HSBC Global Emerging Markets EM Banks Jp

EM

Ban

ks

By Olga Fedotova and Keerthi Angammana

Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns

Fundamentals are improving, supported by a traditional banking business model, fast economic

growth and favourable demographics

We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.

Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks

to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are

attractively priced but wait for better entry point

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Glo

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Mark

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Olga FedotovaAnalystHSBC Bank plc+44 20 7992 [email protected]

Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible forresearch on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst coveringRussian, Kazakh and Ukrainian credits.

March

2011

EM BanksLights back on … but not for all

Global Emerging Markets – Credit Strategy

March 2011Keerthi Angammana, CFA

Analyst

HSBC Bank plc

+44 20 7991 5431

[email protected]

Keerthi Angammana is Head of Fixed Income Quantitative Research, based in London. Keerthi has worked at HSBC for three years, initially as a strategist

in Central and Eastern Europe rates and credit markets. Keerthi is a CFA charterholder.

Yi HuAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2996 [email protected]

Yi joined the Asia credit research team in February 2009, focusing on financial institutions. Yi came to HSBC in September 2007 after completing a Masters degree at the London School of Economics. At HSBC, she has worked in both equity research in Asia and with the credit research team in Europe.

Devendran Mahendran, CFAAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2822 [email protected]

Devendran joined HSBC in 2000 and has worked as a credit analyst since 1994. He started his career in 1991 at the Malaysian central bank where he spentthree years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.

Ksenia MishankinaAnalystHSBC Bank plc+44 20 7992 [email protected]

Ksenia joined HSBC EMEA credit team in June 2009. Prior to that, she has had one year of experience at a leading investment bank having joined on agraduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.

Pavel Simacek, CFAAnalystHSBC Bank plc+44 20 7992 [email protected]

Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerableexperience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analystdesignation and a member of the CFA Institute.

110310_28253 EM Banks (Credit) - Olga Fedotova_f:Layout 1 3/11/2011 3:51 AM Page 1

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Global Emerging Markets – Credit Strategy EM Banks March 2011

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The global financial crisis showed that EM banks were not immune to global events. However, in contrast to

their developed market counterparts, most EM banks, particularly those in Asia and Latin America, have

already shaken off the effect of the financial market dislocation. With a few exceptions, indications are that that

the worst is past for asset quality and liquidity problems. Strengthened regulation, reduced leverage and

increased focus on risk management have made EM banks more resilient to future risks in our view.

EM countries have almost three times the expected growth, over five times the population, but only half

the banking sector penetration of developed countries. This lays a firm foundation for healthy and

profitable growth for EM banks.

From a trading point of view, the strong rally since the crisis has taken away the bargains in EM credit.

Valuations are tight, even as risks from the developed world are rising, and bond supply is likely to reach

new highs this year (we estimate USD100bn, up from USD87bn last year). Therefore while we generally

recommend a cautious stance, we identify a number of relative value opportunities where we believe

credit spreads are either too high or too low relative to the underlying risks.

Key cross-regional trade ideas Quasi-sovereign Russian banks offer the best risk reward profile at the moment. The banks benefit from

improving fundamentals and a high oil price environment. Russian banks are likely to issue USD15bn in

debt, which is primarily refinancing. Russian bonds are slightly cheap relative to the ratings but, given an

expected sovereign upgrade by Fitch, they are a good value alternative to Asian and Brazilian banks. We

particularly see value in Bank of Moscow, which was recently acquired by state-owned VTB. The largest

private Russian bank Alfa Bank is a good entry point for investors who want to switch from pure quasi-

sovereign plays to a privately owned Russian financial institution.

Brazilian banks are some of the strongest banks discussed in this report, with well-developed regulation,

excellent growth prospects and healthy profitability. However their bonds are expensive, and with

USD20bn expected supply, their spread performance is likely to be constrained. We would switch out of

Summary

From a fundamental standpoint we favour the growth story of

Russian, Indian, and Brazilian banks

From a trading perspective we prefer Russian and Kazakh banks

while Brazilian bonds, and Asian names are relatively expensive

EM banks will continue to be the largest issuers in 2011 with

expected supply of up to USD100bn in 2011

Olga Fedotova Analyst HSBC Bank plc +44 20 7992 3707 [email protected]

Keerthi Angammana Analyst HSBC Bank plc +44 207 991 5431 [email protected]

2


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Brazilian policy bank BNDES to Russian policy bank VTB or Bank of Moscow. We also would buy Itau over Brazil for a 150bp spread pick up and 1 notch in relative cheapness.

Indian banks represent the best opportunity in our view in Asia with no sign of a slowdown in the Indian economy, a highly underpenetrated market, and low dependence on external funding. However from a cross-regional prospective we prefer the oil-supported Russian economic recovery story and see more value in switching from Axis Bank to Bank of Moscow.

In Hong Kong we are cautious about asset quality because of banks’ aggressive expansion to China and recommend switching from subordinated debt of Hong Kong banks into senior bonds of quasi-sovereign banks either in Russian or Indian. Specifically, we prefer Bank of India over Bank of China Hong Kong.

Kazakh banks, BTA and Alliance have emerged from their restructuring with significantly reduced liabilities and with the government as owner. Both credits remain fundamentally weak on a standalone basis, but government support makes them the cheapest credits in the EM banking sector. We suggest switching into Kazakh banks from the more expensive Ukrainian banks which have yet to see a full turnaround of the financial sector. We prefer Alliance Bank to Alfa Ukraine.

Korean banks are deleveraging, but we estimate should still issue USD9bn in 2011. Korean policy banks such as Export Import Bank of Korea and Korea Development bank have among the tightest spreads in the region and are likely to remain frequent issuers. Similarly rated Middle Eastern banks could be the best alternative.

Directly affected by the ongoing unrest in the region, Middle Eastern banks are relatively the cheapest in the A-rated emerging-market universe, but we prefer to wait for better entry points.

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Summary 1

Trading Ideas 5

EM banks: strength lies in traditional business model 28

Relative value framework 58

Bank profiles 65

Asian banks 67

China banks 68 China Development Bank 70 Export Import Bank of China 71

Hong Kong Banks 72 BOC Hong Kong 74 Bank of East Asia 75 Citic Bank International 76 Dah Sing Banking Group 77 ICBC (Asia) 78 Wing Hang Bank 79

Indian Banks 80 Axis Bank 82 Bank of Baroda 83 Bank of India 84 ICICI Bank 85 State Bank of India 86

Korean Banks 88 Export-Import Bank of Korea 90 Korea Development Bank 91 Industrial Bank of Korea 92 Hana Bank 93 Kookmin Bank 94 Korea Exchange Bank 95 Shinhan Bank 96 Woori Bank 97

Singaporean Banks 98 DBS Bank 99 OCBC 100 United Overseas Bank 101 Bangkok Bank 102

EMEA banks 103

Kazakh banks 104 Alliance Bank 106 ATF Bank 107 BTA Bank 108 Development Bank of Kazakhstan 109 Eurasian Development Bank 110 Halyk Bank 111 Kazkommertsbank 112

Qatar banks 114 Commercial Bank of Qatar 116

Russian banks 118 Alfa Bank 120 Bank of Moscow 121 Gazprombank 122 Russian Agricultural Bank 123 Sberbank 124 Vnesheconombank 125 VTB 126

Saudi banks 128

UAE banks 130 Abu Dhabi Commercial Bank 132 Emirates NBD 133 National Bank of Abu Dhabi 134

Ukrainian banks 136 Alfa Bank Ukraine 138 Privatbank 139 Ukreximbank 140

LatAm banks 141

Brazilian banks 142 Banco do Brasil 146 BNDES 147 Bradesco 148 Itaú Unibanco 149 Votorantim 150

Appendix 151

Disclosure appendix 157

Disclaimer 164

Contents

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Financials still offer value even after the rally Emerging-market spreads have rallied since the

financial crisis, and the financial sector has

outperformed (Figure 1).

Fig 1. EM Sector performance, Feb 09-March 2011

200

700

1200

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

May

-10

Aug

-10

Nov

-10

Feb-

11

OA

S(bp

)

Govt Fin Energy Comm

200

700

1200

Feb-

09

May

-09

Aug

-09

Nov

-09

Feb-

10

May

-10

Aug

-10

Nov

-10

Feb-

11

OA

S(bp

)


Source: Reuters, Bloomberg, HSBC calculations

The chart below plots the relative performance of

each emerging-market sector, expressed as their

richness or cheapness. It shows emerging-market

financials remain a leveraged play on sovereigns,

particularly given the links between them, which

were strengthened during the financial crisis. With

financials trading around 2 ½ rating notches, or

around 40% extra spread relative to comparably

rated sovereigns, we think this offers adequate

compensation for the down-side risk of around

two rating notches, on the assumption conditions

could revert to where they were in April 2009.

Fig 2 Sector richness/cheapness (measured in rating notches; negative numbers indicate richness), EMBI + CEMBI

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

Feb

-09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug

-10

Dec-

10

Rich

/Che

ap


-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

Feb

-09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug

-10

Dec-

10

Rich

/Che

ap


Source: Bloomberg, Reuters, HSBC Calculations

Trading Ideas

Emerging-market financial-sector external debt still offers

fundamental value and a way to reduce duration as a hedge

against rising developed-market rates, while still maintaining carry

We have concluded that Russia banks represent superior value

when compared with their peers in Brazil and India

We also prefer Kazakh credits over Ukraine as they are well

positioned to benefit from high oil prices

For investors committed to Asia we see more potential in Indian

senior debt than subdebt of Hong Kong banks


Keerthi Angammana Analyst HSBC Bank plc +44 207 991 5431 [email protected]

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The fundamentals of emerging-market banks are

improving across the board: the banks have

benefited from strengthening economies, while

their bonds are supported by a combination of

QE2, limited fixed-income investment

opportunities in developed countries, and a

structural shift in investor preferences towards

emerging markets. The IIF forecasts net private

credit inflows of USD388bn in 2011 and

USD394bn in 2012, up from USD127bn in 2009.

