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Summary of Asia Financials Strategy: Rising Rates to Aid Earnings

Core Content

The Asia Financials Strategy highlights the positive impact of rising interest rates on bank earnings across the Asia-Pacific (APAC) region. The analysis suggests that as central banks in Asia begin to raise rates, the earnings of banks are expected to improve due to the positive correlation between bank earnings and interest rates.

Main Points

• Rate Expectations are Rising: The Fed is expected to start raising rates earlier than previously anticipated, with the first hike in March. Asian rates are following this trend, though the inflationary pressures are relatively contained, leading to more measured policy responses. The projected rate hikes across APAC markets are estimated at 30-120 bp over the next two years, with the largest increases in Singapore, Hong Kong, Australia, India, and Indonesia.

• Yield Premiums and Currency Resilience: Asian ten-year yields are already at a premium of 180-480 bp compared to the US ten-year yield. Countries like India and Indonesia, with strong forex reserves and improved external accounts, are expected to maintain resilient currencies even amid Fed rate hikes.

• China's Monetary Policy: China is expected to see monetary easing due to its positive real rates, which could affect its bank earnings differently compared to other regions.

• Earnings Correlation with Rates: Bank earnings in most APAC countries (excluding Korea) are positively correlated with interest rates. A 50 bp rate hike is projected to increase net interest margins (NIMs) by ~7-18 bp and earnings by ~4-17%. This is attributed to the quicker repricing of assets compared to liabilities, especially for banks with a high share of CASA (Current and Savings Accounts).

• Market Sensitivity and Earnings Outlook: Markets such as Australia, Singapore, and Korea show the strongest correlation with Fed rate hikes, but their earnings sensitivity is also high. In contrast, India and Indonesia are highlighted for their strong earnings outlook, with expectations of 25-30% EPS growth in FY22E due to recovery in loan demand and improved credit costs. These are considered the preferred markets.

• Preferred Banks: In rate-sensitive markets, DBS (Singapore) and KB Financial (Korea) are preferred. In the preferred markets, ICICI and SBI (India), BMRI (Indonesia), and BPI (Philippines) are top picks.

Key Information

• Rate Hike Impact on Earnings: A 50 bp rate hike is expected to raise NIMs by ~7-18 bp and earnings by ~4-17%.
• Earnings Outlook: India and Indonesia are expected to see the highest earnings growth in FY22E, driven by loan demand recovery and reduced credit costs.
• CASA Deposits: Banks with a higher proportion of CASA deposits are better positioned to manage funding costs in a rising rate environment.
• Regional Performance in Previous Cycles: APAC banks have generally outperformed in previous rate hike cycles, with exceptions in certain markets like Taiwan and Australia.
• Valuation and Performance: The table highlights the EPS growth, P/E, ROE, and price performance of banks in different countries, with India and Indonesia showing the strongest growth.

Figures and Data Highlights

• Figure 1: Rate increase expected across Asia; bank earnings positively linked to rate.
• Figure 2: Asia banks: IEA composition (%).
• Figure 3: Asia banks: IBL composition (%).
• Figure 4: MSCI APAC banks have highest correlation to US 10Y bond yields.
• Figure 5: EPS growth outlook strongest for IN and ID, led by pick-up in growth and lower credit costs.
• Figure 6: APAC valuations snapshot and most-/least-preferred stocks.
• Figure 7: CS expects earlier start to a quarterly hike cycle.
• Figure 8: Consensus is also now predicting early hikes.
• Figure 9: APAC central banks are unwinding policy stance, with total expected rate hikes of 10-60 bp in FY22 and another 10-80 bp in FY23.
• Figure 10: FY22E policy rate: Pace of tightening accelerated by 5-25 bp.
• Figure 11: CS house view on FY22E hikes is broadly in line with consensus.
• Figure 12: South Asia yields (ex-TH) are trading 180-480 bp premium to US 10Y.
• Figure 13: Inflation has picked up across markets, save for CN, ID, and PH.
• Figure 14: Real policy rates (calculated using CPI) are negative across markets, except in CN, ID, and VN.
• Figure 15: Fed hikes are positive for Asia.
• Figure 16: MSCI APAC banks have highest correlation to US 10Y bond yields.
• Figure 17: Developed market yields are anchored to US rates.
• Figure 18: Cumulative rate hike expectations high in IN, SG, PH, ID, AU, and KR.
• Figure 19: Two rate hike cycles in past 2 decades in FY04-06 and FY17-19.
• Figure 20: In Cycle 1—APAC banks have been largely unaffected except TW.
• Figure 21: In Cycle 2—banks saw strong outperformance in South Asia (ex-TH), SG, and TW.
• Figure 22: In Cycle 1—banks saw in-line or outperformance in most markets, except TW, HK, AU, SG.
• Figure 23: In Cycle 2—banks saw strong outperformance in South Asia (ex-TH), SG, and TW.
• Figure 24: KR: 3M interbank v bank NIMs.
• Figure 25: IN: 3M interbank vs bank NIMs.
• Figure 26: Asia banks: IEA composition (%).
• Figure 27: Asia banks: IBL composition (%).
• Figure 28: Asia banks: IEA repricing profile (%).
• Figure 29: Asia banks: IBL repricing profile (%).
• Figure 30: Net repricing gap of Asian banks in 3, 6, and 12 months, excluding CASA deposits.
• Figure 31: Interest earning assets (IEA) repriced in <12 months for individual banks.
• Figure 32: Average CASA ratio for individual banks (%).
• Figure 33: Most and least rate-sensitive banks in each Asian country.
• Figure 34: Change in NIM for every 50 bp increase in rates (bp).
• Figure 35: Impact on net profit for every 50 bp increase in rates (%).
• Figure 36: NIM impact of a 50 bp policy rate-hike on select banks.

Conclusion

Overall, the Asia Financials Strategy indicates that rising interest rates are expected to positively impact bank earnings, with a particular focus on the performance of banks in India and Indonesia. The analysis also emphasizes the importance of CASA deposits and the quicker repricing of assets over liabilities in a rate-hike environment. While developed economies like Australia, Singapore, and Korea are more sensitive to rate changes, the preferred markets for investment are those with the strongest earnings growth outlook.