3.5% 2.9% 2.7% 3.4% 3.1% 2.9% 3.2% 3.1%

2015E 3.5% 3.5% 2.9% 2.7% 3.3% 3.1% 2.9% 3.2% 3.0%

Aus

2.6%

2.5%

2.5%

China

3.1%

3.1%

3.1%

HK BOC-HK BEA DSBG DSF HSB

2013 2.0% 2.3% 2.3% 2.3% 2.5%

2014E 2.0% 2.3% 2.3% 2.4% 2.5%

2015E 2.0% 2.3% 2.3% 2.4% 2.5%

HK

2.2%

2.2%

2.2%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 3.5% 5.3% 4.5% 4.2% 6.2% 5.0% 5.1% 2.3% 3.8% 2.7% 5.5% 4.0%

2014E 3.6% 5.1% 4.5% 4.3% 6.3% 4.9% 5.0% 2.5% 3.7% 2.8% 5.6% 4.1%

2015E 3.7% 5.0% 4.5% 4.4% 6.2% 4.9% 4.8% 2.4% 3.7% 2.7% 5.6% 4.1%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 6.9% 8.4% 6.8% 10.5% 7.2%

2014E 7.0% 8.4% 7.2% 9.9% 7.4%

2015E 7.0% 8.5% 7.5% 9.6% 7.3%

Indonesia

7.6%

7.7%

7.7%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 3.1% NR 2.0% 3.1% NR 3.1%

2014E 3.1% NR 2.8% 3.1% NR 3.0%

2015E 3.2% NR 2.7% 3.1% NR 3.1%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 3.6% NR 2.4% 3.2% 2.7% NR

2014E 3.6% NR 2.5% 3.1% 2.6% NR

2015E 3.8% NR 2.6% 3.1% 2.7% NR

Philippines MBT BDO BPI PNB SECB

2013 5.0% 4.5% 4.4% 4.0% 3.5%

2014E 4.6% 4.3% 4.0% 4.0% 3.7%

2015E 4.5% 4.3% 4.1% 4.1% 3.9%

Korea

2.8%

2.9%

2.9%

Malaysia

3.2%

3.2%

3.3%

Philippines

4.5%

4.2%

4.3%

Singapore DBS UOB

2013 2.2% 2.4%

2014E 2.3% 2.4%

2015E 2.4% 2.4%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 1.5% 2.8% 1.9% 2.3% 1.9% 1.8% 1.6% 1.9%

2014E 1.5% 2.4% 2.1% 2.5% 1.9% 1.9% 1.7% 2.1%

2015E 1.4% 2.6% 2.0% 2.6% 2.0% 1.9% 1.8% 2.2%

1.8%

1.9%

1.8%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 5.7% 3.3% 5.2% 5.5% 3.6% 3.8% 4.8% 4.3% 3.8% 4.3%

2014E 5.9% 3.4% 5.4% 5.5% 3.7% 3.5% 4.9% 4.5% 3.9% 4.4%

2015E 6.1% 3.4% 5.5% 5.5% 3.7% 3.5% 5.0% 4.6% 3.9% 4.5%

Singapore

2.2%

2.2%

2.3%

Taiwan

Source: Company, J.P. Morgan estimates

69

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Cost Efficiency Table 46: Cost-to-income - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 45% 39% 38% 49% 46% 58% 48% 57% 43% 55% 45% 59% 55% 44%

2014E 45% 39% 37% 48% 46% 60% 47% 59% 42% 52% 45% 60% 56% 44%

2015E 44% 39% 36% 47% 45% 60% 46% 57% 41% 52% 45% 57% 55% 44%

Australia ANZ CBA NAB WBC

2013 45% 47% 44% 41%

2014E 44% 47% 46% 41%

2015E 43% 46% 45% 41%

Aus

45%

45%

44%

HK BOC-HK BEA DSBG DSF HSB

2013 30% 56% 52% 53% 32%

2014E 29% 55% 52% 51% 31%

2015E 28% 54% 52% 51% 30%

HK

38%

37%

36%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 8% 46% 38% 61% 48% 15% 41% 46% 45% 44% 46% 49%

2014E 8% 43% 37% 60% 47% 17% 40% 43% 47% 44% 47% 48%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 57% NR 41% 62% NR 61%

2014E 60% NR 49% 63% NR 60%

2015E 59% NR 51% 62% NR 59%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 46% NR 46% 44% 31% NR

Korea

55%

55%

55%

Malaysia

Singapore DBS UOB

2013 44% 43%

2014E 44% 43%

2015E 42% 43%

Singapore

43%

43%

43%

Source: Company, J.P. Morgan estimates

70

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 41% 40% 42% 40% 37% 35% 39% 43% 44%

2014E 40% 39% 42% 40% 37% 34% 39% 43% 44%

2015E 41% 42% 42% 41% 38% 34% 41% 44% 45%

China

39%

39%

39%

2015E 8% 41% 36% 57% 46% 22% 40% 44% 47% 44% 48% 47%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 44% 43% 43% 54% 50%

2014E 45% 45% 41% 55% 50%

2015E 43% 43% 40% 53% 50%

Indonesia

46%

46%

45%

2014E 45% NR 43% 45% 30% NR

2015E 44% NR 42% 45% 28% NR

Philippines MBT BDO BPI PNB SECB

2013 56% 58% 51% 71% 55%

2014E 57% 61% 55% 68% 54%

2015E 56% 59% 52% 64% 52%

48%

47%

46%

Philippines

57%

59%

57%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 62% 58% 51% 56% 58% 41% 49% 51%

2014E 52% 58% 45% 53% 56% 39% 47% 51%

2015E 56% 56% 47% 51% 55% 37% 45% 49%

Taiwan

55%

52%

52%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 51% 44% 44% 50% 44% 54% 39% 40% 50% 45%