However, unrest in the Middle East and the

continuing Eurozone debt distress complicate the

picture. The chart above shows the evolution of

the relative richness/cheapness of the

regions considered.

Fig 3. Regional richness/cheapness (in rating notches; negative numbers indicate richness)

-1.5-1.0-0.50.00.51.01.52.0

Feb-

09

Jun-

09

Sep

-09

Jan

-10

May

-

Aug-

10

Dec-

10

Rich

/Che

ap

Asia EE LatAm MidEast

-1.5-1.0-0.50.00.51.01.52.0

Feb-

09

Jun-

09

Sep

-09

Jan

-10

May

-

Aug-

10

Dec-

10

Rich

/Che

ap


Source: Reuters, Bloomberg, HSBC Calculations

Another source of risk for the global financial

markets are expected rate hikes in developed

markets.

The USD100bn of new supply expected from

emerging-market financial-sector issuers this year,

with Brazilian, Indian, Russia and Korean banks

leading the pack, is likely to be front-loaded to take

advantage of still-low developed-market rates.

With an ECB rate hike widely expected in April

and US QE2 unlikely to be extended beyond the

2Q 2011, March does not appear to be the best

month to enter emerging market credits (see our

Fixed Income Allocation, March 2011). But given

fundamental credit stories that are unlikely to be

derailed by rate hikes, emerging-market credit

spreads offer an interesting way to reduce

duration while maintaining carry. We recommend

a cautious stance for the coming months and

switching out of long-dated and subordinated

paper into shorter-duration senior instruments.

Fig 4. EM financial spreads and US 10yr, Feb ‘08-Mar ‘11

0

200

400

600

800

1000

1200

1400

1600

Feb

-08

Jun-

08

Oct

-08

Feb

-09

Jun-

09

Oct

-09

Feb

-10

Jun-

10

Oct

-10

Feb

-11

Sp

read

(b

p)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

US

10y

r Y

ield

EM Financials US 10yr


We also see a number of trades that allow

investors to benefit from relative value

opportunities across regions and position in the

capital structure.

Most emerging-market banks in our universe are

expensive relative to their historical performance

and their ratings, and with rate hikes expected, the

possibility of overshoot on the downside exists.

Supply will also put pressure on spreads, so that

we look for banks with digestible net supply and

strong deposit funding.

Cross-regional trade recommendation Switch into Russian banks from Brazilian

Brazilian banks are some of the strongest

discussed in this report, with well-developed

regulation, excellent growth prospects and healthy

profitability. However, they are also expensive,

following out-performance by the sovereign, and

are likely to be the largest net issuers of external

debt among emerging-market banks. We estimate

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Brazilian banks will be one of the largest net

borrowers this year with potential external bond

supply around USD20bn.

We recommend switching from Brazil into

comparably rated Russian banks. Russia suffered

during the financial crisis, but the sector has

recovered well and the sovereign-linked credit,

such as VTB and Bank of Moscow, offer a

superior return. The rapidly improving

macroeconomic environment is likely to result in

an upgrade by the major rating agencies providing

further support to the mostly quasi-sovereign

banks in our Russian universe of banks. The oil-

exporting country is experiencing strong cash

inflows with banks mediating the process. The

abundance of liquidity in the banking system will

fuel expansion in financial services and thus

provide uplift to the domestic banks. All these

positive developments lead us to favour Russian

banks over their peers in Brazil.

We suggest switching out of Brazilian policy bank

BNDES (Baa2/BBB-/BBB-) 19, indicative OAS

199bp, to Russian state-owned bank VTB

(Baa1/BBB/BBB) 18, 338bp, to pick up 140bp, or

to BKMOSC (Baa2/NR/BBB-) to pick up 150bp.

Both BNDES and VTB are likely to be frequent

issuers with VTB planning USD4.3bn this year, and

BNDES issuance is likely to be driven by ambitious

infrastructure projects in Brazil.

Fig 7. VTB vs BNDES OAS, Oct 2010-Mar 2011

100

200

300

400

500

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

OAS

(bp)

050100150200250300

Diff

(bp)

VTB 18 BNDES 19 Diff

Source Reuters, Bloomberg, HSBC Calculations

The relative value chart below shows that even

though VTB has rallied relative to BNDES,

around three notches of cheapness are still left

after adjusting for regional differences.

Switch into Russian banks out of Indian banks

We prefer Russian banks because the financial sector

benefits from ample liquidity provided by high oil

prices and government support. A fundamental

recovery is underway in the banking sector, with

non-performing loans falling. Indian banks are also

benefiting from strong growth, albeit from a low

base, but increasing corporate demand for US dollars

could lead to net supply risk.

Switch out of SBIIN 15 (Baa2/BBB-/NR, 228bp

OAS) into BKMOSC Mar 15 (Baa2/NR/BBB- /*,

349bp) to pick up 120bp (Fig 7-1)

Fig 7-1. SBIIN vs BKMOSC OAS, Oct 210-Mar 2011

-400

-200

0

200

400

600

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

OAS

(bp)

-400

-300

-200

-100

0

Diff

(bp)

SBIIN 15 BKMOSC 15 Diff

Source: Bloomberg

In non-investment grade, switch into CIS government-linked senior from Asian subordinated

We believe that switching to similarly rated CIS

senior bonds from Asian subordinated paper

would allow investors to improve their position in

the capital structure while picking up spread and

reducing duration. CIS names, particularly Russia

and Kazakhstan, are likely to benefit from

sovereign-rating upgrades and are supported by

better margins, an equally attractive growth story

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and strong internal liquidity on the back of oil

export revenues.

We suggest moving out of CINDBK 20 LT2

(Ba1/NR/BBB-, 320bp OAS), into senior state-

linked VTB 18 ( Baa1/BBB /*-/BBB, 338bp)

In Asia switch from subordinated debt of Hong Kong banks into Indian or Russian senior bonds

Both Indian and Hong Kong banks are seeing

strong growth. The main driver for Hong Kong

banks, however, is expansion into China, often at

the expense of profitability and credit quality.

Indian banks enjoy underpenetrated domestic

market with emerging credit demand, both from

retail and corporates, resulting in stronger

profitability and more healthy growth.

We suggest switching from BCHINA 20

(A1/BBB+/A-, 208bp OAS), into BOIIN 21

(Baa3/BB/NR, 288bp OAS), to pick up spread,

hedge against rapid expansion into China and

participate in Indian growth.

Indian banks benefit from a stable funding base,

the potential for healthy growth as a result of an

under-leveraged population and adequate

capitalization. They will be frequent issuers this

year, but we believe there will be adequate

appetite for this issuance, since the banks are still

new to the market.

We also like Indian ICICI 20 (Baa2/BBB-/NR,

287bp), but the bank has USD3bn to refinance in

2012 and is likely to come to the market in 2011, so

we would recommend waiting for the new issue.

Fig 9. BOOIN vs BCHINA, Oct 2010-Mar 2011

-50

50

150

250

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

OAS

(bp)

-40-20020406080

Diff

(bp)

BOIIN 15 BCHINA 20 Diff

Source Reuters, Bloomberg, HSBC Calculations

We also prefer senior debt of Russian banks over

subordinated debt of Hong Kong banks. We are

concerned about Hong Kong bank's high exposure

to China's market and real estate in the US.

Therefore we recommend switching out of

BNKEA 20 (A3/BBB+/NR, 252bp OAS) to VTB

18 (Baa1/BBB /*-/BBB, 338bp OAS), Russia’s

second largest bank) to upgrade seniority of the

debt, get exposure to improving Russian oil

driven macro environment and pick up 87bp. Sell

ICBCAS 20 subordinated (A3/NR/BBB+, 197bp)

to buy SBERRU 17 (A3/NR/BBB, 253bp), the

largest bank in Russia, to hedge against concerns

about fast growth into China and pick up 60bp.

We conclude that Russia quasi sovereign banks

represent a good in cross regional comparison.

The Russian story looks favourable to us and we

Fig 8. VTB vs BNDES Relative Value, Oct 2010-Mar 2011

-3.0

-1.0

1.0

3.0

5.0

Sep-

10

Oct

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11

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Ric

h/C

heap

(not

ches

)

0.00

1.00

2.00

3.00

4.00

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Diff

eren

ce

VTB 18 BNDES 19 Diff

Source Reuters, Bloomberg, HSBC calculations

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would feel comfortable venturing out into private

universe where our top peak is Alfa Bank.

Buy Kazakh banks as cheapest quasi-sovereign credits in EM

ALLIBK and BTAS have emerged from their

restructuring with significantly reduced liabilities

and with the Kazakh government as their owner.

Both credits are fundamentally weak on a stand-

alone basis with high NPLs and low capitalization,

and weak profitability. Hence we initiate longer-

term fundamental Underweight recommendations

on these two banks in this report.

However the banks have received a credit uplift

from government ownership, and now represent

one of the cheapest EM credits providing high

carry and adequate risk/reward short term, in our

view. It is important to highlight that ALLIBK

will start repayment of its sinkable bonds only in

2014, lightening its immediate repayment burden.

