Q4 2010
www.businessmonitor.com
COMMERCIAL BANKING REPORT
ISSN 1758-454X
Published by Business Monitor International Ltd.
VIETNAM
INCLUDES 5-YEAR FORECASTS TO 2014
Business Monitor International
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DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of
publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor
International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the
publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as
to the accuracy or completeness of any information hereto contained.




VIETNAM COMMERCIAL
BANKING REPORT Q4 2010
INCLUDING 5-YEAR INDUSTRY FORECASTS TO 2014


Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: September 2010



Business Monitor International
Mermaid House,
2 Puddle Dock,
London, EC4V 3DS,
UK
Tel: +44 (0) 20 7248 0468
Fax: +44 (0) 20 7248 0467
Email:

Web:



© 2010 Business Monitor International.
All rights reserved.

All information contained in this publication is
copyrighted in the name of Business Monitor
International, and as such no part of this publication
may be reproduced, repackaged, redistributed, resold in
whole or in any part, or used in any form or by any
means graphic, electronic or mechanical, including
photocopying, recording, taping, or by information
storage or retrieval, or by any other means, without the
express written consent of the publisher.

DISCLAIMER
All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of
publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor
International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the
publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as
to the accuracy or completeness of any information hereto contained.




VIETNAM COMMERCIAL
BANKING REPORT Q4 2010
INCLUDING 5-YEAR INDUSTRY FORECASTS TO 2014



Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: September 2010



Vietnam Commercial Banking Report Q4 2010



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Vietnam Commercial Banking Report Q4 2010



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CONTENTS
Executive Summary 5
Table: Levels (VNDbn) 5
Table: Levels (US$bn) 5
Table: Levels At August 2009 5
Table: Annual Growth Rate Projections 2010-2014 (%) 5
Table: Ranking Out Of 59 Countries Reviewed In 2010 6
Table: Projected Levels (VNDbn) 6
Table: Projected Levels (US$bn) 6
SWOT Analysis 7
Vietnam Commercial Banking SWOT 7
Vietnam Political SWOT 8

Vietnam Economic SWOT 9
Vietnam Business Environment SWOT 10
Business Environment Outlook 11
Commercial Banking Business Environment Ratings 11
Table: Vietnam Commercial Banking Business Environment Rating 11
Commercial Banking Business Environment Rating Methodology 11
Table: Asia Commercial Banking Business Environment Ratings 13
Global Commercial Banking Outlook 14
Asia Banking Sector Outlook 19
Table: Banks’ Bond Portfolios 24
Table: Asia Commercial Banking Business Environment Ratings 25
Table: Comparison Of Loan/Deposit, Loan/Asset & Loan/GDP Ratios 26
Table: Anticipated Developments In 2010 27
Table: Comparison Of Total Assets, Client Loans & Client Deposits, 2008-2009 (US$bn) 28
Table: Comparison Of Per Capita Deposits, 2010 (US$) 29
Table: Interbank Rates & Bond Yields 30
Vietnam Banking Sector Outlook 31
Economic Outlook 34
Table: Vietnam Economic Activity, 2007-2014 35
Competitive Landscape 36
Market Structure 36
Protagonists 36
Table: Protagonists In Vietnam’s Commercial Banking Sector 36
Definition Of The Commercial Banking Universe 36
List Of Banks 37
Table: Financial Institutions In Vietnam 37
Company Profiles 40
Vietcombank 40
Table: Key Statistics For Vietcombank, 2004-2008 (VNDmn) 41
BIDV 42

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Table: Key Statistics For BIDV, 2004-2006 (VNDmn) 43
VietinBank 44
Table: Key Statistics For VietinBank, 2005-2008 (VNDmn) 45
Agribank 46
Table: Balance Sheet (VNDmn, unless stated) 47
Table: Balance Sheet (US$mn, unless stated) 47
Table: Key Ratios (%) 47
MHB Bank 48
Table: Key Statistics For MHB Bank, 2006-2008 (VNDmn) 49
Habubank 50
Table: Key Statistics For Habubank, 2004-2007 (VNDmn) 51
Eximbank 52
Table: Balance Sheet (VNDmn, unless stated) 53
Table: Balance Sheet (US$mn, unless stated) 53
Table: Key Ratios (%) 53
Sacombank 54
Table: Stock Market Indicators 55
Table: Balance Sheet (VNDmn, unless stated) 55
Table: Balance Sheet (US$mn, unless stated) 56
Table: Key Ratios (%) 56
Saigonbank 57
Table: Stock Market Indicators 57
Table: Balance Sheet (VNDmn, unless stated) 58
Table: Balance Sheet (US$mn, unless stated) 58
Table: Key Ratios (%) 58