2014E 50% 43% 43% 52% 46% 59% 38% 40% 50% 45%

2015E 49% 42% 43% 53% 46% 61% 38% 41% 51% 45%

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Cost /Assets Table 47: Cost-to-assets - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 1.15% 1.22% 0.83% 1.99% 3.47% 1.61% 1.53% 2.55% 0.94% 0.98% 1.93% 1.39% 1.51% 1.29%

2014E 1.13% 1.22% 0.81% 1.96% 3.52% 1.71% 1.52% 2.48% 0.93% 0.96% 1.97% 1.36% 1.45% 1.29%

2015E 1.10% 1.24% 0.80% 1.91% 3.44% 1.75% 1.51% 2.42% 0.94% 0.95% 1.99% 1.27% 1.39% 1.28%

Australia ANZ CBA NAB WBC

2013 1.17% 1.31% 1.01% 1.11%

2014E 1.12% 1.30% 1.02% 1.09%

2015E 1.08% 1.27% 0.98% 1.07%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 1.36% 1.43% 1.24% 1.09% 1.22% 1.08% 1.11% 1.36% 1.43%

2014E 1.41% 1.38% 1.23% 1.07% 1.25% 1.06% 1.14% 1.40% 1.37%

2015E 1.41% 1.47% 1.23% 1.09% 1.28% 1.05% 1.18% 1.42% 1.34%

Aus

1.15%

1.13%

1.10%

China

1.22%

1.22%

1.24%

HK BOC-HK BEA DSBG DSF HSB

2013 0.59% 1.27% 1.18% 1.21% 0.80%

2014E 0.58% 1.23% 1.18% 1.21% 0.78%

2015E 0.57% 1.23% 1.18% 1.22% 0.77%

2015E 3.05% 3.68% 3.00% 5.07% 3.64%

0.80%

2015E 0.29% 2.05% 1.61% 2.48% 2.83% 1.09% 1.95% 1.05% 1.73% 1.21% 2.69% 1.91%

2014E 3.11% 3.77% 3.00% 5.44% 3.69%

0.81%

2014E 0.28% 2.17% 1.65% 2.57% 2.96% 0.83% 2.01% 1.08% 1.72% 1.21% 2.66% 1.96%

2013 3.08% 3.58% 2.95% 5.65% 3.64%

0.83%

2013 0.28% 2.45% 1.73% 2.60% 2.99% 0.73% 2.06% 1.08% 1.70% 1.18% 2.52% 1.99%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

3.47%

3.52%

3.44%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 1.75% NR 0.80% 1.91% NR 1.85%

2014E 1.88% NR 1.36% 1.96% NR 1.81%

2015E 1.86% NR 1.40% 1.93% NR 1.83%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 1.65% NR 1.13% 1.53% 0.82% NR

2014E 1.63% NR 1.10% 1.51% 0.78% NR

2015E 1.67% NR 1.11% 1.48% 0.76% NR

Philippines MBT BDO BPI PNB SECB

2013 2.81% 2.59% 2.23% 2.81% 1.94%

2014E 2.63% 2.58% 2.18% 2.70% 2.02%

2015E 2.51% 2.56% 2.13% 2.63% 2.05%

Korea

1.61%

1.71%

1.75%

Malaysia

1.53%

1.52%

1.51%

Philippines

2.55%

2.48%

2.42%

Singapore DBS UOB

2013 0.97% 1.02%

2014E 0.99% 1.02%

2015E 1.02% 1.02%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.92% 1.62% 0.95% 1.30% 1.08% 0.74% 0.84% 1.07%

2014E 0.80% 1.39% 0.94% 1.34% 1.08% 0.73% 0.83% 1.13%

2015E 0.79% 1.46% 0.95% 1.35% 1.10% 0.72% 0.83% 1.13%

Singapore

0.94%

0.93%

0.94%

Taiwan

0.98%

0.96%

0.95%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 2.93% 1.46% 2.29% 2.76% 1.60% 2.04% 1.87% 1.74% 1.90% 1.93%

2014E 2.97% 1.45% 2.33% 2.84% 1.69% 2.08% 1.90% 1.84% 1.96% 1.97%

2015E 3.00% 1.43% 2.35% 2.92% 1.70% 2.14% 1.93% 1.85% 2.01% 1.99%

Source: Company, J.P. Morgan estimates

71

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Credit Costs (LLP / Loans) Table 48: LLP / Loans - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 0.25% 0.52% 0.12% 1.18% 1.11% 0.68% 0.22% 0.98% 0.26% 0.27% 0.99% 0.55% 0.55% 0.51%

2014E 0.19% 0.56% 0.16% 1.19% 1.27% 0.63% 0.30% 0.68% 0.26% 0.22% 0.86% 0.32% 0.54% 0.50%

2015E 0.20% 0.55% 0.16% 1.12% 1.48% 0.58% 0.40% 0.79% 0.36% 0.26% 0.85% 0.36% 0.56% 0.50%

Australia ANZ CBA NAB WBC

2013 0.26% 0.20% 0.38% 0.16%

2014E 0.21% 0.17% 0.22% 0.15%

2015E 0.22% 0.18% 0.23% 0.18%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 0.53% 0.88% 0.32% 0.59% 0.53% 0.41% 0.63% 0.76% 0.51%

2014E 0.53% 0.85% 0.33% 0.63% 0.55% 0.52% 0.80% 0.69% 0.52%

2015E 0.53% 0.64% 0.35% 0.62% 0.53% 0.55% 0.83% 0.66% 0.53%

Aus

0.25%

0.19%

0.20%

China

0.52%

0.56%

0.55%

HK BOC-HK BEA DSBG DSF HSB

2013 0.09% 0.12% 0.34% 0.34% 0.10%

2014E 0.10% 0.14% 0.47% 0.47% 0.12%

2015E 0.11% 0.16% 0.51% 0.51% 0.13%

2015E -1.15% -1.62% -0.63% -3.34% -1.99%

0.16%

2015E 0.05% 0.48% 1.02% 1.51% 0.54% 0.21% 0.88% 0.77% 1.50% 1.14% 0.87% 1.12%

2014E -1.04% -1.29% -0.53% -3.01% -1.67%

0.16%

2014E 0.05% 0.58% 1.07% 1.46% 0.54% 0.98% 1.04% 0.88% 1.76% 1.31% 0.91% 1.19%

2013 -1.07% -0.97% -0.65% -2.67% -1.14%

0.12%

2013 0.05% 0.58% 0.82% 1.37% 0.64% 1.08% 0.98% 1.03% 1.99% 1.46% 0.93% 1.18%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