As a trading call, therefore, we advocate buy

ALLIBK 17 (Caa2/B-/B-, 991bp OAS) and BTAS

18 (NR/NR/B-, 798bp).

The positive macroeconomic environment in

Kazakhstan provides additional support for this

buy trading call.

In CIS, switch from Ukraine into Kazakhstan

Banks in Ukraine are generally expensive relative

to its rating and its beta, and the country has yet to

see a full turnaround of the financial sector.

Kazakh banks benefit from an improving macro-

economic and operating environment as a result of

strengthening oil prices, which is likely to lead to

a sovereign upgrade. We expect limited supply

from the region, and for investors interested in

participating in single B credits, we suggest

switching from Ukrainian state-owned EXIMUK

15 (B1/NA/B, 565bp OAS) to Kazakh state-

owned BTAS 18 (B-/NA/NA, 798bp OAS), or

ALLIBK 17 (Caa2/B-/B-, 991bp OAS).

We expect a total of USD18bn supply to come

from the CIS region, with USD15bn of external

debt from Russian banks. Neither Ukrainian nor

Kazakh banks are likely to be heavy issuers.

Fig 10. OAS vs historical beta for financial sector, 1 March 2011

UKR

THA

SGP

SAU

RUSQAT

KOR

KAZ

IND

HKG

CHN

BRAARE

y = 47.465x + 194.18R2 = 0.6687

0

100

200

300

400

500

600

700

-2.0 0.0 2.0 4.0 6.0 8.0 10.0

Beta Relative to EMBI

Spre

ad (

bp)

UKR

THA

SGP

SAU

RUSQAT

KOR

KAZ

IND

HKG

CHN

BRAARE

y = 47.465x + 194.18R2 = 0.6687

0

100

200

300

400

500

600

700

-2.0 0.0 2.0 4.0 6.0 8.0 10.0

Beta Relative to EMBI

Spre

ad (

bp)


Figure 10A shows the richness (negative

numbers) and cheapness of selected countries

relative to the HSBC Forecast Adjusted Rating

model (see Emerging sovereigns: A new tool for

identifying opportunities in sovereign CDS,

January 2010).

Fig 10A Relative richness/cheapness of selected countries expressed in rating notches (negative numbers indicate richness)

Country Rich/Cheap Country Rich/CheapBrazil -3.0 Russia -1.7China 1.8 Saudi Arabia 2.0Hong Kong -1.7 Singapore N/AIndia 0.2 Thailand -0.9Kazakhstan 0.6 Ukraine -0.4Korea 1.3 UAE 3.5Qatar 4.7 Source: HSBC Calculations

Switch to EURDEV (A3/NR/BBB) from Russia 15 (Baa1/BBB/BBB)

EURDEV is majority-owned by the Russian and

Kazakh governments, which translates into strong

support in case of need. The bank enjoys high

capitalisation (65% of total assets), which means it is

well-positioned for further growth. Even though

EURDEV could raise up to USD1bn this year, that

could be absorbed by investors and should increase

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cods3ulz0v&n=257910.PDF

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=cods3ulz0v&n=257910.PDF

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liquidity for the bonds. Switching from RUSSIA 15

(Baa1/BBB/BBB, 159bp) to EURDEV 14

(A3/BBB/NR, 297bp) offers a spread pick-up of

138bp, cheapness to ratings, and substantially the

same credit risk. Figure 11 shows the spread

difference between EURDEV 14 and Russia 15.

Fig 11. EURDEV 14 vs Russia 15, Oct 2010-Mar 2011

100

200

300

400

Sep-

10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

OAS

(bp)

0

50

100

150

200

250

Diff

(bp)

EURDEV 14 RUSSIA 15 Diff


Figure 12 shows the relative value between the two

names expressed in rating notches. Even though the

spread has tightened recently, EURDEV 14s still

offer about two notches of cheapness.

Fig 12 Model richness/cheapness of EURDEV vs Russia 15 (richness is represented by negative numbers)

1.0

2.0

3.0

4.0

5.0

Sep-

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)

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eren

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EURDEV 14 RUSSIA 15 Diff


GCC banks cheap, but wait for better entry point

Directly affected by the ongoing unrest in the region,

the Middle Eastern banks are relatively the cheapest

in the A-rated emerging-market universe. However,

after adjusting for the regional cheapness of the

Middle East relative to Asia because of its

political instability, we find them not quite as

cheap as spreads alone would indicate. So even if

we like switching out of, for example, Korean

banks from a relative-value standpoint, we would

look for a better entry point.

The issuance risk is lower for Abu Dhabi banks

(USD6bn in 2011) compared with Korean policy

banks, where we expect wholesale-focused Korean

banks in this report to issue USD9bn this year.

Abu Dhabi is a compelling credit story with a

cash-rich government (supported by an oil-driven

economy) which has in the past demonstrated a

strong commitment to the banking sector.

However, banks there suffer from constrained net-

interest margins and limited growth prospects

because of its relatively small population. But

they are well-capitalised and enjoy improving

liquidity from rising oil prices, while government

support makes their credit closely linked to that of

the government.

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Relative value charts, 7 March 2011

OAS vs rating, A-rated or better, 5+yrs, 7 March 2011

Maturity 5+ years

ICBCAS 20 sub

EIBKOR 21 EIBKOR 20

BNKEA 20 LT2

BCHINA 20 LT2

BBB+A-AA+AA-AAAA+AAA

C OMQAT 19 LT2

100

150

200

250

300

350

OAS

(bp)

Asia MiddleEast

Maturity 5+ years

ICBCAS 20 sub

EIBKOR 21 EIBKOR 20

BNKEA 20 LT2

BCHINA 20 LT2


C OMQAT 19 LT2

100

150

200

250

300

350

OAS

(bp)

Asia MiddleEast


OAS vs rating, A-rated or better, 0-5yrs, 7 March 2011

Maturity 0 to 5 years

WOORIB 16

WOORIB 15

WOORIB 15 LT2

WOORIB 15 UOBSP 13 UT2

SHNH AN 15

SDBC 15 SDBC 14

KEB 16

KDB 16 KDB 15 KDB 14

KDB 13

INDKOR 15

INDKOR 14

HANABK 15

EXIMCH 15 EXIMCH 14

EIBKOR 15

EIBKOR 14 EIBKOR 13

D BSSP 15

CITNAT 14


BRADES 13 sub

BAN BRA 14 sub

SABBAB 15 NBADUH 15 NBADUH 14

COMQAT 14

ADCB 14

50

100

150

200

250

300

350

OAS

(bp)

Asia LatAm MiddleEast


WOORIB 16

WOORIB 15

WOORIB 15 LT2

WOORIB 15 UOBSP 13 UT2

SHNH AN 15

SDBC 15 SDBC 14

KEB 16

KDB 16 KDB 15 KDB 14

KDB 13

INDKOR 15

INDKOR 14

HANABK 15

EXIMCH 15 EXIMCH 14

EIBKOR 15

EIBKOR 14 EIBKOR 13

D BSSP 15

CITNAT 14


BRADES 13 sub

BAN BRA 14 sub

SABBAB 15 NBADUH 15 NBADUH 14

COMQAT 14

ADCB 14

50

100

150

200

250

300

350

OAS

(bp)



12


abc

OAS vs rating, BBB rated, 0-5 yrs, 7 March 2011 Maturity 0 to 5 years

SBIIN 15 SBIIN 14

ICICI 16 ICICI 15

BOIIN 15

BOBIN 15

BBLTB 15

AXSBIN 15

BB+BBB-BBBBBB+A-

VTB 15 UT2

VTB 15

SBERRU 15

SBERRU 13

SBERRU 13

RSHB 14 RSHB 14

RSHB 13 DBKAZ 15

BKMOSC 15

BKMOSC 13

BRADES 15

BRADES 13

BANVOR 13

BANBRA 15

100

150

200

250

300

350

400

OAS

(bp)

Asia EE LatAm


SBIIN 15 SBIIN 14

ICICI 16 ICICI 15

BOIIN 15

BOBIN 15

BBLTB 15

AXSBIN 15

BB+BBB-BBBBBB+A-

VTB 15 UT2

VTB 15

SBERRU 15

SBERRU 13

SBERRU 13

RSHB 14 RSHB 14

RSHB 13 DBKAZ 15

BKMOSC 15

BKMOSC 13

BRADES 15

BRADES 13

BANVOR 13

BANBRA 15

100

150

200

250

300

350

400

OAS

(bp)

Asia EE LatAm


OAS vs rating, BBB-rated, 5+ years, 7 March 2011

Maturity 5+ years

ICICI 20 UT2

ICICI 20 DAHSIN 20 LT2

CINDBK 20 LT2BBLTB 29 sub

BBLTB 20

AXSBIN 16

BB+BBB-BBBBBB+A-

VTB 35 VTB 20

VTB 18

VEBBNK 25

VEBBNK 20 VEBBNK 17

SBERRU 17

RSHB 18 RSHB 17

GPBRU 16

ITAU 20 sub

BRADES 21 subBRADES 21 sub

BRADES 19 sub

BNDES 20

BNDES 19

BNDES 18

BANVOR 20 sub

BANBRA 21 LT2

BANBRA 20

100

150

200

250

300

350

400

OAS

(bp)

