Pan-Asia Banks 2H16Road Ahead:Five Bank Stock Ideas for the Post-Brexit World

Buys: Axis, BBNI, SCB, ANZ, BoCHK — As “risk-off” volatility starts to settle, ourpost-Brexit fundamental views consider: [1] Likely GDP downgrades for UK/EU +global rates likely lower for longer, yield curves flattening; [2] Into 2017, marketsmay price an earnings uplift from credit costs peaking, notably for India, Indonesia &Thailand. Thus we prefer EM domestic-driven banks. DM banks are relative losersoverall (especially on NIMs), but there are still stock-specific restructuring plays.

    Axis Bank (AXBK.BO): quality retail franchise — Unlike peers that face assetquality challenges, Axis continues to deliver well on growth (18-20%) despite NPLuptick. While we expect continued slippages (~60% of watch-list), we believechallenges are well recognized & credit costs should remain in guided 125-150bps.

    Axis differentiated itself by building a quality retail asset franchise (40% of loans),leveraging its leading liabilities platform. We see 16-17% ROEs ahead, decent inthe current environment, and benchmark stock at +1SD from mean (2.25x P/B).

    BBNI (BBNI.JK): downside looks priced in — Indonesian banks have suffered aYTD PER and P/B de-rating on slowing loan growth (Apr-16 +8.6%), elevated NPLformation and credit costs, and monetary policy uncertainty. ROAs of large banksare down 55-90bps from peak. We view BBNI has priced in downside risks at 1.1xP/B vs. 13.4% ROE. Global monetary easing gives BI room to cut domestic rates tolift credit growth with less risk to IDR or liquidity; tax amnesty may lift govt. spend.

    Siam Commercial Bank (SCB.BK): stabilizing asset quality — We prefer SCBamong Thai banks given retail asset quality plateauing and economic indicatorsfarm income, manufacturing, car sales) picking up. Proactive NPL mgmt. hashelped LLR coverage recover to 122%, after dipping to 100% in 3Q15. Discussionon new strategic partner in life insurance business could reinvigorate slowdown inFYP seen in past few quarters