1.11%

1.27%

1.48%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 0.60% NR 0.84% 0.65% NR 0.53%

2014E 0.57% NR 0.75% 0.62% NR 0.47%

2015E 0.53% NR 0.75% 0.62% NR 0.51%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 -0.08% NR -0.04% -0.21% -0.17% NR

2014E -0.11% NR -0.05% -0.33% -0.27% NR

2015E -0.20% NR -0.29% -0.33% -0.35% NR

Philippines MBT BDO BPI PNB SECB

2013 -1.83% -0.81% -0.45% -0.37% -0.09%

2014E -0.71% -0.64% -0.50% -0.55% -0.21%

2015E -0.76% -0.81% -0.55% -0.66% -0.33%

Korea

0.68%

0.63%

0.58%

Malaysia

0.22%

0.30%

0.40%

Philippines

0.98%

0.68%

0.79%

Singapore DBS UOB

2013 -0.32% -0.24%

2014E -0.26% -0.34%

2015E -0.33% -0.45%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.09% 0.52% 0.38% 0.26% -0.03% 0.33% 0.47% 0.22%

2014E 0.12% 0.21% 0.14% 0.29% 0.03% 0.15% 0.50% 0.19%

2015E 0.14% 0.26% 0.18% 0.31% 0.09% 0.22% 0.51% 0.21%

Singapore

0.26%

0.26%

0.36%

0.27%

0.22%

0.26%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 1.89% 0.51% 0.85% -1.25% 0.76% 1.49% 0.83% 1.53% 1.60% 0.99%

2014E 1.70% 0.45% 0.85% -1.21% 0.79% 0.80% 0.70% 1.50% 1.15% 0.86%

2015E 1.70% 0.45% 0.85% -1.21% 0.77% 0.80% 0.70% 1.50% 1.00% 0.85%

Source: Company, J.P. Morgan estimates

72

Taiwan

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

EPS Growth Table 49: EPS Growth - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 3.0% 10.6% 19.0% -3.4% 17.2% -22.4% 2.8% 18.4% -11.2% 11.1% 20.9% 13.8% -17.5% 7.2%

2014E 10.8% 8.4% -11.4% 18.1% 4.9% 15.8% 1.7% -11.2% 10.6% 30.1% 7.1% -5.1% 11.7% 8.1%

2015E 6.6% 9.3% 10.3% 22.1% 10.4% 9.5% 12.9% 15.7% 3.1% -3.2% 10.4% -2.3% 4.8% 8.6%

Australia ANZ CBA NAB WBC

2013 8.2% 6.6% 27.7% 10.0%

2014E 11.1% 10.3% 12.8% 9.5%

2015E 6.9% 4.3% 10.1% 6.2%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 9.7% 4.9% 12.3% -5.1% 11.1% 10.0% 26.2% 14.6% 11.7%

2014E 1.5% -3.9% 9.6% 6.5% 9.0% 9.3% 7.4% 10.9% 12.4%

2015E 12.8% 5.9% 9.2% 8.8% 8.3% 9.5% 8.4% 10.3% 11.9%

Australia

3.0%

10.8%

6.6%

China

10.6%

8.4%

9.3%

HK BOC-HK BEA DSBG DSF HSB

2013 6.3% 2.2% 17.3% 14.4% 38.0%

2014E 8.9% 2.1% -1.3% 2.3% -32.1%

2015E 11.9% 7.2% 7.9% 7.3% 9.3%

HK

19.0%

-11.4%

10.3%

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

2013 11.2% 25.0% 17.4% -28.1% 9.5% -1.7% 19.8% -0.6% -31.3% -7.9% 32.0% -3.4%

2014E 16.8% 22.2% 15.9% 21.0% 23.0% -5.9% 17.6% 27.6% 13.2% 4.2% 22.7% 18.1%

2015E 18.8% 25.6% 22.2% 30.4% 15.1% 7.0% 19.9% 18.3% 11.2% 11.0% 23.7% 22.1%

Indonesia Mandiri BBRI BCA Danamon BBNI

2013 17.4% 14.3% 20.3% 0.7% 28.5%

2014E 12.5% 6.1% 0.2% -20.1% 5.4%

2015E 16.9% 14.8% 0.2% 13.4% 4.2%

Indonesia

17.2%

4.9%

10.4%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 -12.8% NR -27.5% -24.7% NR -18.8%

2014E 5.2% NR 61.9% 19.2% NR 16.1%

2015E 16.4% NR -0.3% 12.3% NR 11.7%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 10.0% NR 0.8% 4.2% 6.2% NR

2014E 15.2% NR 11.4% -1.4% -0.9% NR

2015E 14.0% NR 3.8% 9.7% 9.4% NR

Philippines MBT BDO BPI PNB SECB

2013 47.5% 37.5% 15.0% -31.4% -33.3%

2014E -22.7% -5.2% -15.4% 0.8% 6.0%

2015E 11.6% 8.2% 20.2% 36.3% 18.3%

Korea

-22.4%

15.8%

9.5%

Malaysia

2.8%

1.7%

12.9%

Philippines

18.4%

-11.2%

15.7%

Singapore DBS UOB

2013 -4.7% 8.0%

2014E 13.6% 0.4%

2015E 8.6% 0.4%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 56.8% -4.3% 8.7% 7.5% 31.7% 4.2% 3.5% 4.5%