SeABank 59
Table: Balance Sheet (VNDmn, unless stated) 59
Table: Balance Sheet (US$mn, unless stated) 60
Table: Key Ratios (%) 60
BMI Banking Sector Methodology 61
Commercial Bank Business Environment Rating 62
Table: Commercial Banking Business Environment Indicators And Rationale 63
Table: Weighting Of Indicators 64

















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Executive Summary
Table: Levels (VNDbn)
Date
Total
Assets
Client
Loans
Bond
Portfolio Other
Liabilities&
Capital Capital
Client
Deposits Other
August 2008 1,659,548.7 1,259,980.0 149,816.7 249,752.0 1,659,548.7 217,173.0 1,205,967.7 236,408.0
August 2009 2,065,761.6 1,706,340.0 173,358.3 186,063.3 2,065,761.6 286,547.0 1,594,992.6 184,222.0
Change, % 24% 35% 16% -26% 24% 32% 32% -22%
Source: BMI, SBV, regulators

Table: Levels (US$bn)
Date
Total
Assets
Client
Loans
Bond
Portfolio Other
Liabilities
& Capital Capital
Client
Deposits Other

August 2008 100.4 76.2 9.1 15.1 100.4 13.1 73.0 14.3
August 2009 116.0 95.8 9.7331 10.4 116.0 16.1 89.6 10.3
Change, % 15% 26% 7% -31% 15% 22% 23% -28%
Source: BMI, SBV, regulators

Table: Levels At August 2009
Loan/Deposit Ratio Loan/Asset Ratio Loan/GDP Ratio
GDP Per Capita,
US$
Deposits Per
Capita, US$
106.98% 82.60% 107.32% 1,058 1,030
Rising Falling Rising
Source: BMI, SBV, regulators

Table: Annual Growth Rate Projections 2010-2014 (%)
Assets Loans Deposits
Annual Growth Rate 24 24 14
CAGR 25 25 13
Ranking 1 1 14
Source: BMI, SBV, regulators

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Table: Ranking Out Of 59 Countries Reviewed In 2010
Loan/Deposit Ratio Loan/Asset Ratio Loan/GDP Ratio
5 2 10

Local Currency Asset Growth Local Currency Loan Growth

Local Currency Deposit Growth
1 1 13
Source: BMI, SBV, regulators

Table: Projected Levels (VNDbn)
2007 2008 2009e 2010f 2011f 2012f 2013f 2014f
Total
Assets
1,410,221.40 1,747,335.40 2,411,322.85 2,893,587.42 3,472,304.91 4,236,211.99 5,252,902.86 6,566,128.58
Client
Loans
1,067,730.00 1,339,260.00 1,848,178.80 2,217,814.56 2,661,377.47 3,246,880.52 4,026,131.84 5,032,664.80
Client
Deposits
1,100,392.90 1,341,142.80 1,528,902.79 1,697,082.10 1,917,702.77 2,186,181.16 2,492,246.52 2,841,161.04
e/f = BMI estimate/forecast. Source: BMI, SBV, regulators

Table: Projected Levels (US$bn)
2007 2008 2009e 2010f 2011f 2012f 2013f 2014f
Total
Assets 88.04 99.96 130.56 148.39 173.62 211.81 269.38 345.59
Client
Loans
66.66 76.62 100.07 113.73 133.07 162.34 206.47 264.88
Client
Deposits
68.70 76.72 82.78 87.03 95.89 109.31 127.81 149.53
e/f = BMI estimate/forecast. Source: BMI, SBV, regulators

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SWOT Analysis
Vietnam Commercial Banking SWOT
Strengths
! Rapid growth.
! Untapped potential.
! The high savings rate of Vietnamese households.
! Increasingly open to foreign banks since accession to the WTO in 2007.
! The role of state-owned banks is steadily decreasing.

