Asian Financials Are Not in a Structural Crisis

It has been a harrowing year for the banking and financial sectors in the US and Europe. Major banking and financial institutions with proud history and rich traditions, such as Bear Stearns, Lehman Brothers, Merrill Lynch, Bradford & Bingley, to name a few, either collapsed, were subjected to takeovers by a rival institution or were nationalised.

The picture is vastly different in Asia. Although we are in the midst of a global financial crisis, the key thing to note is that "Asian financials are not in a structural crisis" - a point that Choo Jee Meng, Senior Vice President of Fullerton Fund Management, stressed in a recent interview with iFAST.

Though Asian financials are not experiencing any structural crisis, like what their peers in the US and Europe are currently facing, most Asian financial stocks have been battered as well, as confidence in the global financial markets remain shaky.

Asian financials have learnt their lessons well from the Asian Financial Crisis of 1997-98. The data provided by Fullerton (as at September 2008) points to the fact Asian banks are now well-capitalised, having built up high capital adequacy ratios (CAR) since the Asian Financial Crisis: Asian banks' tier-1 CAR are above that of their counterparts in the US, Europe and Australia.

Another key factor is that Asian banks also have the benefit of being able to attract public deposits as a main source of funding. Fullerton also notes that Asian banks' asset quality has remained relatively intact, with non-performing loan ratios expected to remain significantly below their Asian Financial Crisis peaks.

A reflection of their conviction in Asian financials, Fullerton Fund Management launched the Fullerton Asian Financials Fund in early October this year, amidst the global financial crisis. In a recent email interview with Jee Meng, we uncover more about Fullerton's positive outlook on Asian financials.

iFAST: There's a crisis gripping the US and European banking sectors. Are Asian banks in danger of contracting the crisis from Western markets?

Jee Meng: In most cases, Asian banks' exposure to structured products such as collateralised debt obligations (CDOs) is small i.e. far below 10% of total equity. In terms of writedowns, Asia's share of subprime-related write-offs was only about 5%, compared to 50% for the US and 45% for Europe respectively.

In addition, Asia's economic fundamentals are also much stronger than 10 years ago, during the Asian financial crisis. For example, many Asian countries have high current account surpluses and healthy foreign reserves. Hence, we believe it is unlikely that the financial crisis affecting Western banks would affect Asian banks in a drastic way.

iFAST: The fact that you're launching an Asian financials fund amid the financial crisis suggests you're bullish on Asian financials. Have Asian financials actually benefitted from the crisis or is the crisis merely highlighting their positive points?

JM: We see attractive opportunities emerging amongst Asian financial stocks and we believe that over time, the share prices of quality Asian financials would recover and provide attractive returns.

Indeed some Asian financials have been net beneficiaries of this crisis as customers have moved their savings accounts, deposits as well as businesses, to stronger and better capitalized banks that are not impacted by the crisis in a significant way. This would provide additional low cost funding to these companies.

iFAST: The launch of several global financials funds suggest that some see value emerging in certain western banks. After all, their prices have been battered down more severely than Asian banks. Why focus solely on Asian financials?

JM: Fullerton is an Asian specialist. We believe that we can add value to investors given our long experience and expertise in the Asian markets. In addition, we note that the share prices of Asian financials have fallen as much as US financials even though the current financial crisis started in the US and is affecting Western banks more than Asian banks.

iFAST: How long would it take to see returns if an investor were to invest into your fund? How much do investors stand to gain from their investment?

JM: Asian financials fell about 75% during the Asian financial crisis from 1997-98 and subsequently recovered more than 150% from the lows over a period of one-and-a-half years. In the current crisis, we note that Asian financials have fallen more than 50%, although they are in better shape than 10 years ago. Taking into account that developed economies and markets are severely impacted and would have to go through a period of deleveraging and slow growth, the recovery in the initial years may not be as strong as after the Asian crisis. However, we believe investors with a longer term horizon would potentially see attractive returns.

iFAST: Are investors likely to lose their capital if they were to invest in the fund now?

JM: The markets are likely to remain very volatile in the short term given concerns surrounding the global credit crunch and prevailing macro headwinds. However, we believe that investors with a longer term horizon can look to enjoy potentially attractive returns.

iFAST: Give us a bear scenario. Under what circumstances would this fund massively underperform? Give us a bull scenario. Under what circumstances would this fund massively outperform?

JM: The fund invests in fundamentally strong financial stocks e.g. well-capitalised and high asset quality banks. These stocks tend to outperform over time in rising, falling as well as range-bound markets. Hence, the fund may outperform in these market conditions. However, in a sharp momentum-driven market rebound, where more leveraged and risky stocks tend to outperform, the fund may then underperform its benchmark.

iFAST: Why should investors be putting their money into your fund now?

JM: As mentioned earlier, although Asian financials have stronger fundamentals than their US counterparts, their share prices have fallen just as much. Thus, attractive valuations and opportunities are emerging amongst Asian financial stocks and we believe it is an opportune time for long term investors to consider seeking exposure to the sector.

To watch our video interview with Jee Meng, click here.

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