2014E 53.0% 90.9% 35.9% 13.6% -5.0% 20.4% 7.6% 13.4%

2015E -17.2% -25.0% 2.4% 13.6% 8.2% 6.8% 11.7% 9.2%

Taiwan

11.1%

30.1%

-3.2%

2013 -4.1% 8.7% 17.2% -1.1% 29.8% 69.0% 24.9% 9.2% 257.5% 20.9%

2014E 18.6% 9.4% 14.4% -5.9% -5.9% -38.2% 11.0% 5.7% 35.3% 7.1%

2015E 15.0% 9.8% 11.7% 5.2% 9.4% -0.4% 10.1% 9.1% 13.8% 10.4%

Singapore

-11.2%

10.6%

3.1%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

Source: Company, J.P. Morgan estimates

73

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

Operating ROA (PPOP / Assets) Table 50: PPOP / Assets - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 1.47% 1.99% 1.41% 2.21% 4.42% 1.17% 1.74% 2.28% 1.32% 0.83% 2.50% 0.97% 1.29% 1.69%

2014E 1.46% 2.01% 1.43% 2.29% 4.42% 1.19% 1.77% 1.91% 1.32% 0.94% 2.52% 0.92% 1.15% 1.71%

2015E 1.45% 1.99% 1.47% 2.36% 4.59% 1.18% 1.90% 2.02% 1.39% 0.92% 2.56% 0.98% 1.16% 1.73%

Australia ANZ CBA NAB WBC

2013 1.51% 1.49% 1.31% 1.61%

2014E 1.49% 1.52% 1.23% 1.61%

2015E 1.47% 1.52% 1.22% 1.60%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 2.12% 2.17% 1.77% 1.76% 2.20% 2.06% 1.95% 1.92% 1.95%

2014E 2.22% 2.28% 1.78% 1.72% 2.20% 2.13% 1.90% 1.91% 1.92%

2015E 2.19% 2.14% 1.79% 1.68% 2.17% 2.13% 1.84% 1.90% 1.80%

Aus

1.47%

1.46%

1.45%

China

1.99%

2.01%

1.99%

HK BOC-HK BEA DSBG DSF HSB

2013 1.46% 1.06% 1.14% 1.13% 1.71%

2014E 1.46% 1.08% 1.14% 1.21% 1.77%

2015E 1.51% 1.10% 1.15% 1.21% 1.83%

2015E 4.26% 5.17% 4.78% 4.82% 3.91%

1.47%

2015E 3.64% 3.24% 3.14% 2.02% 3.61% 3.82% 3.16% 1.48% 2.05% 1.63% 3.25% 2.36%

2014E 4.09% 4.98% 4.49% 4.60% 3.95%

1.43%

2014E 3.60% 3.21% 3.09% 1.86% 3.58% 4.11% 3.25% 1.51% 2.09% 1.62% 3.26% 2.29%

2013 4.15% 5.11% 4.07% 5.27% 3.87%

1.41%

2013 3.47% 3.19% 2.93% 1.74% 3.37% 4.37% 3.17% 1.36% 2.22% 1.65% 3.19% 2.21%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

4.42%

4.42%

4.59%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 1.37% NR 1.19% 1.20% NR 1.22%

2014E 1.30% NR 1.44% 1.16% NR 1.26%

2015E 1.35% NR 1.38% 1.20% NR 1.33%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 1.99% NR 1.34% 1.82% 1.95% NR

2014E 2.06% NR 1.50% 1.73% 1.92% NR

2015E 2.20% NR 1.57% 1.74% 2.04% NR

Philippines MBT BDO BPI PNB SECB

2013 2.54% 2.18% 2.37% 1.52% 1.83%

2014E 2.10% 1.76% 1.95% 1.38% 1.81%

2015E 2.11% 1.87% 2.07% 1.61% 2.01%

Korea

1.17%

1.19%

1.18%

Malaysia

1.74%

1.77%

1.90%

Philippines

2.28%

1.91%

2.02%

Singapore DBS UOB

2013 1.33% 1.42%

2014E 1.30% 1.39%

2015E 1.45% 1.42%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.58% 1.24% 0.96% 1.05% 0.82% 1.12% 0.82% 0.92%

2014E 0.77% 1.20% 1.19% 1.21% 0.89% 1.19% 0.89% 0.99%

2015E 0.64% 1.16% 1.10% 1.31% 0.94% 1.24% 0.94% 1.09%

Singapore

1.32%

1.32%

1.39%

Taiwan

0.83%

0.94%

0.92%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 2.94% 1.94% 3.09% 2.80% 2.16% 1.74% 3.08% 2.83% 1.97% 2.50%

2014E 3.07% 1.99% 3.22% 2.70% 2.05% 1.46% 3.15% 2.83% 1.98% 2.52%

2015E 3.18% 2.03% 3.29% 2.70% 2.05% 1.41% 3.21% 2.83% 1.98% 2.56%

Source: Company, J.P. Morgan estimates

74

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

ROA Table 51: ROA - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 0.89% 1.31% 1.41% 1.06% 2.94% 0.48% 1.25% 1.61% 0.96% 0.61% 1.53% 0.58% 0.61% 1.07%

2014E 0.93% 1.30% 1.16% 1.09% 2.86% 0.53% 1.20% 1.21% 0.97% 0.75% 1.51% 0.57% 0.65% 1.08%

2015E 0.95% 1.29% 1.19% 1.15% 2.88% 0.56% 1.25% 1.23% 0.94% 0.67% 1.55% 0.56% 0.65% 1.09%

Australia ANZ CBA NAB WBC

2013 1.01% 1.07% 0.73% 1.03%

2014E 1.01% 1.10% 0.74% 1.02%

2015E 1.01% 1.09% 0.74% 1.01%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 1.39% 1.31% 1.18% 1.11% 1.46% 1.44% 1.19% 1.20% 1.28%