Asia EE LatAm

Maturity 5+ years

ICICI 20 UT2

ICICI 20 DAHSIN 20 LT2

CINDBK 20 LT2BBLTB 29 sub

BBLTB 20

AXSBIN 16

BB+BBB-BBBBBB+A-

VTB 35 VTB 20

VTB 18

VEBBNK 25

VEBBNK 20 VEBBNK 17

SBERRU 17

RSHB 18 RSHB 17

GPBRU 16

ITAU 20 sub

BRADES 21 subBRADES 21 sub

BRADES 19 sub

BNDES 20

BNDES 19

BNDES 18

BANVOR 20 sub

BANBRA 21 LT2

BANBRA 20

100

150

200

250

300

350

400

OAS

(bp)

Asia EE LatAm


13


abc

OAS vs rating, Non-investment grade, 0-5 years, 7 March 2011


CCCCCC-CCCCCC+B-BB+BB-BBBB+BBB-

PROMBK 15

PROMBK 13

PRBANK 15 KKB 13

HSBKKZ 13 HSBKKZ 13

GPBRU 15 GPBRU 14

GPBRU 13

EXIMUK 16 LT2

EXIMUK 15

BKMOSC 15 LT2

BCCRD 14

ATFBP 14

ALFARU 15 ALFARU 13

200

300

400

500

600

700

800

OAS

(bp)

EE



PROMBK 15

PROMBK 13

PRBANK 15 KKB 13

HSBKKZ 13 HSBKKZ 13

GPBRU 15 GPBRU 14

GPBRU 13

EXIMUK 16 LT2

EXIMUK 15

BKMOSC 15 LT2

BCCRD 14

ATFBP 14

ALFARU 15 ALFARU 13

200

300

400

500

600

700

800

OAS

(bp)

EE


OAS vs rating, non-investment grade, 5+ years, 7 March 2011

Maturity 5+ years


PROMBK 16 UT2KKB 16

HSBKKZ 17

BTAS 25 sub

BTAS 18

ATFBP 16

ALLIBK 17

0

100

200

300

400

500

600

700

800

900

1000

OAS

(bp)

EE

Maturity 5+ years


PROMBK 16 UT2KKB 16

HSBKKZ 17

BTAS 25 sub

BTAS 18

ATFBP 16

ALLIBK 17

0

100

200

300

400

500

600

700

800

900

1000

OAS

(bp)

EE


14


abc

Rchp vs rating, A-rated, 0-5yrs, 7 March 2011


WOORIB 16 WOORIB 15

WOORIB 15

SDBC 15

SDBC 14

KDB 16

KDB 15 KDB 14

KDB 13

INDKOR 15 INDKOR 14

EXIMCH 15

EXIMCH 14

EIBKOR 15

EIBKOR 14 EIBKOR 13

C ITNAT 14


BANBRA 14 sub

SABBAB 15

NBADUH 15 NBADUH 14

COMQAT 14 ADCB 14

-2

-1

0

1

2

3

4

5

Rich

/Che

ap



WOORIB 16 WOORIB 15

WOORIB 15

SDBC 15

SDBC 14

KDB 16

KDB 15 KDB 14

KDB 13

INDKOR 15 INDKOR 14

EXIMCH 15

EXIMCH 14

EIBKOR 15

EIBKOR 14 EIBKOR 13

C ITNAT 14


BANBRA 14 sub

SABBAB 15

NBADUH 15 NBADUH 14

COMQAT 14 ADCB 14

-2

-1

0

1

2

3

4

5

Rich

/Che

ap



Rchp vs rating, A-rated 5+yrs, 7 March 2011

Maturity 5+ years

ICBCAS 20 sub

EIBKOR 21

EIBKOR 20 EIBKOR 16

BCHINA 20 LT2


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Rich

/Che

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Asia

Maturity 5+ years

ICBCAS 20 sub

EIBKOR 21

EIBKOR 20 EIBKOR 16

BCHINA 20 LT2


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Rich

/Che

ap

Asia


15


abc

Rchp vs rating, BBB-rated, 0-5yrs, 7 March 2011


SBIIN 14

ICICI 16

ICICI 15

BBLTB 15 AXSBIN 15

BB+BBB-BBBBBB+A-

VTB 15 UT2VTB 15

SBERRU 15

SBERRU 13

SBERRU 13

RSHB 14

RSHB 14

RSHB 13

DBKAZ 15

BKMOSC 15

BKMOSC 13

BRADES 15

BRADES 13

BANBRA 15

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Rich

/Che

ap

Asia EE LatAm


SBIIN 14

ICICI 16

ICICI 15

BBLTB 15 AXSBIN 15

BB+BBB-BBBBBB+A-

VTB 15 UT2VTB 15

SBERRU 15

SBERRU 13

SBERRU 13

RSHB 14

RSHB 14

RSHB 13

DBKAZ 15

BKMOSC 15

BKMOSC 13

BRADES 15

BRADES 13

BANBRA 15

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Rich

/Che

ap

Asia EE LatAm


Rchp vs rating, BBB-rated, 5+ years, 7 March 2011

Maturity 5+ years

ICICI 20

DAHSIN 20 LT2BBLTB 20

BB+BBB-BBBBBB+A-

VTB 20

VTB 18

SBERRU 17

RSHB 17

GPBRU 16

ITAU 20 sub

BRADES 19 sub

BNDES 20 BNDES 19

BANVOR 20 sub

BANBRA 20

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Rich

/Che

ap

Asia EE LatAm

Maturity 5+ years

ICICI 20

DAHSIN 20 LT2BBLTB 20

BB+BBB-BBBBBB+A-

VTB 20

VTB 18

SBERRU 17

RSHB 17

GPBRU 16

ITAU 20 sub

BRADES 19 sub

BNDES 20 BNDES 19

BANVOR 20 sub

BANBRA 20

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Rich

/Che

ap

Asia EE LatAm


16


abc

Rchp vs rating, non-investment grade, 0-5 years, 7 March 2011



PROMBK 15 PROMBK 13

KKB 13 H SBKKZ 13

HSBKKZ 13

GPBRU 15

GPBRU 14

GPBRU 13

EXIMUK 16 LT2

EXIMUK 15

BCCRD 14

ATFBP 14

ALFARU 15 ALFARU 13

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

Rich

/Che

ap

EE



PROMBK 15 PROMBK 13

KKB 13 H SBKKZ 13

HSBKKZ 13

GPBRU 15

GPBRU 14

GPBRU 13

EXIMUK 16 LT2

EXIMUK 15

BCCRD 14

ATFBP 14

ALFARU 15 ALFARU 13

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

Rich

/Che

ap

EE


Rchp vs rating, non-investment grade, 5+ years, 7 March 2011

Maturity 5+ years


HSBKKZ 17

BTAS 25 sub

ATFBP 16

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

Rich

/Che

ap

EE

Maturity 5+ years


HSBKKZ 17

BTAS 25 sub

ATFBP 16

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

Rich

/Che

ap

EE


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cTrade recommendations Asian Banks: total expected supply for the region USD26bn Chinese Banks: total expected supply is very low

Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading Ideas

China Development Bank A+ St /Aa3 Pos /AA- St Extremely high Neutral Very low Moody's positive outlook is likely to be resolved

in 3Q 2011. Given the bank's special ministerial status, 100% state ownership and crucial policy role.

Credit profile is linked closely to the sovereign given the ownership and role it plays in China’s economy. Potential adverse exposure to LGFVs could weigh on asset quality and the bank’s capital structure going forward.

Mostly funded by internal bonds, which are 0%-risk weighted.

SDBC 14 (Aa3/AA-/A+, 145bp) and SDBC 15 (Aa3/AA-/A+, 135bp) trade slightly rich to their rating and to the Asian Financial sector. Asset quality concerns should constrain bonds’ outperformance in the future.

Export-Import Bank (China) A+ St /Aa3 Pos /AA- St Extremely high Neutral Very Low Moody's positive outlook is likely to be resolved

in 3Q 2011. 100% state owned. CEXIM plays an important policy role of

promoting trade and its credit profile is inextricably linked to the China sovereign.

Unlikely to use external debt. EXIMCH 14 (Aa3/Aa-/A+, 122bp) and EXIMCH 15 (Aa3/Aa-/A+, 127bp) are likely to continue their stable performance trading rich to the Asian banking sector.

Source: Bloomberg, Fitch, Moody’s, S&P and HSBC

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cHong Kong Banks: total expected supply USD4bn

Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading Ideas

BOC Hong Kong A St /Aa3 St /A- Pos Very high Neutral Low S&P's positive outlook is likely to

be resolved in 2Q 2011. Strong domestic franchise and its credit

profile, underpinned by the strength of its parent, Bank of China, majority owned by the government of China.

Limited issue due to pressure to constraint loan growth.

Sell: BCHINA 20 LT2 (A1/BBB+/A-, 208bp) Buy: SBERRU 17 (A3/NR/BBB, 253bp) to pick up 45bp, move up in the capital structure and capitalise on the improving macro environment in potential Upgrade of Russia' sovereign by Fitch. Buy Indian BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp) would pick up 80bp and hedge against rapid expansion into China.

Bank of East Asia NR /A2 St /A- St Moderate Underweight Low Weak profitability and strong credit growth

will put pressure on the bank's capital. Exposure to real estate in China could weigh on asset quality.

Strong deposit base, no bonds maturing in the next 2 years.

Sell: BNKEA 20 (A3/BBB+/NR,252bp) We are concerned about the bank's high exposure to China's market and real estate property in the US. Buy: VTB 18 (Baa1/BBB *-/BBB, 338bp) to pick up 85bp, to improve seniority of the debt and get exposure to improving Russian oil-driven macro environment.

Citic Bank International BBB+ St/Baa2 St/NR Moderate Neutral Low Strong capital structure and favourable

business cycle in Hong Kong. Concentration risk to China corporates is a potential concern. Majority shareholding by China Citic Bank is a positive for CBI.