Weaknesses
! Domestic banks lack the capital and technology to sustain high credit growth.
! The financial accounts of many banks are still opaque.
! High exposure to real estate and stock market loans among smaller banks.

Opportunities
! The population is still under-banked.
! Income levels are likely to rise strongly over the medium term.

Threats
! The National Congress of the Communist Party of Vietnam in January 2011 could
result in a shift of economic policy away from further liberalisation.
































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Vietnam Political SWOT
Strengths
! The Communist Party government appears committed to market-oriented
reforms, although specific economic policies will undoubtedly be discussed at
the 2011 National Congress. The one-party system is generally conducive to
short-term political stability.
! Relations with the US are generally improving, and Washington sees Hanoi as a
potential geopolitical ally in South East Asia.

Weaknesses
! Corruption among government officials poses a major threat to the legitimacy of
the ruling Communist Party.
! There is increasing (albeit still limited) public dissatisfaction with the leadership’s
tight control over political dissent.

Opportunities
! The government recognises the threat that corruption poses to its legitimacy,
and has acted to clamp down on graft among party officials.
! Vietnam has allowed legislators to become more vocal in criticising government
policies. This is opening up opportunities for more checks and balances within
the one-party system.

Threats
! The slowdown in growth in 2009 and 2010 is likely to weigh on public
acceptance of the one-party system, and street demonstrations to protest
economic conditions could develop into a full-on challenge of undemocractic
rule.
! Although strong domestic control will ensure little change to Vietnam’s political

scene in the next few years, over the longer term, the one-party-state will
probably be unsustainable.
! Relations with China have deteriorated over the past year due to Beijing’s more
assertive stance over disputed islands in the South China Sea and domestic
criticism of a large Chinese investment into a bauxite mining project in the
central highlands, which could potentially cause large environmental damage.




















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Vietnam Economic SWOT
Strengths
! Vietnam has been one of the fastest growing economies in Asia in recent years,
with GDP growth averaging 7.6% annually between 2000 and 2009.
! The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 20% in 2004.

Weaknesses
! Vietnam still suffers from substantial trade, current account and fiscal deficits,
leaving the economy vulnerable as the global economy continues to suffer in
2010. The fiscal picture is clouded by considerable ‘off-the-books’ spending.
! The heavily-managed and weak dong currency reduces incentives to improve
quality of exports, and also serves to keep import costs high, thus contributing
to inflationary pressures.

Opportunities
! WTO membership has given Vietnam access to both foreign markets and
capital, while making Vietnamese enterprises stronger through increased
competition.
! The government will in spite of the current macroeconomic woes, continue to
move forward with market reforms, including privatisation of state-owned
enterprises, and liberalising the banking sector.
! Urbanisation will continue to be a long-term growth driver. The UN forecasts the
urban population to rise from 29% of the population to more than 50% by the
early 2040s.

Threats
! Inflation and deficit concerns have caused some investors to re-assess their
hitherto upbeat view of Vietnam. If the government focuses too much on

stimulating growth and fails to root out inflationary pressure, it risks prolonging
macroeconomic instability, which could lead to a potential crisis.
! Prolonged macroeconomic instability could prompt the authorities to put reforms
on hold, as they struggle to stabilise the economy.























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Vietnam Business Environment SWOT
Strengths
! Vietnam has a large, skilled and low-cost workforce that has made the country
attractive to foreign investors.
! Vietnam’s location – its proximity to China and South East Asia, and its good
sea links – makes it a good base for foreign companies to export to the rest of
Asia, and beyond.

Weaknesses
! Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate
to cope with the country’s economic growth and links with the outside world.
! Vietnam remains one of the world’s most corrupt countries. Its score in
Transparency International’s 2009 Corruption Perceptions Index was just 2.7,
placing it 22
nd
in the Asia-Pacific region.

Opportunities
! Vietnam is increasingly attracting investment from key Asian economies, such
as Japan, South Korea and Taiwan. This offers the possibility of the transfer of
high-tech skills and knowhow.
! Vietnam is pressing ahead with the privatisation of state-owned enterprises and
the liberalisation of the banking sector. This should offer foreign investors new
entry points.

