Asian bank shares: The new alchemists of finance?

I grew up in a world where the smart money viewed Asia as a growth warrant on the world economy, where we were all obsessed by exporters like Samsung Electronics, Sony and Infosys for performance ... Yet in the post-9/11 world, I became a serious student of Asian banks and brokers.

By Money Maze By Matein Khalid

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Published: Mon 28 Nov 2005, 9:44 AM

Last updated: Thu 2 Apr 2015, 5:28 PM

After all, huge trade surpluses, undervalued currencies, negative real interest rates, oligopolistic banking markets, the virtuous macroeconomic cycles to structural evolution of such high growth opportunities as home mortgages, credit cards, stock brokerage and asset securitization and, above all, the exponential scale of wealth creation makes Asian financial shares an absolute strategic winner in the short, medium and even (yes, we are all dead!) long term.

There are now more dollar millionaires in China than the entire population of Toronto. China's savings rate is an incredible 45 per cent (the US rate is zero) and Chinese private investors control almost $2 trillion in Yuan deposits, one of the worlds great pools of private liquidity.

The crème de la crème of Wall Street - Goldman Sachs, American Express, ING, HSBC, Stan Chart, Citigroup - have scrambled to buy stakes in Chinese banks. The $8 billion IPO of China Construction Bank, lead managed by Morgan Stanley, was the biggest new issue on the planet since Kraft Foods four years ago.

It is no surprise that global banking boardrooms are agog with rumours that J.P.Morgan Chase has formed a consortium with Abu Dhabi's ADIA and Kuwait's KIO to take a $3 billion stake in a Big Four Chinese bank. And why not? China and the Gulf states are destined to become epic trading partners, as they were seven hundred years ago when Chinese silk and porcelain flooded the souks of Baghdad, where the bills of exchange and money orders of the Abbasid empire's merchant elite (seks, the roots of the English word "cheque") circulated in the port of Canton.

Besides, my romance with recreating Ibn Batuta's cross-civilisation economic linkages aside, Bank of America invested in a pre-IPO private placement in CCB and made a cool billion dollars when its shares were listed in New York and London.

I cannot think of a more attractive pipeline of pre-IPO and private equity deals anywhere in the world than Mainland China and bank shares are unquestionably a part of the value proposition Asian financial market in my book.

South Korea's bank shares have been such incredible winners in 2005, the local bank index up almost double the KOPSI's 35 per cent rise. South Korean banks restructured, consolidated and deleveraged, slashed their exposure to the chaebol (conglomerates) that bought Korea, Inc to the brink of ruin during the Asian financial meltdown in 1997-98.

Yet South Korea's banking renaissance would have been impossible without merger instigated by foreign banks and private equity firms. It is no coincidence that the four leading South Korean banks - Kookmin, Hana, Shinhan Financial, Woori - all have strategic international shareholders. Stan Chart's forked out $3.3 billion to win Korea First, Citi bought Koram, Goldman Sachs has a 9 per cent stake in Kookmin and Hana.

The South Korean example is a classic example of the role of foreign capital and management experience in restructuring banking systems crippled by asset deflation, capital market panics and a poor credit culture. This is a lesson I predict banks in the overleveraged, go-go dark alleys of the Third World (sorry, emerging markets) will have to learn the hard way.

So who is going to be the next merger target in South Korean banking? I am pretty sure Korea Exchange Bank is the most attractive target in Seoul for any international bank seeking a strategic franchise or a local bank, Kookmin or Hana, wanting to build up economies of scale. Why? One, Korea Exchange is owned 50per cent by the private equity firm Lone Star, 14 per cent by Commerzbank.

These opportunistic shareholders will sell if the bid is high enough. Two, Korea Exchange shares are up 30 per cent in the past two months on higher volumes. My contacts in Hong Kong tell me a deal bid may well be brewing somewhere in the world.

Who would be my call to make a cash majority stake bid for Korea Exchange Bank? Naturally, HSBC, the global bank, which is currently hero, number zero in South Korea.

Sir John Bond has amassed 14 billion free cash flow and will either do deals or accelerate his share buybacks.

That much, at least is certain. Korea Exchange would be an ideal strategic prize for HSBC, after all. Its return on equity is an incredible 40 per cent so the deal could well be accretive to HSBC earnings on day one.

A merger bid will increase concentration, boost margins and NII spreads, even help asset quality. Sir John Bond has $14 billion, a licence to bid and he can well own Korea Exchange Bank stirred, not shaken.

ICICI bank has been an epic investment story for me. I am privileged to know Ms. Kalpana Morperia, the strategist behind the most successful South Asian banking growth story in the world. (as well as her lieutenants Nimesh and Parag in the ICICI office on Bank Street!). ICICI shares have, of course, doubled since I last wrote about them in this column two years ago from Bombay. The bank's New York ADR has risen fivefold since its IPO.

My persistent recommendations to buy Citigroup at 43, Goldman Sachs at 105 and Merrill Lynch at 54 in successive columns has been vindicated as all three have broken out despite a yield curve from Dante's Inferno and no end in the Fed tightening cycle.

This means financials have offered sector leadership to the stealth bull market that, I believe, offers all kind of opportunities to make money on money centre banks, regionals, deal bait, asset managers and insurance companies on Wall Street.

Bank of America, for example, is the cheapest growth megabank around. In Singapore, the Development Bank of Singapore is a winner now that it will not buy a bank in Guandong, China .

I feel 10 times earnings and 1.4 times book is a cheap price to pay for the best loan growth and asset reflation play in the Lion City with a culture of management excellence that would have made old Sir Stamford Raffles turn cartwheels with joy in his grave.

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