2014E 1.40% 1.36% 1.18% 1.04% 1.45% 1.45% 1.08% 1.20% 1.21%

2015E 1.41% 1.33% 1.18% 1.01% 1.43% 1.43% 1.02% 1.20% 1.12%

Aus

0.89%

0.93%

0.95%

China

1.31%

1.30%

1.29%

HK BOC-HK BEA DSBG DSF HSB

2013 1.15% 0.87% 1.09% 0.85% 2.40%

2014E 1.14% 0.83% 1.10% 0.91% 1.53%

2015E 1.18% 0.84% 1.09% 0.90% 1.56%

2015E 2.68% 3.31% 3.59% 1.71% 2.12%

1.19%

2015E 2.58% 1.96% 1.81% 0.74% 2.21% 2.45% 1.76% 0.83% 0.73% 0.61% 1.80% 1.15%

2014E 2.62% 3.36% 3.42% 1.69% 2.31%

1.16%

2014E 2.58% 1.90% 1.75% 0.67% 2.22% 2.35% 1.76% 0.82% 0.65% 0.55% 1.79% 1.09%

2013 2.66% 3.63% 3.03% 2.38% 2.52%

1.41%

2013 2.59% 1.90% 1.73% 0.63% 2.02% 2.49% 1.72% 0.75% 0.65% 0.53% 1.76% 1.06%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

2.94%

2.86%

2.88%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 0.66% NR 0.37% 0.44% NR 0.61%

2014E 0.64% NR 0.59% 0.51% NR 0.68%

2015E 0.69% NR 0.57% 0.55% NR 0.71%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 1.37% NR 1.15% 1.24% 1.40% NR

2014E 1.46% NR 1.31% 1.12% 1.32% NR

2015E 1.51% NR 1.26% 1.12% 1.37% NR

Philippines MBT BDO BPI PNB SECB

2013 1.82% 1.53% 1.73% 1.08% 1.65%

2014E 1.15% 1.20% 1.35% 0.91% 1.45%

2015E 1.13% 1.17% 1.41% 1.04% 1.57%

Korea

0.48%

0.53%

0.56%

Malaysia

1.25%

1.20%

1.25%

Philippines

1.61%

1.21%

1.23%

Singapore DBS UOB

2013 0.97% 1.08%

2014E 0.99% 0.99%

2015E 1.02% 0.93%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 0.50% 0.95% 0.76% 0.77% 0.46% 0.77% 0.46% 0.64%

2014E 0.74% 1.40% 0.96% 0.87% 0.44% 0.91% 0.44% 0.72%

2015E 0.58% 0.85% 0.89% 0.95% 0.45% 0.92% 0.45% 0.79%

Singapore

0.96%

0.97%

0.94%

Taiwan

0.61%

0.75%

0.67%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 1.24% 1.43% 1.89% 1.58% 1.42% 0.89% 2.09% 1.31% 0.78% 1.53%

2014E 1.36% 1.45% 1.98% 1.40% 1.22% 0.53% 2.12% 1.25% 0.99% 1.51%

2015E 1.45% 1.48% 2.02% 1.39% 1.23% 0.51% 2.16% 1.25% 1.06% 1.55%

Source: Company, J.P. Morgan estimates

75

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

ROE Table 52: ROE - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 18.8% 20.3% 16.7% 14.0% 23.4% 6.2% 15.5% 15.3% 11.7% 10.6% 16.7% 9.1% 8.7% 16.4%

2014E 19.8% 19.5% 13.6% 14.6% 22.0% 6.9% 14.6% 12.0% 11.9% 12.6% 16.0% 8.5% 9.4% 16.1%

2015E 20.5% 18.7% 13.8% 16.0% 21.7% 7.1% 15.2% 12.4% 11.3% 10.9% 15.9% 8.0% 9.3% 15.9%

Australia ANZ CBA NAB WBC

2013 15.3% 18.5% 14.7% 15.9%

2014E 15.3% 18.6% 14.9% 16.2%

2015E 15.3% 18.1% 14.7% 16.1%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 22.2% 23.4% 17.9% 15.6% 21.4% 21.9% 18.5% 20.9% 17.6%

2014E 20.5% 21.1% 17.5% 15.0% 20.4% 21.0% 17.5% 20.3% 17.4%

2015E 19.9% 19.5% 17.1% 14.6% 19.4% 20.0% 16.7% 19.6% 17.1%

Aus

18.8%

19.8%

20.5%

China

20.3%

19.5%

18.7%

HK BOC-HK BEA DSBG DSF HSB

2013 14.4% 10.4% 10.8% 9.3% 27.8%

2014E 14.5% 9.9% 10.5% 9.7% 16.8%

2015E 14.8% 10.2% 10.1% 9.4% 16.9%

2015E 21.6% 25.0% 25.1% 10.6% 17.2%

13.8%

2015E 23.7% 23.0% 16.3% 13.4% 14.5% 11.6% 18.3% 16.3% 11.8% 11.4% 19.4% 16.0%

2014E 21.6% 26.0% 25.6% 10.0% 18.7%

13.6%

2014E 22.1% 21.8% 14.8% 11.3% 14.3% 11.5% 17.7% 15.6% 10.6% 11.0% 18.4% 14.6%

2013 22.5% 29.7% 24.6% 13.5% 19.9%

16.7%

2013 20.5% 21.3% 14.0% 10.6% 13.6% 12.6% 17.4% 13.8% 10.2% 11.0% 17.5% 14.0%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

23.4%

22.0%

21.7%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 9.1% NR 5.9% 5.1% NR 7.4%

2014E 8.9% NR 9.3% 5.8% NR 8.2%

2015E 9.5% NR 8.9% 6.2% NR 8.6%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 14.1% NR 15.0% 14.9% 21.1% NR