Threats
! Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.

! Labour unrest remains a lingering threat. A failure by the authorities to boost
skills levels could leave Vietnam a second-rate economy for an indefinite period.
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Business Environment Outlook
Commercial Banking Business Environment Ratings
Table: Vietnam Commercial Banking Business Environment Rating
Limits of Potential Returns Data Score, out of 10 Ratings Score, out of 100
Total assets, 2009 US$130.6mn 6 Market Structure 63
Growth in total assets, 2009-2014 6
Growth in client loans, 2009-2014 7
GDP per capita, 2009 US$1,058 2 Country Structure 53
Tax 2.9 3
GDP volatility 0.6 10
Financial infrastructure 5.6 6
Risks to Realisation of Returns
Regulatory framework and
development 4.5 5 Market Risk 40
Regulatory framework and competitive
landscape
5.0 5
Moody’s rating for local currency
deposits
2.0 2
Long-term financial risk 4.8 5 Country Risk 46
Long-term external risk 3.3 3
Long-term policy continuity 7.0 7

Legal framework 3.7 4
Bureaucracy 3.9 4
Commercial Banking Business Environment Rating 54
Source: BMI

Commercial Banking Business Environment Rating Methodology
Since Q108, we have described numerically the banking business environment for each of the countries
surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),
a measure that ensures we capture the latest quantitative information available. It also ensures consistency
across all countries and between the inputs to the CBBER and the Insurance Business Environment
Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings
calculated by BMI for all the other industries on which it reports, the CBBER takes into account the
limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former
and 30% to the latter.
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The evaluation of the Limits of Potential Returns includes market elements that are specific to the
banking industry of the country in question and elements that relate to that country in general. Within the
70% of the CBBER that takes into account the Limits of Potential Returns, the market elements have a
60% weighting and the country elements have a 40% weighting. The evaluation of the Risks to
Realisation of Returns also includes banking elements and country elements (specifically, BMI’s
assessment of long-term country risk). However, within the 30% of the CBBER that takes into account
the risks, these elements are weighted 40% and 60%, respectively.
Further details on how we calculate the CBBER are provided at the end of this report. In general, though,
three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements
of the Limits of Potential Returns are by far the most heavily weighted of the four elements. They account
for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly higher

than the country elements of the Limits of Potential Returns, it usually implies that the banking sector is
(very) large and/or developed relative to the general wealth, stability and financial infrastructure in the
country. Conversely, if the market elements are significantly lower than the country elements, it usually
means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and
financial infrastructure in the country. Third, within the Risks to Realisation of Returns category, the
market elements (ie: how regulations affect the development of the sector, how regulations affect
competition within it, and Moody’s Investors Service’s ratings for local currency deposits) can be
markedly different from BMI’s long-term risk rating.
























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Table: Asia Commercial Banking Business Environment Ratings

Limits of Potential
Returns
Risks to Potential
Returns Overall

Market
Structure
Country
Structure
Market
Risks
Country
Risks
Rating Ranking
Bangladesh 43.3 45.0 30.0 42.0 42.0 52
China 93.3 55.0 56.7 76.0 75.1 13
Hong Kong 73.3 90.0 70.0 84.0 79.5 9
India 83.3 55.0 53.3 56.0 66.9 24
Indonesia 73.3 62.5 76.7 42.0 65.1 29
Japan 30.0 75.0 63.3 80.0 55.6 38
Malaysia 70.0 80.0 76.7 80.0 75.4 12
Pakistan 33.3 47.5 56.7 40.0 41.3 55

