Banking Brilliance: Amid the ebb and flow of global interest rates and the looming specter of a potential economic downturn, astute investors are placing their bets on the banking sectors of India and Indonesia. These regions are seen as having the most robust loan and profitability profiles, positioning them for potential returns in the upcoming year.
Over the past 18 months, Asian central banks have mirrored the U.S. Federal Reserve’s tightening of monetary policy to combat inflation. However, their interest rate hikes were more measured, resulting in healthier interest income for the region’s banks without compromising loan growth. This strategic approach has propelled banking indexes in India, Indonesia, and Thailand to outperform broader indices since March 2022 when the Fed initiated rate hikes.
Now, as the global rates cycle peaks and concerns about a potential recession arise, investors are becoming more selective. They are honing in on banks that effectively managed funding costs while expanding loan portfolios. The anticipation is that a mild rate-cutting cycle in the next year could spur loan growth, making the financial sector in Asia an attractive prospect.
Frederic Neumann, Chief Asia Economist at HSBC, highlights India as a promising contender. Indian banks have exhibited double-digit loan growth in recent months, driven by increasing credit demand in the world’s most populous yet under-banked nation. Projections indicate that loan growth across Asian banks is set to rise from 4.5% this year to an impressive 10% next year, with India and Indonesia leading the pack at 15% and 11%, respectively.
J.P. Morgan analysts note that Asian banks, excluding China, have been at the forefront of the global demand for aggregate loans. Their interest margins, standing at 2.4% in 2022, are already at pre-pandemic levels. Xin-Yao Ng, Investment Manager of Asian Equities at abrdn, emphasizes that the era of easy gains from rising borrowing costs is waning, prompting a more discerning investment approach.
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Ng favors banks in India and Indonesia, citing the better economic growth in these regions and the ability of banks to sustain margins. According to LSEG data, profits at banks in India and Indonesia are expected to grow by 13% and 11% next year, nearly double the 6% average rise across Asia-Pacific banks.
However, rich valuations present a potential risk for investors. Banks such as HDFC, ICICI, Axis Bank in India, and Bank Central Asia in Indonesia trade at elevated price-to-book ratios, signaling a cautious approach. Additionally, both India and Indonesia face elections next year, introducing an element of potential market volatility.
In contrast, more mature financial sectors in Singapore, Hong Kong, and South Korea, coupled with low-interest rates, limit the scope for banks to navigate and capitalize on market dynamics. Profit growth expectations are lower in these developed markets, with Australian banks estimated to see a 5% drop in profit in 2024, while Singaporean banks are projected to experience flat profits, and South Korean banks anticipate a 4% growth.
As the banking sector navigates the complexities of a changing global landscape, the nuanced strategy of selectively investing in resilient performers in dynamic economies emerges as a prevailing theme for investors seeking returns in the coming year.
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