Greencore (GNCGY), a sandwich and convenience foods manufacturer operating in Ireland and the United...
Banking on Asia
10/14/2008 12:01 am EST
Yiannis Mostrous, editor of Silk Road Investor, sees value in oversold Asian banks.
It's increasingly obvious that, although the global financial system remains US-centric, real economies around the world are moving in the opposite direction. Regarding Asia, I still believe the Chinese economy will post decent growth this year, around 8%, with the authorities looking to give support as needed.
I've repeatedly written that the final outcome of the current economic cycle in the US will be consumer deleveraging, which is deflationary in nature. A cursory look at the data shows that households are already trying to repair their balance sheets, paying down debt as their own assets-mainly houses and stocks-rapidly lose value. Savings have also been boosted, rising $870 billion over the past year. The savings rate is now around 2.5% and will climb toward 4% if the trend continues.
An unenthusiastic US consumer isn't the best boost for the global economy, and the effects on the current account deficit will be profound. However, this will place the economy on firmer ground in time, allowing the cycle to start all over again.
A recent Bloomberg survey indicates that even financial institutions have moved quickly in recognizing losses, with $550 billion already written down. That's 40% of the International Monetary Fund-calculated final loss of $1.3 trillion. It took Japanese banks five years to write off 30% of the losses following the real estate collapse in the early 1990s.
On the market front, the case remains that Asian stocks as a whole are oversold and undervalued and would benefit from any positive news that will come out of the US.
One of my favorite indicators when looking at global bank industries is the loan-to-deposit ratio. A high ratio indicates that banks are funding themselves for the interbank or the capital markets (rather than through their customer deposits).
The recent turmoil has dried up these markets. And because financial liquidity, money supply, and credit are the primary forces driving capital markets, that's made it almost impossible for banks to operate; they can't refinance maturing bonds. This ratio has been above 100 for US banks for a year now, indicating a substantial need for liquidity. It certainly explains part of the problem they're currently facing.
On the other hand, Asian banks as a whole have a ratio below 80 and, in some instances such as China, below 70. The system there isn't as stretched; therefore, the authorities have more room to maneuver as they try to help their economies get through these difficult economic times.
The banks I favor right now are (in descending order):
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