2014E 15.0% NR 16.1% 14.0% 17.7% NR

2015E 15.7% NR 15.0% 14.9% 16.8% NR

Philippines MBT BDO BPI PNB SECB

2013 18.4% 14.5% 18.7% 8.6% 12.9%

2014E 12.6% 12.8% 14.4% 6.7% 12.2%

2015E 13.0% 12.7% 14.6% 7.9% 13.1%

Korea

6.2%

6.9%

7.1%

Malaysia

15.5%

14.6%

15.2%

Philippines

15.3%

12.0%

12.4%

Singapore DBS UOB

2013 11.3% 12.3%

2014E 11.4% 11.7%

2015E 11.2% 11.1%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 11.0% 11.8% 10.5% 10.4% 13.1% 9.9% 13.1% 10.7%

2014E 13.6% 20.0% 13.6% 11.3% 11.7% 11.8% 11.7% 11.0%

2015E 9.5% 13.1% 12.5% 11.7% 11.3% 11.8% 11.3% 11.1%

Singapore

11.7%

11.9%

11.3%

Taiwan

10.6%

12.6%

10.9%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 11.9% 12.6% 20.4% 11.3% 17.4% 19.7% 21.8% 20.6% 10.0% 16.7%

2014E 13.0% 12.8% 19.8% 10.2% 14.8% 11.2% 21.2% 19.3% 12.0% 16.0%

2015E 13.9% 12.9% 18.9% 10.4% 14.8% 10.4% 20.4% 18.8% 12.5% 15.9%

Source: Company, J.P. Morgan estimates

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RORWA Table 53: RORWA - Sector Sector Australia China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand HSBC StanC Asia

2013 2.01% 2.04% 3.15% 1.55% 4.09% 0.73% 2.09% 2.44% 1.80% 1.51% 2.31% 1.34% 1.27% 1.86%

2014E 2.08% 1.88% 2.48% 1.61% 3.85% 0.84% 1.99% 1.81% 1.78% 1.90% 2.28% 1.23% 1.34% 1.78%

2015E 2.12% 1.84% 2.49% 1.72% 3.85% 0.90% 2.03% 1.72% 1.71% 1.74% 2.34% 1.19% 1.34% 1.77%

Australia ANZ CBA NAB WBC

2013 1.96% 2.41% 1.49% 2.23%

2014E 1.97% 2.50% 1.63% 2.29%

2015E 1.96% 2.51% 1.75% 2.30%

China CMB Minsheng BOC-H BoComm CCB ICBC-H Citic-H ABC-H CQRB

2013 2.06% 1.95% 1.88% 1.66% 2.45% 2.44% 1.72% 2.04% 2.15%

2014E 2.04% 1.81% 1.76% 1.46% 2.26% 2.24% 1.49% 1.93% 1.99%

2015E 2.07% 1.66% 1.77% 1.41% 2.22% 2.16% 1.39% 1.93% 1.84%

Aus

2.01%

2.08%

2.12%

China

2.04%

1.88%

1.84%

HK BOC-HK BEA DSBG DSF HSB

2013 2.79% 1.53% 1.63% 1.39% 7.15%

2014E 2.62% 1.46% 1.63% 1.46% 4.16%

2015E 2.63% 1.49% 1.60% 1.42% 4.11%

2015E 3.63% 4.77% 4.75% 1.93% 2.74%

2.49%

2015E 2.98% 2.81% 2.16% 1.24% 2.52% 2.78% 2.35% 1.48% 1.05% 0.97% 2.18% 1.72%

2014E 3.52% 4.91% 4.60% 1.95% 2.97%

2.48%

2014E 3.00% 2.72% 2.09% 1.06% 2.52% 2.60% 2.36% 1.50% 0.94% 0.88% 2.25% 1.61%

2013 3.67% 5.60% 4.19% 2.83% 3.31%

3.15%

2013 3.04% 2.60% 2.09% 0.98% 2.31% 2.71% 2.29% 1.40% 0.96% 0.87% 2.34% 1.55%

Indonesia Mandiri BBRI BCA Danamon BBNI

HK

India HDFC HDFCB ICICI SBI KMB IDFC Axis BOB PNB BOI IndusInd India

Indonesia

4.09%

3.85%

3.85%

Korea Daegu Hana IBK KB Fin Busan Shinhan

2013 0.95% NR 0.58% 0.69% NR 0.96%

2014E 0.93% NR 0.92% 0.81% NR 1.12%

2015E 1.01% NR 0.90% 0.84% NR 1.19%

Malaysia AMMB CIMB HLBB MayBank Public RHBC

2013 1.89% NR 1.88% 2.22% 2.14% NR

2014E 2.02% NR 2.11% 1.94% 2.02% NR

2015E 2.09% NR 2.04% 1.86% 2.09% NR

Philippines MBT BDO BPI PNB SECB

2013 2.86% 2.24% 2.80% 1.74% 2.00%

2014E 1.79% 1.69% 2.31% 1.37% 1.73%

2015E 1.64% 1.48% 2.39% 1.49% 1.69%

Korea

0.73%

0.84%

0.90%

Malaysia

2.09%

1.99%

2.03%

Philippines

2.44%

1.81%

1.72%

Singapore DBS UOB

2013 1.62% 1.95%

2014E 1.68% 1.72%

2015E 1.71% 1.63%

Taiwan Cathay Chinatrust Fubon Sinopac Taishin Mega First ESun

2013 2.40% 1.65% 2.70% 1.32% 1.50% 1.07% 1.50% 0.86%

2014E 3.69% 3.00% 3.57% 1.49% 1.40% 1.31% 1.40% 0.97%

2015E 6.12% 2.10% 3.44% 1.60% 1.41% 2.70% 1.41% 2.18%

Singapore

1.80%

1.78%

1.71%

Taiwan

1.51%

1.90%

1.74%

Thailand BAY BBL Kbank KK KTB TCAP SCB TISCO TMB Thailand

2013 1.68% 1.91% 2.74% 1.95% 2.06% 1.20% 2.78% 2.27% 1.27% 2.31%

2014E 1.83% 1.92% 2.87% 1.69% 1.82% 0.72% 2.86% 2.26% 1.64% 2.28%

2015E 1.96% 1.94% 2.94% 1.66% 1.83% 0.69% 2.92% 2.17% 1.76% 2.34%

Source: Company, J.P. Morgan estimates

77

Josh Klaczek (852) 2800-8534 [email protected]

Asia Pacific Equity Research 31 August 2014

Companies Discussed in This Report (all prices in this report as of market close on 29 August 2014) DGB Financial Group (139130.KS/W17700/Overweight), Industrial Bank of Korea (024110.KS/W17600/Overweight), KB Financial Group (105560.KS/W41550/Neutral), SK hynix (000660.KS/W45400/Overweight), Shinhan Financial Group (055550.KS/W52500/Overweight) Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or intervention.