Strong deposit base, no maturities in 2011-12.

Sell: CINDBK ’20 LT2 (Baa3/NR/BBB,320bp) Buy Russian state owned VTB 18 (Baa1/BBB *-/BBB, 338bp) to improve rating and seniority of the bond, even though the spread between two bonds are historically tight at 20bp.

Dah Sing Bank A- St /A3 St /BBB+ St Moderate Neutral Low Owing to the small size (1% of banking

sector assets). Growth in lending into China is a potential source of asset quality risk but the cyclical strength of the economies of Hong Kong and China will allow the bank to preserve its rating profile in 2011.

Strong deposit base and limited maturities in 2011-12.

All DAHSIN bonds are small in size and relatively illiquid.

ICBC (Asia) A- Rating watch on/A2 ST/NR High Neutral Medium The largest bank in China. Strong potential support from the parent,

however the bank's standalone profile will likely slip in 2011 on account of strong loan growth placing pressure on the capital structure and funding.

Limited retail deposits combined with loan demand may put pressure on funding.

Sell ICBCAS 20 (A3/NR/BBB+, 197bp) subordinated Buy SBERRU 17 (A3/NR/BBB, 253bp), the largest bank in Russia, to hedge against concerns about fast growth into China and pick up 60bp. Sell: ICBAS 20 (A3/NR/BBB+, 197bp) Buy BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp)

Wing Hang Bank A- St /A2 St /NR Moderate Neutral Medium Limited size of the bank, although some

support could come from other shareholders – Fung family and BONY.

Strong capitalisation but balance sheet has become less liquid as it pushes for earnings growth. Strong sector concentration of loans but the strength of underlying economies should ensure stability of credit profile.

Deposit growth does not keep pace with loan expansion and high balance sheet employment could put pressure on funding.

Perpetual WINHAN ‘49-17c and WINHAN ’49-13c are relatively illiquid.


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cTrade recommendations Asian Banks (cont’d) Indian Banks: total expected supply USD7bn

Bank Fitch/Moody’s/S&P Government support Fundamental credit view External debt supply Trading ideas

Axis Bank BBB- St /Baa2 St /BBB- St Moderate Neutral Medium Owing to the bank's 3% share in Indian

banking industry deposits. Concern over the bank’s rapid balance sheet expansion is offset by demonstrated profitability and India’s favourable macro outlook.

Rapid growth in international operations suggests higher USD debt supply risk. EUR2bn medium-term note (MTN) programme.

Sell: AXSBIN 16 (Baa2/BBB-/BR, 288bp) Buy:BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 61bp and benefit from the recent acquisition Bank of Moscow by the state champion VTB Prefer Russian banks to Indian banks even though spreads seem fair after adjusting for regional differences. Even though India's GDP is likely to grow at a higher rate than Russia's, the near to medium-term prospects of the banks in India will be constrained by a much lower per capita GDP and level of industrialisation. O&G economies likely to support banking sector growth. We recommend switching.

Bank of Baroda BBB- St /Baa2 St /BBB- St High Neutral Low-Medium Given majority state ownership. Rapid credit growth could potentially

translate into asset quality concerns down the road. Nevertheless its credit profile is underpinned by the government's majority stake in the bank.

Strong funding position with healthy loan/deposit ratio.

Sell BOBIN 15 (Baa2/NR/BBB-, 269bp) Buy: similarly rated Russian state owned BKMOSC Mar 15 (Baa2/NR/BBB-, 349bp) to pick up 80bp.

Bank of India NR /Baa2 St /BBB- St High Neutral Medium On the back of majority state ownership. Credit metrics are showing strains from

rapid growth, however credit profile will remain stable against the backdrop of a favourable macro environment.

Strong deposit funding, however some USD800m of maturing bonds in 2011-12.

Sell BOIIN Oct 15 (Baa2/BBB-/NR, 252bp) Buy: a similarly rated Russian state owned of BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 97bp. Within the region Sell: ICBCAS 20 (A3/NR/BBB+, 197bp) Buy: BOIIN 6.25% 21 (Baa2/BBB-/NR, 288bp) to pick up 91bp, or BCHINA 20 (A1/BBB+/A-, 208bp) to pick up 80bp and hedge against rapid expansion into China.

ICICI Bank Ltd BBB- St /Baa2 St /BBB- St High Neutral High Given the bank is the 2nd largest by

deposits and assets. The bank remains profitable compared to peers and the macro environment remains favourable.

Risk of fresh USD supply due to expected growth and USD3bn in redemptions by 2012.

Potential supply of new bonds to refinance USD3bn in 2012 should constrain further bond performance. Bonds fairly priced.

State Bank of India BBB- St /Baa2 St /BBB- St High Neutral Low-medium Crucial to Indian economy since it is the

largest bank. Also it is majority state owned (59.4%).

Strong recent credit growth raises concerns on asset quality, however the macro backdrop remains favourable and majority state ownership supports credit.

USD800m of maturities before 2012, however strong deposit funding (almost a quarter of the country's total) provides a solid base.

Sell: state owned Indian SBIIN 14 (Baa2/BBB-/BBB-,222bp) Buy: Kazakh bank HSBKKZ 17 (Ba3/B+/B+,427bp) to pick up 205bp.

Sell SBIIN 15 (Baa2/BBB-/NR,228bp), to BKMOSC Mar 15 (Baa2/NR/BBB-,349bp) to pick up 121bp.


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cTrade recommendations Asian Banks (cont’d) Korean Banks: total expected supply USD9bn

Bank Fitch/Moodys/S&P Government support Fundamental credit view External debt supply Trading ideas

Export-Import Bank of Korea A+ St /A1 St /A St Strong Neutral High Quasi-sovereign status. The level of government support is

viewed favourably and should ensure that the ratings move in tandem with the sovereign.

Total foreign currency funding needs in 2011 are expected to be in the region of USD7-8bn.

Sell: EIBKOR 8.125% 14 (A1/A/A+,177bp) is relatively expensive and is likely to be a frequent issuer in the medium term.

Hana Bank A- St /A1 Possible upgrade /A- Watch Neg

High Neutral Medium-High

S&P's watch negative outlook is likely to be resolved in 1Q 2011.

Owing to a track record of government support and systemic importance

Acquisition of 51% stake in KEB from Lone Star Funds for (USD4.1bn) creates uncertainty.

Almost USD2bn of redemptions by through 2012 combined with need to fund acquisition

Buy: senior debt of BKMOSC Mar 15 (Baa2/NR/BBB-,320bp Z-sprd) to pick up 59bp Sell: subordinated HANABK 16 (A2/BBB+/BBB+, 261bp Z-sprd) Potential USD bond supply should undermine future performance of HANA bonds.

Industrial Bank of Korea A+ St /A1 St /A St High Neutral Low Owing to substantial market share in the

SME lending market. Recent results show stability in IBK's credit profile and expect its ratings to remain stable over the next year.

Only USD500m of maturities in 2011. More cautious approach to FX lending would further limit borrowing needs.

Fairly priced

Kookmin Bank A- St /A1 St /A St High Neutral Medium Owing to a track record of government

support and systemic importance. Greater focus on internal controls and trimming costs ahead of acquisitive growth. We expect improvement in asset quality going forward.

Limited redemptions of USD1.2bn in 2011-12 although BCC subsidiary in Kazakhstan may require more funding.

Fairly priced. Supply might constrain bond performance

Korea Development Bank A+ St /A1 St /A Neg High Neutral Medium Given the solvency guarantee, state

ownership and systemic importance. Credit profile is closely linked to that of the sovereign.

Bank likely to be a multiple issuer as USD1.7bn of bonds are maturing in 2011-12.

Fairly priced. Supply might constrain bond performance

Korea Exchange Bank A- St /A2 possible upgrade /BBB+ St Extremely high Neutral Low Given its unique role as one of the key

banks in trade facilitation and foreign currency operations.

Acquisition by Hana Financial Group will benefit credit profile, while the bank’s stand alone credit metrics compare well against peers.

Limited USD300m in redemptions in 2012, combined with solid deposit base.

Fairly priced

Shinhan Bank A Neg /A1 St /A- St High Neutral Low-Medium Fitch's negative outlook is likely to be

resolved in 2Q 2011. Owing to a track record of government support and systemic importance.

The restructuring of the shipping sector in 2011 could weigh on earnings. Although profitability is better than peers, the operating environment will present some challenges.

Relatively liquid balance sheet compared to peers (Loans to deposits c 100%) should make redemptions of USD800m due to 2012 manageable.

Fairly priced


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cTrade recommendations Asian Banks (cont’d) Korean Banks: total expected supply USD9bn


Woori Bank A- St /A1 St /A- St Very High Neutral Medium-High Given the bank's size as the 2nd largest

in the system. With 19% of the system's deposits, we believe the level of government support for the bank will remain very high. Senior ratings should remain stable on strong government support.

Potentially heavy redemptions in 2011 with USD1.5bn coming due.

Sell: WOORIB 37 T1 (Ba2/BBB/BB+, Zsprd 391bp)

Buy: the largest private Russian bank ALFARU 15s (Ba1/B+/BB, Zsprd 405bp) at roughly flat spread, but move up in the capital structure, and obtain exposure to the rapidly growing Russian banking sector.

Singaporean Banks: total expected supply: USD4bn

Bank Fitch/Moodys/S&P Government Support Fundamental Credit View External Debt Supply Trading Ideas

DBS Bank AA- St /Aa1 St /AA- St Very High Neutral Low-Medium The largest bank in Singapore. The bank is facing lower profitability

compared to its peers however its credit profile is among the highest in Asia.

