Dark Clouds on the Horizon

1
Dark Clouds on the Horizon?
Asia-Pacific Banking Outlook 2006

• Ping CHEW
• Director and Team Leader, Asia
• Sovereign, International Public Finance
  Financial Services Ratings

2
Agenda

• Global Economic Outlook
• Asia Pacific Banking
• Greater China Banking
• China Top 50 Banks
• South South East Asia Banking

3
Macroeconomic Scenario

• Growth for Asian economies likely to remain
  strong in 2006, despite slight easing from 2005.
• Global macroeconomic conditions, including
  growth, liquidity, and interest rates, are still
  favorable for the regions economies.
• US economy is still robust, while Japan and
  Europes modest recovery is helping Asias export
  growth. China and India should see continued
  strong growth, led by investment and consumption.
• Inflationary pressures persist, with oil prices
  only moderating from record highs.
• Global liquidity, while still ample, is
  tightening.
• Asian central banks catching up with US Feds, and
  pace of interest-rate hikes could quicken in
  2006.
• Corporate restructuring - partly in response to
  Chinese competition across Asia has streamlined
  operations and increased capacity utilization.
• Rising interest rates have had greater impact on
  consumers than on businesses due partly to strong
  corporate earnings.
• Corporate indebtedness generally low to modest
  (except for Philippines and Indonesia).

4
Global Consolidation
Real GDP Growth,
USA
Japan
Eurozone
change
Asias real GDP
Asias Consumer Price Index
p Preliminary, f Forecast Source SP
unweighted averages, excluding Pacific countries
5
Other Baseline Forecasts
Feb 10 Fed Rate 4.5 Crude Oil US62.60 bbl
EUR-USD 1.20 USD-JPY 118.84
chg
Fed Rate, 4.75
Fed Rate ()
Crude Oil US65.86 bbl
EUR-US, 1.23
US-JPY, 118.85
As of week ended Feb 10, 2006 Source SP
6
Asias Risk Factors

• Medium-term credit outlook linked to resolution
  of economic, financial imbalances in the U.S.
  Driven by 6 of GDP U.S. current account deficit
• Unprecedented, unsustainable situation,
  resolvable by either
• Gradual fiscal monetary tightening in U.S.,
  moderately weaker dollar, or
• A rapid dollar decline or interest rate increase
  that delivers a major global economic/financial
  shock
• Policy/political risk - Trade Protectionism
• Key risks for Asia
• Weakening US consumer demand (housing market
  correction)
• Avian flu
• Supply-induced oil-price shocks
• Most immediate uncertainty is inflation and
  corresponding monetary policy
• Monetary policy responses will have an impact on
  longer-term growth
• Strong credit growth and large capital inflows in
  some economies can complicate policy management
• Negative real rates still prevalent in some
  economies.
• Close look at the state of Asian banking systems
  would provide better assessment of their
  vulnerability to these risks.

7
Economic and Industry Risk Scatter Diagram of
Risk Profiles
Economic Risk
Low
Moderate
Moderately High
High
Very High
Moderately Low
Australia
Low
New ZealandSingapore
Moderately Low
Hong Kong
Korea, Taiwan Malaysia Hong Kong
Moderate
Japan
Industry Risk
Korea Taiwan
Thailand India
Moderately High
Japan
Philippines Indonesia
High
China India
IndonesiaVietnam
Very High
China
8
Asia-Pacific Declining Impaired Assets
Source Standard Poors estimates based on
reported data on rated banks in the respective
systems
9
Asia Banks Credit Portfolio Vulnerability
10
Regional Overview BFSR Across Asia-Pacific
Ratings are as at Dec 28, 2005
11
Regional Overview Bank Ratings Across
Asia-Pacific
Ratings are as at Dec 28, 2005
12
China Banking SectorOverview

• Outlook Positive
• Sunny with occasional strong showers
• Improving but still a high risk banking market
• Robust economic growth
• Rapidly changing landscape
• Untested developing banking infrastructures and
  market mechanism

13
China Banking SectorRapidly Changing Landscape

• Sector-wide reforms
• System rehabilitation with financial
  restructuring, Regulatory strengthening,
  introduction of foreign stake
• An improving system but the road is long and
  bumpy
• Excluding government engineered NPL disposals,
  NPLs are increasing. However, the rate of
  increase is manageable for economy and government
• Special mention loans increasing
• Measures taken to cool down certain economic
  sectors
• Tightening application of loan classifications
• A polarizing industry ripe for consolidation
• Role of government in Shaping Chinese Banks
• Mixed influence supportive and interfering roles
  
• Future of China banks rests in how government
  define its own role
• Progress in banking sector likely, but uneven

14
Key trends and observations

• Key trends
• Improving financial profile, control and
  performance
• But many banks are still in early stage of reform
• Polarization
• Timing of government support will further
  increase the gap
• Consolidation
• Pull and push
• Observations
• Next 5 years would be critical
• Turn windfall into sustainable profitability
• Smaller institutions need to find a niche
• Moral hazards remains a concern

15
China Banking Sector

• Foreign banks a closer look at entry
  strategies
• Organic growth
• Acquisition of a minority stake in domestic bank
• Establishment of strategic partnership by
  business lines
• Domestic consolidation and foreign ownership
• Central government and local government will
  encourage consolidation, especially among second-
  and third- tier banks
• Foreign banks might be catalyst

16
China Banking Sector

• Growth and Patience needed,
• But Persistent Reform is Key

17
China BankingPerformance Asset Quality

• A closer look reported NPL ratio
• Factoring in the dilution effect of loan growth
• The downward trend is an indication of
  improvement in underwriting ability and financial
  discipline
• But there is plenty of room for improvement

18
Peer comparison grouping
Bank of Communications is grouped under sub-group
1. reformed mega banks
19
Peer ComparisonBig Picture View
National banks
City commercial banks
Mega banks
20
Peer comparisonBusiness Profile

• Mega banks
• Low funding cost,
• Large customer base
• Listed national banks
• More flexible
• Smaller legacy burden
• Bond market development may have a bigger effect
• City commercial banks
• Weak franchise (nationwide)
• Limited customer base

21
Hong Kong Banking Outlook 2006

• Nice weather nicer for some
• Sound fundamentals and strong regulatory regime.
• Counterbalanced by saturated market and keen
  competition among domestic peers
• Increasing exposure to mainland China
• Polarization
• Business diversification
• Income source diversification
• Geographical diversification
• Scale matters - Consolidation, MA

22
South-SE Asia Banking Sectors Light Showers
Expected

• Asset quality improving
• Move towards a more diversified earnings base
• Improved growth fundamentals
• More emphasis on risk management systems
• Consolidation

23
Asia Pacific Banking Outlook 2006

• Scattered
• Light
• Shower

24
(No Transcript)