Important Disclosures



Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Industrial Bank of Korea within the past 12 months.



Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: SK hynix, KB Financial Group, Industrial Bank of Korea.



Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: KB Financial Group, Industrial Bank of Korea.



Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: KB Financial Group, Industrial Bank of Korea.



Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: KB Financial Group, Industrial Bank of Korea.



Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking KB Financial Group, Industrial Bank of Korea.



Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from KB Financial Group, Industrial Bank of Korea.



Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from KB Financial Group, Industrial Bank of Korea.



“J.P. Morgan Securities (Far East) Limited, Seoul Branch (“J.P. Morgan”) is acting as a Joint Bookrunner on secondary placement in Industrial Bank of Korea (“IBK”) as announced on 17 Jul 2014. J.P. Morgan will be receiving fees for so acting. J.P. Morgan and its affiliates may perform, or may seek to perform, other financial or advisory services for IBK or its affiliates and may have other interests in or relationships with IBK or its affiliates, and receive fees, commissions or other compensation in such capacities. This research report and the information herein is not intended to serve as an endorsement of the proposed transaction or result in procurement, withholding or revocation of a proxy or any other action by a security holder. This report is based solely on publicly available information. No representation is made that it is accurate or complete.” Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan– covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing [email protected] with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail [email protected].

78

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Josh Klaczek (852) 2800-8534 [email protected]

Date

SK hynix (000660.KS, 000660 KS) Price Chart 86,424

UW W25,000 N W15,000 UW W8,000 N W19,000 N W25,000

N W19,000 N W25,000

OW W39,000

UW W28,000 N W23,000 N W18,000 N W8,000 UW W11,000 N W27,000

31250

28000

25-May-07 UW

29900

25000

28-Jul-07

UW

36350

28000

19-Oct-07

UW

26100

25000

21-Nov-07 N

23000

25000

02-Feb-08 N

25300

23000

26-Aug-08 N

20550

20000

18-Sep-08 N

18550

18000

08-Oct-08

N

15100

15000

31-Oct-08

N

10800

10000

8520

8000

N W22,000 N W26,000 N W22,000 N W31,000OW W56,000 17-Feb-09

UW

8210

8000

12-Jun-09

UW

12900

9000

25-Jul-09

UW

16350

11000

13-Oct-09

N

20600

19000

22-Jan-10

N

25950

22000

14-Apr-10

N

27900

27000

23-Jul-10

N

23600

25000

23-Sep-10 N

22100

23000

19-Jan-11

N

27650

25000

29-Apr-11

N

34350

28000

13-Jul-11

N

26450

22000

30-Sep-11 N

21850

19000

03-Feb-12 N

27300

23000

27-Apr-12

N

27050

26000

11-Jun-12

N

21750

25000

26-Jul-12

N

20400

23000

11-Oct-12

N

22900

22000

04-Apr-13

N

28900

26000

27-Jun-13

N

30650

31000

27-Sep-13 OW

30350

39000

03-Jan-14

OW

36300

45000

24-Apr-14

OW

40900

47000

04-Jun-14

OW

44650

56000

Date

Rating Share Price (W)

Price Target (W)

25-Jan-07

OW

16500

19500

19-Apr-07

N

16550

18000

19-Jul-07

N

18600

20500

OW W19,500 OW W18,500 22-Jan-08

N

14850

18000

21-Apr-08

N

15300

16400

23-Jul-08

N

12400

13000

22-Oct-08

N

7630

8500

10-Feb-09 N

7260

7000

28-Apr-09

N

8540

7700

02-Jul-09

N

12150

12500

14-Jul-09

OW

12250

16500

28-Oct-09

OW

16200

20000

29-Apr-10

OW

15000

19000

27-Oct-10

N

15900

15500

10-Feb-11 OW

17050

20000

01-May-11 OW

17650

22000

10-Aug-11 OW

15800

24000

06-Oct-11

12650

17000

57,616 UW UW W28,000 W25,000 N W25,000 N W20,000 N W10,000 UW W9,000 N W22,000 N W23,000 N W25,000 N W28,000N W23,000 N W23,000 N W26,000 OW OW W45,000 W47,000 43,212

28,808

14,404

0 Oct 06

Apr 08

Oct 09

Apr 11

Oct 12

Apr 14

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Feb 01, 2007.

DGB Financial Group (139130.KS, 139130 KS) Price Chart 34,223 N W20,500 N W13,000 N W12,500

OW W18,000 OW W15,000

NR

29,334 N W18,000 N W16,400

N W7,700

OW W22,000 OW W17,000 OW W17,000

24,445

OW W19,500 N W18,000N W8,500 N W7,000 OWOW W16,500 W20,000 OW W19,000 N W15,500 OW W20,000 OW W24,000 OW W18,500 OW W17,000 OW W17,500 OW W19,500 19,556 Price(W) 14,667 9,778 4,889 0 Oct 06

Apr 08

Oct 09

Price Target (W)

01-Feb-07 UW

22-Dec-08 N

72,020

Price(W)

Rating Share Price (W)

Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Sep 26, 2013 - Jan 22, 2014.