Likely to refinance some USD1.6bn of maturities coming due in 2011.

Fairly priced.

OCBC AA- St /Aa1 St /A+ St Very High Neutral Low We think the bank is underrated by S&P

and has room for a 1-notch upgrade in the year ahead.

High systemic importance to Singapore's economy.

The move to acquire ING's private banking assets in Asia will differentiate and strengthen its franchise, in our view.

News issues likely to be driven by USD1.25bn of redemptions due in 2011.

Fairly priced.

United Overseas Bank AA- St /Aa1 St /A+ St Very High Neutral Low The bank's credit profile is on an

improving trend and it comfortably sits in the AA category, in our view. We expect that S&P will raise UOB's senior debt rating to AA- in the year ahead.

Given it is one of Singapore's major three banks.

Good customer base in the SME and consumer sectors and better than peers' profitability. Its standalone profile is among the strongest in the region.

Strong deposit base and liquid balance sheet.

Fairly priced.

Thailand Banks: total expected supply: USD2bn

Bank Fitch/Moodys/S&P Government Support Fundamental Credit View External Debt Supply Trading Ideas

Bangkok Bank BBB+ St /A3 St /BBB+ St High Neutral Low We think the ratings of Bangkok Bank will

get a lift from a sovereign rating upgrade in 2011.

Owing to systemic importance to Thai banking sector.

The bank's credit metrics are strong and its ratings by S&P and Fitch are currently being constrained by the sovereign, in our view.

No redemptions in 2011-12 while deposits comfortably cover potential loan growth.

Fairly priced.


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cTrade recommendations CIS banks: Total expected supply for the region: USD18n

Kazakh Banks: total expected supply USD2bn

Bank Fitch/Moodys/S&P Government Support Fundamental credit view External Debt Supply Trading Ideas

Alliance Bank B- St /B3 St /B- St Limited Underweight No issuance expected. The bank doesn't represent strategic

investment for Samruk-Kazyna National Welfare fund.

Weak fundamentals and the uncertainty surrounding the future ownership structure.

No issuance expected. Buy ALLIBK 17 (Caa2/B-/B-, 991bp ALLIBK is a very weak credit on a stand-alone basis. However, it has come out of government bailout program with restructured liabilities and state ownership. It is the cheapest quasi-sovereign credit in the EM universe. The first repayment of the sinkable bond is scheduled to start in 2014.) Sell: EXIMUK 15 (B1/NR/B, 565bp) to ALLIBK 17 (Caa2/B-/B-, 991bp) to pick up 426bp

ATF Bank BBB Pos /Ba2 St /NR Limited Neutral No issuance expected. Fitch's positive outlook could be

resolved in Q3 2011 Privately owed. However, high probability of support from Unicredit, its 100% owner

The strengthening ties with a reputable international parent (Unicredit) are the main factor underpinning the credit profile of ATF Bank. However, weak credit indicators constrain the credit profile.

No issuance expected. Buy: ATFBP 14 (Ba2/NR/BBB, 545bp) benefits from its foreign ownership which is the main credit driver. Indeed Italian Unicredito provides explicit and implicit support, which makes the bank one of the cheapest Ba2/BBB credits.

BTA B- St /Caa3 Possible upgrade /B- St Moderate Underweight No issuance expected. Is not a strategic investment for Samruk

Kazyna, National Welfare fund. The relationship with SK is the bank’s main credit driver. However, the bank struggles to recover from its recent failure, the credit fundamentals remain weak further undermined by very high NPLs

No issuance expected. Buy BTAS 18 (NR/NR/B-, 798bp) BTAS 18 trades rich to ALLIBK 17 (Caa2/B-/B-, 991bp), but also benefits from government support and potential for recovery supported by advancing economy. Sell: EXIMUK 15 (B1/NR/B,565bp) to pick up 233bp

Development Bank of Kazakhstan

BBB- St /Baa3 St /BBB St High Overweight Low

100% state owned. Due to its government ownership and development mission, DBK’s credit risk is closely aligned with that of Kazakhstan. The current favourable macroeconomic story supports the positive momentum of its credit profile.

USD500m is possible. Bonds are very illiquid.

EURDEV BBB+ Pos /A3 St /BBB St Strong Overweight Medium Fitch's positive outlook is likely to be

resolved in 3Q 2011. Strong support from Russian and Kazakh government owing to the bank's role as a multilateral development finance institution

EDB’s has strong political profile, regional development mission and direct involvement of cash rich governments

USD500m is possible. Sell: Russia 2015 (Baa1/BBB/BBB,159bp) Buy: EURDEV 14 (A3/BBB/NR,297bp) and pick up 138bp and a relative cheapness of around 2 rating notches.

Halyk Bank B+ St /Ba3 St /B+ St Medium to strong Neutral No issuance expected. The largest retail bank in Kazakhstan.

Track record of government equity and funding injections

Creditworthiness remains under pressure due to the still challenging operating environment and fragile economic recovery. This coupled with a low albeit stabilising quality of the loan book.

Has completed USD500m in 2011. No more expected in the current year.

Halyk bonds appear fair valued across all maturities.

KKB B- St /Ba3 St /B St Medium Neutral The largest bank is Kazakhstan by assets.

Track record of government equity and funding injections.

One of the largest private banks in the CIS and the market leader by total assets in Kazakhstan. However, credit volumes stayed flat in H1 2010, reflecting a still difficult economic situation and a scarcity of funding.

In case of favourable market conditions around USD300m, however, the base case scenario assumes no issuance.

Buy KKB 14 (B2/B/B-,803bp) outright. Switch from PRBANK 15 (B1/NR/B, 726bp) to ALLIBK 17 (Caa2/B-/B-, 987bp) to pick up 261bps. Ukrainian banks to underperform their peers in the Central Asian region as the economic recovery in Ukraine has not picked up momentum yet and is lacking the support of natural resources.


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cTrade recommendations CIS banks: (cont’d) Russian Banks: total expected supply USD15bn


Alfa Bank BB St /Ba1 St/B+ Pos Limited Overweight Medium S&P's positive outlook could be

resolved in Q1 2011 However, there is a track record of shareholder support.

Seems well positioned to reap the benefits of the Russian’s continuing economic recovery. Strong credit profile and improving financial performance is likely to continue.

USD1.5-2.0bn Buy ALFARU 15 (Ba1/B+/BB, 437bp) ALFARU is a good choice for investors who want to switch from pure quasi sovereign plays to a Russian privately-owned financial institution. Sell: SBERRU 17 (A3/NR/BBB, 253bp) to pick up 184bp while still enjoying one of the strongest credit profiles among private banks in Russia.

Bank of Moscow BBB- On watch /Baa2 St /NR Overweight No issuance expected. An ongoing acquisition by government-

owned VTB would strengthen BOM’s credit profile, lifting the bank from sub-Sovereign control to direct Sovereign ownership. Additionally the bank's performance has been improving over the past year.

No issuance expected. Buy: Following its acquisition by the state-owned VTB, BKMOSC15 (Baa2/NR/BBB-, 349bp) is our top pick among Russian quasi-sovereign names. Also the rating of BKMOSC should receive an uplift in case of a sovereign upgrade. Sell: Asian SBIIN 15 (Baa2/BBB-/NR,228bp), and BOBIN 15 (Baa2/NR/BBB-, 269bp) to pick up spread and benefit from strong (oil/commodity) cash inflows running through state owned banks. Also switch from subordinated Korean HANABK 16 (A2/BBB+/BBB+, 261bp Z-sprd) to pick up 41bp. We also prefer BKMOSC 15 over Brazilian BNDES 19 (Baa2/BBB-/BBB).

Gazprombank NR /Baa3 St /BB Pos High Overweight Medium. S&P's positive outlook could be

resolved in Q2 2011 Was demonstrated by injections from government during the crisis.

The bank’s relationship with Gazprom and the Russian government underpins its credit profile. The banks profitability is growing rapidly on the back of strengthening economy driven by high commodity prices.

USD1bn is possible. GPBRU 15 (Baa3/BB/NR, 344bp) is fairly priced, in our view.

Russian Agricultural Bank BBB St /Baa1 St /NR High Neutral Medium 100% state owned. Has a clearly defined role in the

implementation of the government’s economic policy. Credit profile is closely linked to that of the Russian government, its 100% owner. However, the bank is involved in the highly volatile agricultural business.

USD1,500bn. RSHB could be excluded from the bond index given the state might divest a minority stake. According to the Ministry of Finance the transaction should take place by 2013. Also the risk of new supply is relatively high. Therefore the upside performance is limited.


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cTrade recommendations CIS banks: (cont’d) Russian Banks: total expected supply USD15bn


Sberbank BBB St /A3 St /NR Very high Overweight Medium Plays the key role in the Russian

economy as the largest bank. Majority state owned.

A close proxy for Russian sovereign risk. The state is a controlling shareholder with a 57.6% stake, while the bank’s systemic importance is enhanced by its unmatched retail franchise with 48% of retail deposits on its books.

Expected to be quite active on debt capital markets in 2011. May raise up to USD2bn.

Buy: SBERRU 17 (A3/NR/BBB, 253bp) Sberbank is one of the strongest financial credits with undisputed leadership position in retail business. Sell: BCHINA ’20 LT2 (A1/BBB+/A-, 208bp) to pick up 45bp. Sell: ICBCAS 20 (A3/NR/BBB+, 197bp) subordinated. In Russia: Sell: SBERRU 17, Buy ALFARU 15 (Ba1/B+/BB, 437bp) to pick up 184bp while still enjoying one of the strongest credit profiles among private banks in Russia.