Philippines 50.0 60.0 56.7 50.0 53.6 43
Singapore 66.7 90.0 96.7 88.0 80.6 7
Sri Lanka 20.0 55.0 36.7 44.0 36.1 56
South Korea 76.7 85.0 76.7 68.0 77.4 10
Taiwan 70.0 70.0 83.3 74.0 72.3 17
Thailand 56.7 65.0 80.0 68.0 63.8 31
Vietnam 63.3 52.5 40.0 46.0 54.4 41
US 90.0 85.0 100.0 78.0 87.6 2
Scores out of 100, with 100 the highest. Source: BMI
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Global Commercial Banking Outlook
Post-Crisis Era Begins To Take Shape
With a number of new regulations being implemented in the US, controversial stress test data released in
the EU and emerging market banking sectors showing resilience, the post-crisis era is slowly taking
shape. The short-term risks abound and our global macroeconomic forecasts include significant
slowdowns in growth in the US and China in H210 and into 2011. This will temper banking sector asset
expansion and, combined with tighter regulatory frameworks, we do not expect a return to the lending
dynamism of the pre-crisis era. The dynamics for national banking sectors vary, but generally we forecast
weaker asset and loan growth in developed markets, in line with our macro view that deleveraging will
continue to dominate the economic agenda in Western Europe and the US over the next few years. In
contrast, most emerging market banking sectors have withstood the global crisis and should continue to
expand in the coming years.
Debt Deleveraging Cycle Underwa
y

US – Lending Growth, % change y-o-y


Source: Federal Reserve
US and Eurozone: We continue to anticipate sluggish loan and asset growth in the US and the
eurozone’s banking sectors, in line with our macroeconomic view that households are in for a prolonged
period of deleveraging. New financial regulations, in particular the signing of the Dodd-Frank financial
regulation act by President Obama in July, reinforce our view that the pre-crisis lending boom will not
return anytime soon, and help justify our headline forecasts for subdued asset and loan growth. This
would be the case even if households and businesses were prepared to borrow, but in our view private
sector deleveraging is only in its early stages. While we believe the chances of a new systematic banking
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crisis in the US are low, we also doubt that financial institutions will return to the levels they reached pre-
crisis for the foreseeable future.
In Europe, the results of the much
anticipated EU banking sector
stress test came as little surprise,
with only seven of 91 examined
banks failing to meet the minimum
thresholds determined by the
Committee of European Banking
Supervisors (CEBS). In our view,
the main shortcomings of the test
is that it failed to measure liquidity
risks and exposures to a sovereign
default, which indicates that
uncertainty risks will continue to
force a premium on banks. The test

reinforces our view that the
eurozone banking sector overall
remains relatively healthy and that a systemic crisis is not on the cards. That said, this does not discount
the macroeconomic challenges likely to face European banks through to 2012. Further asset contractions
and impairments remain our core scenario.
Latin America: While the exposure of European banks to the eurozone’s myriad woes has raised
concerns that the Latin America’s banking systems could face serious systemic risks over the medium
term, we believe that Latin American banking sectors are generally well placed to withstand external
shocks emanating from across the Atlantic. While risks to Latin American and Caribbean banking sectors
from Europe’s banking problems remain muted, the region is unlikely to be immune from a sustained
period of weakness for foreign banks. Despite the importance of local affiliates and deposits to many
foreign banks operating in Latin America, a significant worsening of global financing conditions
prompted by a spike in European credit spreads would almost certainly weigh on lending growth in the
region, particularly if Spanish banks suffer heavily from concerns about Spain’s debt obligations.
Domestically owned banks would also suffer from tighter interbank lending, reducing the availability of
credit across the sector.






Stress Test Methodology Summary
EU – Banking Sector Stress Test Key Facts

Source: CEBS
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Clear Separation
Latin America – Loan-to-Deposit Ratio, %

Source: BMI, countries’ central banks and regulators
Emerging Europe: We believe that the positive results from the EU’s stress test masks the risks faced by
the region’s banks. The test focused on the predominant financial institutions in Western Europe, but we
emphasise that their emerging European counterparts are still a major weak link in the chain. With a
significant degree of leverage and faced with an elevation in non-performing loans, Central and Eastern
European banking sectors remain vulnerable to another potential constriction in global credit conditions.
Confronted with rising unemployment and weak corporate profitability, banks remain vulnerable to the
elevation in non-performing loans and broader deterioration in asset quality. We hold to our view that
domestic demand across the region will be weak over the medium term as the private sector deleverages
and unemployment is stubbornly slow to decrease, which will hinder demand for fresh credit.