Oct 12

Apr 14

OW

79

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

KB Financial Group (105560.KS, 105560 KS) Price Chart

101,514

OW W60,000

87,012 72,510

Price(W)

OW W60,000

OW W54,000OW W61,000

OW W52,000

OW W70,000 OW W45,000

N W41,000 N W42,000 OW W72,000 OW W76,000 OW W62,000 OW W75,000 OW W80,000 OW W45,000 OW W49,000 OW W48,000 OW W44,000 OW W49,000 OW W45,000 N W36,000

58,008 43,506 29,004 14,502 0 Oct 08

Jul 09

Apr 10

Jan 11

Oct 11

Jul 12

Apr 13

Jan 14

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 31, 2008.

Shinhan Financial Group (055550.KS, 055550 KS) Price Chart 103,544 OW W32,000 OW W50,000

OW W50,000 OW W49,000

88,752 OW W70,000 OW W41,000 OW W44,000 OW W60,000 OW W60,000 OW W50,000

NR

73,960 OW W65,000 OWOW W70,000 OW W75,000 W65,000 OW W62,000 N W32,000 OWOW W60,000 W62,000 OW W65,000 OW W65,000 OW W70,000OW W46,000 OW W55,000 OW W54,000 59,168 Price(W) 44,376 29,584 14,792 0 Oct 06

Apr 08

Oct 09

Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Sep 26, 2013 - Jan 22, 2014.

80

Oct 12

Apr 14

01-Nov-11 OW

14000

18000

13-Mar-12 OW

15700

18500

03-May-12 OW

13600

17000

02-Aug-12 OW

12950

15000

01-Nov-12 OW

13800

17000

10-May-13 OW

15150

17500

02-Aug-13 OW

16800

19500

26-Sep-13 NR

16450

--

22-Jan-14

OW

15900

19500

30-Apr-14

OW

15050

18500

Date

Rating Share Price (W)

Price Target (W)

31-Oct-08

N

31308

41000

03-May-09 N

44712

42000

13-Jul-09

OW

43685

54000

31-Jul-09

OW

53100

60000

30-Oct-09

OW

58800

72000

11-Feb-10 OW

51000

76000

08-Apr-10

OW

52300

61000

01-Aug-10 OW

52200

62000

16-Jan-11

OW

60900

75000

30-Jul-11

OW

52500

80000

13-Sep-11 OW

37250

70000

29-Oct-11

OW

43200

60000

13-Jan-12

OW

36150

45000

27-Apr-12

OW

40100

49000

28-Jul-12

OW

34500

45000

04-Oct-12

OW

38600

52000

26-Oct-12

OW

37000

48000

28-Apr-13

OW

35150

44000

25-Oct-13

OW

42000

49000

07-Feb-14 OW

37100

45000

09-Jun-14

N

34400

36000

Date

Rating Share Price Price Target (W) (W)

23-Jan-07

OW

46222

65000

21-Jun-07

OW

56304

70000

04-Oct-07

OW

60869

75000

15-Jan-08

OW

42941

65000

05-Mar-08 OW

47506

70000

31-Jul-08

OW

45081

62000

01-Nov-08 OW

29769

41000

04-Feb-09 OW

26202

32000

06-May-09 N

31700

32000

13-Jul-09

OW

34000

44000

30-Jul-09

OW

40300

50000

04-Nov-09 OW

46000

60000

18-Feb-10 OW

42600

62000

29-Jul-10

OW

49200

65000

15-Sep-10 OW

44500

60000

09-Feb-11 OW

50900

65000

04-Aug-11 OW

49500

70000

27-Oct-11

OW

45050

60000

13-Jan-12

OW

39400

50000

31-Jul-12

OW

35450

46000

04-Oct-12

OW

38000

50000

Asia Pacific Equity Research 31 August 2014

Josh Klaczek (852) 2800-8534 [email protected]

31-Oct-12

Industrial Bank of Korea (024110.KS, 024110 KS) Price Chart

49000

44350

55000

26-Sep-13 NR

44350

--

22-Jan-14

OW

43900

54000

Date

Rating Share Price Price Target (W) (W) 15350

16700

09-Nov-08 N

7660

7800

13-Feb-09 N

8110

7600

08-May-09 N

8940

7500

16-Jun-09

N

10100

11000

N W16,700 NN W7,500 W14,000 N W15,500 N W18,000 N W19,000 N W20,000 N W14,500 N W13,000 N W14,000 OW W16,500 14-Jul-09

N

11150

12500

31-Jul-09

N

14100

14000

01-Nov-09 N

14750

15000

12-Feb-10 N

13000

15500

28-Jul-10

N

16050

18000

28-Apr-11

N

19350

19000

07-Aug-11 N

16050

20000

06-Nov-11 N

14950

16000

18-Feb-12 N

13500

14500

02-Nov-12 N

12150

13000

01-May-13 N

12550

14000

05-Aug-13 N

11600

12000

30-Sep-13 NR

12100

--

09-Jun-14

13750

16500

N W7,600 N W12,500 N W7,800 N W11,000 N W15,000

28,410

NR N W16,000

N W12,000

Price(W) 17,046 11,364 5,682 0 Oct 06

37450

27-Aug-08 N 34,092

22,728

OW

20-Sep-13 OW

Apr 08

Oct 09

Apr 11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Sep 30, 2013 - Jun 09, 2014.

Oct 12

Apr 14

OW

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com. Coverage Universe: Klaczek, Josh A: Aozora Bank (8304) (8304.T), HSBC Holdings plc (0005.HK), Mitsubishi UFJ Financial Group (8306) (8306.T), Mizuho Financial Group (8411) (8411.T), Noah Holdings Ltd (NOAH), Resona Holdings (8308) (8308.T), Shinsei Bank (8303) (8303.T), Standard Chartered Plc (HK) (2888.HK), Sumitomo Mitsui Financial Group (8316) (8316.T), Sun Hung Kai & Co Ltd (0086.HK), Value Partners Group Limited (0806.HK)

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Asia Pacific Equity Research 31 August 2014

J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2014

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*

Overweight (buy) 45% 55% 46% 75%

Neutral (hold) 43% 49% 47% 66%

Underweight (sell) 11% 34% 7% 54%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected]. Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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