VEB BBB St /Baa1 St /BBB St High Overweight High 100% state owned VEB is wholly owned by the government,

so its creditworthiness is likely to mirror the developments the sovereign. The banks enjoys extraordinary government support and plays crucial role to the Russian economy.

Two benchmark issues totalling maximum USD3bn in 2011.

VEB is essential part of Russian government finance. The bank is likely to be a frequent issuer in the medium term as it plans to replace government funding with wholesale funding. It is fairly priced, in our view.

VTB BBB St /Baa1 St /BBB St Full support Neutral High Government is the controlling

shareholder. VTB’s credit profile is closely linked to that of the Russian government, owner of 75.5% of its equity. State support has been forthcoming in the past, and remains strong in our opinion. However, the bank’s aggressive acquisitions policy creates integration risks.

USD4.3bn Buy VTB 6.465% 15 (Baa1/BBB/BBB, 309bp) is fairly valued given the supply risk and integration risk stemming from the recently acquired banks. Sell: HK's BNKEA 20 (A3/BBB+/NR,252bp) Buy Russia's second-largest bank VTB 18 (Baa1/BBB/*-/BBB, 338bp) to upgrade seniority of the debt, get exposure to improving Russian oil driven macro environment and pick up 86bp. Sell: BRADES 15 (Baa2/BBB/WD,213bp) Buy VTB 18s (Baa1/BBB/BBB, 338bp) to pick up 125bp.


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cTrade recommendations CIS Banks: (cont’d) Ukrainian Banks: total expected supply USD2bn


Alfa Ukraine NR /Withdrawn /CCC+ Pos No support Neutral Low S&P's positive outlook is likely to be

resolved in 1Q 2011. Private ownership. However, Alfa Bank Consortium, the bank's ultimate shareholder, provided multiple capital injections during the crisis with the latest one in March 2010 of USD93m.

The bank's operating environment remains weak and asset quality stays under pressure. On the other hand, ABU’s shareholder, AGC, provided continuous support to the bank during the crisis including the latest capital injection of USD116.4m in February ‘11.

No issuance expected Buy: ALLIBK 17 (Caa2/B-/B-,991bp) Sell: ALFAUA 12 (NR/CCC+/NR, 700bp) to play Kazakh oil-driven recovery story, benefit from Kazakh state support and pick up 290bp.

Privatbank B St /B1 St /NR Possible Neutral Low Given the large size and importance to

the Ukrainian banking sector. Benefits from a strong domestic franchise and solid financial performance. A strong market share of the retail sector boosts its systemic importance. However, weak operating environment constrains further upside performance.

Up to USD500m. Sell: EXIMUK 15 (B1/NR/B,565bp) Buy: PRBANK 15 (B1/NR/B,726bp) to reduce maturity, reduce new supply and pick up 161bp.

Ukreximbank B St /B3 St /NR High Neutral Medium Significant support was provided to the

bank by Ukrainian government. Enjoys support from its owner, the Ukrainian government, which injected USD800m in fresh equity in H1 2010, although government finances remain fragile. Also, the bank’s liquidity appears adequate and sufficient to cover liabilities maturing in 2011.

Up to USD1bn. Sell EXIMUK 15 (B1/NR/B,565bp)

Buy PRBANK 15 (B1/NR/B,726bp) to reduce maturity, reduce new supply and pick up 161bp. For those who are not comfortable with Ukrainian risks, we recommend to switching to high-yield Kazakh banks.

Buy: BTAS 18 (NR/NR/B-, 798bp) to pick up 233bp, or ALLIBK 17 (Caa2/B-/B-,991bp) to pick up 426bp

Source: Bloomberg, Fitch, Moody’s, S&P

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cTrade recommendations Latin American Banks: total expected supply for the region USD20bn Brazilian banks: total expected supply USD20bn

Bank Fitch/Moodys/S&P Government Support Fundamental credit view External debt supply Trading Ideas

Banco Bradesco SA BBB Pos/Baa2 St/BBB St High Medium Fitch's positive outlook is likely to be

resolved in 2Q 2011. The bank's importance to the Brazilian banking sector is very high.

Being one of the largest private banks in Brazil and LatAm Bradesco’s credit profile benefits from high probability of state support and a good access to the local deposits though vast branch network and strong brand recognition.

The bank enjoys strong liquidity from its local market and very light repayment schedule of external debt in 2011-2012. However, HSBC equity research expects that the bank will grow 18% in 2011, which will require additional funding. If the bank decides to issue it would be only long-term bonds, mainly subordinated issue, as equity will be needed to support further growth. HSBC credit research estimates that the bank might issue up to USD3bn in 2011.

Sell BRADES 15 (Baa2/BBB/WD,213bp) Buy VTB 18s (Baa1/BBB/BBB, 338bp) to pick up 125bp.

Banco do Brasil SA BBB- Pos/Baa2 St/BBB- St Very High Medium-High The bank might be upgraded in 2011,

particularly if sovereign is upgraded *Largest bank in Brazil* Majority owned by the federal government of Brazil

Banco do Brasil is one of the highest-rated banks in the LATAM universe. The bank benefits from hefty liquidity on the back of vast deposit base, healthy margins and healthy capital base.

Banco do Brasil has low refinancing needs in the short-term, but the bank will need to fund expected 20% loan growth in 2011. We estimate that BdB might issue USD3-5bn in the next 12 months. Supply of external bonds is likely to have either long-term maturity or subordinated nature, as BoB capital remains tight.

Sell: BANBRA 21 (Baa2/NR/NR, 223bp) Buy: BANVOR 20 (Baa2/NR/NR, 342bp) to pick up 120bp.

Banco Votorantim BBB- Pos/Baa3 St /BB+ St High from Banco do Brasil Medium Fitch's positive outlook is likely to be

resolved in 1Q 2011. Banco do Brasil owns 49.9% of Banco Votorantin

The bank benefits from access to cheaper and longer funding from Banco do Brasil and a sizable market share in retail lending.

The bank is likely to be a regular issuer, however it benefits from an access to Banco do Brasil deposit base and potential of selling its retail loan portfolio to Banco do Brasil in case of need.

Fairly priced.

BNDES BBB- Pos/Baa2 St /BBB- St High Medium Fitch's positive outlook is likely to be

resolved in 3Q 2011. BNDES is 100% state owned A quasi-sovereign risk, the bank is fully

owned by the government and is the major tool in implementing the state policy.

The bank is likely to be a regular borrower given its funding structure and fast growth.

Sell: of BNDES 18 (Baa2/BBB-/NR, 199bp) Buy BKMOSC 6.699% 15 (Baa2/NR/BBB- /*-, 349bp) to pick up 150bp. Sell: BNDES 19 (Baa2/BBB-/BBB-, 199bp) Buy VTB 18 (Baa1/BBB *-/BBB, 338bp) to pick up 139bp.

Itau Unibanco BBB Pos /Baa2 St /BBB St Moderate Medium Fitch's positive outlook is likely to be

resolved in 1Q 2011. Significant importance to Brazilian financial system

Constrained by sovereign ceiling, the bank is one of the best credits in the country and will be benefiting from improvement of overall operating environment through its exposure to commercial lending and consumer credit.

With already high employment of balance sheet the bank will likely to be multiple issuer.

Sell: Brazil 2019 (Baa3/BBB-/BBB-, 122bp)

Buy: ITAU 20 (Baa2/NR/BBB-, 277bp) to pick up 150bp in spread and 1 notch in relative cheapness.

Source: HSBC, Bloomberg, Fitch Rating, Moody’s

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cTrade recommendations Middle East banks: total expected supply for the region USD12bn Middle East banks

Fitch/Moody’s/S&P Government support Credit profile External debt supply Trading ideas

Abu Dhabi Commercial Bank PJSC NR / A1 St / A- St Extremely high Low-Medium Given its majority ownership by the Abu

Dhabi Investment Council (ADIC). The bank is likely to continue consolidating its balance sheet and focus on improving its credit strength this year. The group's operating performance will likely remain subdued meanwhile.

Some USD1bn of maturities due in 2011

MENA banks are cheap but wait for entry point

COMMERCIAL BANK OF QATAR A St / A1 St / A- St Extremely high Low-Medium Given CBQ's systematic importance to

Qatar banking system and track record of support.

Earnings pressure as its share of business with public sector entities increases. Continued capital injection from the state is credit supportive.

USD500m of redemptions in 2011 and further pressure on loan/deposit ratio due to infrastructure lending may lead to new supply

MENA banks are cheap but wait for entry point.

Emirates NBD PJSC A+ St / A3 St / NR Extremely high Low Given its majority ownership by the

government of Dubai (56%) and track record of support in the UAE.

Continued margin pressures due to relatively higher cost of funding. Exposure to Dubai remains a point of concern and the bank will likely book further impairments in 2011.

Balance sheet rationalisation is to continue.


National Bank of Abu Dhabi PJSC AA- St / Aa3 St / A+ St Extremely high Medium High importance to UAE banking

system, indirect majority ownership and close links to Abu Dhabi government.

Strong support from Abu Dhabi. The group will likely focus on lending growth this year after a modest growth in 2010.

Modest redemptions in 2012 (cUSD700m) however growth focus and already high loan/deposit ratio may lead to more supply.