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Turkey Leaping Forward
Emerging Europe – Bank Loans, % change y-o-y


Source: BMI, central banks
Asia: Asia region is mixed in terms of its outlook, as some banking sectors have solid enough
fundamentals to support asset and loan growth, while others are set to be restrained by deleveraging.
Based on a number of risk metrics, such as assets-to-equity, loan-to-deposit and assets-to-GDP ratios,
Indonesia and the Philippines are in the best shape. Their banking systems should facilitate acceleration in
loan growth and profitability in 2010. While Asia’s economic and financial sector fundamentals are
among the strongest in the world, the profit growth currently assumed by market valuations seems to be
overly optimistic. From an investor’s point of view, the Indonesian banking sector stands out as being
very expensive in relation to book value, as does China’s, despite a large decline. We also believe the
markets are not giving enough weight to financial crisis risks in Australia and New Zealand, while South
Korea is relatively attractive.
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Middle East And North
Africa: The regional
macroeconomic recovery has
failed to translate into a revival
in bank lending or asset growth
within the Gulf Cooperation
Council (GCC) so far in 2010,
and although we expect overall
positive year-on-year expansion,
this is more a reflection of a low
base than an improvement in
appetite for financial services.
That said, the prospects for

Saudi and Qatari banks are more
encouraging than those for banks
in Kuwait, Dubai and Bahrain,
where there are greater stability
issues albeit with no major
systemic threats. Outside the GCC, Iran’s banking sector is in particular danger, while Israeli lenders
remain at the whim of the global economic recovery - something BMI remains concerned about,
particularly as we go into H210. We expect to GCC banks to continue to look to Iraq, Syria, Egypt and
Libya for untapped growth potential.
Sub-Saharan Africa: The region’s major banking sectors have all come through the global financial
crisis and are continuing to rebound from the various difficulties they experienced in 2009. Broadly
speaking, past practices stood the region’s banking sectors in good stead, allowing them to weather the
storm. Not only did banks have limited exposure to toxic US subprime mortgage assets, they also had
relatively weak links with the global financial system and, with the notable exception of Nigerian banks,
conservative lending habits dominated. We expect a healthy rebound for all of Sub-Saharan Africa’s
major banking sectors in 2010 driven by improving domestic fundamentals. South Africa, Nigeria and
Kenya are forecast to experience GDP growth several percentage points higher in 2010 than it was in
2009, which will boost incomes and in turn enable an increase in deposits and greater take-up of banking
services.
Bottoming, But No Overall Recovery
GCC – Average Commercial Banks Deposit &Asset
Growth (% change y-o-y)

Source: GCC central banks, BMI
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Asia Banking Sector Outlook

Bullish Extremes In Banking Valuations
While Asia’s economic and financial sector fundamentals are among the strongest in the world, the profit
growth assumed by market valuations seems overly optimistic. The MSCI Indonesia Financial Index
stands out as being very expensive in relation to book value, as does China’s despite a large decline. We
also believe the markets are not giving enough weight to the financial crisis risks in Australia and New
Zealand, while South Korea appears to be relatively attractive.
In our previous Asia banking sector report we outlined which banking sectors we believed were in the
best shape based on a number of risk metrics such as assets-to-equity, loan-to-deposit and assets-to-GDP
ratios. This gave us a crude overview of which banking sectors in the region were likely to support
growth in the coming year and which we expected to hold back growth through deleveraging. We
concluded that Indonesia and the Philippines were in the best shape and that their banking systems would
facilitate an acceleration in loan growth, and therefore profitability, in 2010. In this report, we look at the
relative valuations of the region’s financial sectors from an investment perspective.
Asia’s Strong Fundamentals Are Fully Priced In
The chart below shows Asia’s main financial industries’ price-to-book ratios, together with a number of
eurozone countries, the US and the UK. Looking at Asia as a whole, for which we have a much more
bullish economic and financial sector outlook than for the eurozone, it appears that we are not the only
ones. On the whole, European financial sectors are trading at a discount price-to-book value, with the
average for Europe being 0.90X, against 1.79X for Asia, suggesting sharply diverging profit outlooks.
Japan, the cheapest sector in the region, is the only country that is valued for systemic risks in our view,
with South Korea, the next cheapest financial system based on price-to-book value, still trading at a
premium value of 1.13X. Moving from left to right, we can see that Indonesia appears to be the most
expensive, trading at 4.03X book value, with India, China, Philippines and Malaysia in second, third,
fourth and fifth positions respectively.





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From Bear To Bull
MSCI Financial Sector Equity Price-to-Book Ratios

Source: MSCI, BMI

Indonesia: Outlook Bright, But Not That Bright
The valuation spectrum throws up some interesting observations about where the market consensus is
compared to our own view of the risks and opportunities associated with the region’s financial systems.
Indonesia is one of our most favoured countries over the medium term. Its domestic demand-driven
economy, commodities wealth, young population and stable banking system suggest that investors should
be paying a premium to benefit from the profit growth of Indonesian banks. However, we take issue with
the current valuation, given our view that risk aversion is likely to increase over the coming months, and
we believe the MSCI for Indonesia and the Jakarta Composite Index are highly overvalued.






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Increasingly Overstretched
MSCI Indonesia Financial Index & RSI


Source: MSCI, BMI
Were the index to head back towards the 1.80X level posted at the height of the global financial crisis
then this would look attractive, but at 4.03X valuations appear to have strayed far out of line with the
economic outlook, notwithstanding our projections for acceleration in asset growth over the coming
years. With a dividend yield of just 1.84% against deposit rates of 6.50%, investors are clearly banking on
blockbuster profit growth and are showing little concern for dividends - usually a sign of a market top.
From a technical perspective, the index is posting new highs, but we are concerned that with the triple-
negative divergence on the weekly Relative Strength Index (RSI) any short-term weakness could usher in
a painful correction. While this is a low probability occurrence, a down week would provide a strong case
for an ending diagonal formation, with 800 a potential downside target from the 1,092 level.

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China: Stands Out For The Wrong Reasons
With the exception of China, the top of the MSCI valuation list roughly matches BMI’s own views on the
prospects for the region’s financial sectors. As well as Indonesia, we have bullish views on the Philippine,
Malaysian and Indian banking sectors for the medium term. What stands out to us, however, is China.
Despite our long-held, increasingly popular view that instability in the Chinese financial system is on the
horizon, the MSCI China Financial Index is still trading at a lofty 2.27X book value, making it the third
most expensive in the region, although valuations are nowhere near as rich as during the 2007 bubble,
when the price-to-book ratio hit 5.45X. However, given the malinvestment unleashed by the credit boom
of 2009 and 2010, we would not be surprised to see valuations trade back down towards 1.50X before the
ensuing financial turbulence is behind us.
Still Not Cheap Despite The Crash
MSCI China Financial Index Price-to-Book Ratio


Source: MSCI, BMI
India: Priced For Perfection
We note that China is not the only regional powerhouse that the market has bid up to scary valuations in
recent months. The MSCI India Financial index, which broke out to the upside, is trading at 2.79X book
value. While we believe crisis risks in the index are highly unlikely, and we are bullish about the growth
outlook, we view current valuations as extreme. With that in mind, our view of the BSE Sensex
outperforming the Shanghai Composite Index may be reaching a peak. The ratio of the Sensex-to-
Shanghai Composite has moved from 5.4 to 7.2 in our favour since we put out this view at the start of
2010.
Australia And New Zealand: Crisis Risks Underplayed
Another development we believe is worth noting is the relatively high valuations of Australia and New
Zealand (see our online service, June 17 2010, ‘Financial Crisis Down Under’), given our concern that
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the crisis risks in both countries are very real. Trading at 1.54X and 1.25X respectively, we expect the
bursting of housing bubbles to cause havoc for both countries’ banking sector profit outlooks, with
damage limitation the name of the game over the coming years. As such, we would not be surprised if
these two indices traded below book value in the near future.
South Korea: Looking Relatively Attractive
While by no means a bargain at these levels, the MSCI South Korea Financial Index is the cheapest in the
region on a price-to-book basis, apart from outlier Japan, and trading at 1.13X is on a par with Spain.
While the South Korean banking sector has one of the highest loan-to-deposit ratios in the region, local
financial institutions face nothing like the same risks facing their Spanish counterparts. We expect a
growth slowdown in 2011 and the potential for currency volatility but South Korean assets still look
relatively cheap at these levels. The government has taken steps to reduce banking sector leverage,
including reducing loan-to-deposit ratios to 100% by 2013, and lowering derivative exposure to
prevent acutely won sell-offs. These developments should support financial stability over the medium

term.