Source: HSBC, Bloomberg, Fitch Rating, Moody’s

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Resumption in growth has fundamental support Emerging market (EM) banks offer an attractive

risk-adjusted premium over their Sovereigns in

our view. As 2011 EM corporate issuance is

expected to be dominated by banks, they will be a

key focus for debt investors.

HSBC FI has performed extensive fundamental,

relative-value analysis, including visiting many of

the banks covered in the report, as well as

investors, rating agencies and regulators. On this

basis, we believe growth in the sector is founded

on solid fundamental ground, with no indications

yet that a bubble is forming.

The different regions display converging growth

prospects and credit stories, which offer numerous

cross-regional arbitrage opportunities. In absolute

terms we favour Brazilian, Russian and

Indian banks.

Chart 1: EM debt outstanding by industry as of February 2011 – financials have been the major source of supply

Finance45%

Chemicals2%

Other8%Transportation

3%

Oil & Gas18%

Telecoms6%

Utility & Energy6%

Metal & Mining

6%

RE6%

Finance45%

Chemicals2%

Other8%Transportation

3%

Oil & Gas18%

Telecoms6%

Utility & Energy6%

Metal & Mining

6%

RE6%

Source: Dealogic

In our opinion a favourable macroeconomic story

underpinned by strong commodity prices will

translate into positive momentum for banks in a

number of EM countries. The current price of

crude around USD100 per barrel will support

EM banks: strength lies in traditional business model

Our positive outlook on Brazilian, Russian and Indian banks is

supported by their traditional interest-income business model,

robust growth prospects and healthy profitability

Asset quality in the UAE, Kazakhstan and Ukraine remains under

pressure, but should start recovering slowly later this year;

Kazakhstan will benefit from an improved macro environment

We expect EM banks to borrow cUSD100bn in 2011 to improve

their maturity profiles, fund growth and address USD30bn in

refinancing needs


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business activity in oil-exporting countries

including Russia, Kazakhstan, the UAE and Saudi

Arabia. HSBC forecasts oil prices to stay above

USD84 per barrel in the next two years, thus

securing the continuation of growth in oil

producing economies. Improved business activity

in oil exporting countries will lead to an increased

demand for banking services and thus have a

positive bearing on local financial institutions.

Consequently we expect the banking sectors of

commodity/oil exporting countries to deliver a

better performance than those of countries lacking

these natural resources.

Chart 2: Oil net exporters/(importers)

-220

-120

-20

80

180

280

380

Rus

sia

Saud

i

UAE

Kaza

khst

an

Qat

ar

Braz

il

Thai

land

Sing

apor

e

Indi

a

Chi

na

m to

nnes

Source: BP, 2009FY. Net exports = production - consumption

Talk of bubbles is premature… Emerging markets account for 85% of the world’s

population according to Moody’s. They are

expected to grow at almost three times the rate of

developed countries over next two years and have

half the banking sector penetration. EM banks

therefore have a firm foundation on which to

build healthy and profitable growth. A traditional

business model focused on deposit collection and

loan origination also supports the long-term

growth prospects of EM banks.

However, the expansion story is not free of risk,

and the global financial crisis amply demonstrated

that EM banks are not immune to global events

despite their more conventional business model.

That said, in contrast to their developed market

counterparts, most EM banks – particularly those

in Asia and Latin America – have already shaken

off the effects of financial market dislocation and,

with a few exceptions, the indications are that

asset quality problems have already peaked.

The response to the crisis has strengthened

regulation, reduced leverage and increased the focus

on risk management, making EM banks more

responsive to the underlying risks. Liquidity

measures and capital injections introduced during

the crisis have increased the links between banks

and governments, making the sector’s debt a

leveraged proxy for that of its Sovereigns,

something that is already reflected in credit spreads.

Nevertheless, even in the new post-crisis world,

most EM banks still carry old baggage of high

related-party transactions, concentration risk,

inconsistent corporate governance and maturity

mismatches. The speed of the EM expansion, and

inflows created by the excessive liquidity

provided by developed market policymakers has

also raised the question of whether a bubble may

be growing in EM banks.

…but it is a risk in the future To be successful you have to be lucky, or a little

mad, or very talented, or find yourself in a rapid

growth field.

Edward de Bono

Following a dip in 2009, strong inflows returned

to EMs, fuelled by loose monetary policy and

limited investment opportunities in developed

markets. The Institute of International Finance

(IIF) forecasts that net private capital inflows into

EMs will reach USD1trn in 2011, up from

USD669bn in 2009 (see Chart 3).

These strong inflows coupled with limited

investment opportunities, and abundant liquidity

have already inflated asset prices in EM,

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increasing concerns about bubble creation due to

such imbalances as rising property prices and

rapidly increasing leverage. Indeed, this risk of

overheating, (while overheating does not

necessarily result in a bubble) has already been

recognised by some governments and, with

inflation also becoming a concern in such

countries as China, Brazil and Korea, they are

stepping in with counter-cyclical measures to cool

off excessive growth.

Highest growth will be in the BRICs, Qatar and Hong Kong

HSBC forecasts high banking sector loan growth

in India (20%), Brazil (15%) and Russia (20%),

which should be well supported by positive

macroeconomic growth, low banking penetration,

a large population as well as an under-penetrated

SME and retail client base, coupled with robust

liquidity, capitalisation and profitability.

In China, HSBC economists are concerned about

loan growth rates that are above the long-term

trend (15-16%) even before accounting for off-

balance-sheet transactions such as informal

securitisation and discounted bills, even though

recent quantitative tightening measures appear to

be having an effect (China – Jan new lending

below expectation as tightening takes effect, 15

February 2011, Qu Hongbin).

Qatar’s 18% growth is supported by anticipated

government capital expenditure on infrastructure

projects, even though it doesn’t have the benefit of a

large population or low banking sector penetration.

In Hong Kong (15%) growth is driven mainly by

demand from offshore Chinese companies.

We are generally cautious about countries with

fast-growing banking systems, but in many EMs

this is caused by a still developing banking system

and improving living standards, so that we believe

it will be two to three years before we see any

red flags.

Chart 3: Capital inflows to emerging market economies

0

200

400

600

800

1000

1200

2009 2010e 2011f 2012f

USD

bn

Equity inv estments, net Priv ate creditors, net

Source: IFF research

Medium to lower growth in Singapore, Korea, Thailand, Kazakhstan, Ukraine, Saudi Arabia and the UAE

In Singapore (10%), Korea (7.4%) and Thailand

(7.5%), growth is constrained by a highly

competitive environment and high banking

sector penetration.

Relatively lower growth is expected in

Kazakhstan, Ukraine, UAE, and Saudi Arabia. In

Kazakhstan (6.5%) and Ukraine (4%) it is due to

poor asset quality, low capital, and negative

demographics (relatively small bankable

population, defined as those earning enough

money to be eligible to be served by banks) in

Kazakhstan and falling population in Ukraine).

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The UAE (5.1%) is significantly more leveraged

than its other Middle Eastern peers, having been

exposed to the Dubai construction sector and has

suffered significantly during the crisis. Credit

growth is likely to be constrained by a limited

deposit base, although the banks would be looking

for favourable windows of opportunity to attract

external funding.

Although Saudi Arabia (9.6%) has low banking

sector penetration, forecasted economic growth

(2011 4.8%) is low relative to population growth

(14% over the next five years).

Credit creation in energy producers is also

sensitive to oil price risk and could be higher than

the above numbers if oil prices stay above

USD100 a barrel (HSBC forecast USD84).

Chart 5: Growth in the emerging markets will boost global growth

0.0

1.0

2.0

3.0

4.0

1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s

0.0

1.0

2.0

3.0

4.0

Dev eloped Markets Emerging markets Global

% % Contributions to global growth

Source:

Chart 4: Summary of banks’ fundamentals outlook

Macro DemographicsPotential

loan growth

Potential Retail growth

Growth Outlook

Asset quality Liquidity

Net Interest margin Capital

Fundamental Outlook

State Support likelihood

Overall Outlook

China 3 3 1 1 2.00 1 2 0 1 1 2 1.67

India 2 2 3 3 2.50 1 3 1 3 2 2 2.17

Hong Kong 2 2 1 0 3.00 1 2 0 2 1.25 0 1.00

Singapore 2 1 1 0 1.00 2 1 0 2 1.25 0 1.00

Korea 1 1 1 1 1.00 2 1 0 2 1.25 3 1.00

Thailand 1 1 1 1 1.00 2 3 0 3 2 0 1.00

Russia 1.5 0.9 3 3 2.10 1 3 2 2 2 2 3.00

Kazakhstan 3 1 3 1 1.50 1 0 1 0 0.5 1 1.00

Ukraine 1 0 1 1 0.75 0 0 0 0 0 0 0.25

UAE 1 1.5 0 1.5 1.00 0 1 0 2 0.75 2 1.25

Saudi Arabia 1 1 2 2 1.50 2 3 1 1 1.75 3 2.08

Qatar 1 0 2 2 1.25 3 1 1 3 2 3 2.08

Brazil 2 2 2 2 2.00 1 2 3 2 2 3 2.33

Outlook Positive Neutral Negative

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Favourable economic backdrop

The investor of today does not profit from

yesterday’s growth

Warren Buffett

HSBC economists expect EM growth (6.4%) to

outpace the developed world (2.3%) over next

three years. Emerging economies in Asia are

expected to be the fastest growing (7.5% overall

and 8.6% in China), followed by Latin America

with 4.8% and EMEA with 4.1% (see The world

in 2050 – quantifying the shift in the global

economy, January 2011, and Global Economics

Quarterly – a misfiring growth engine, Q1 2011).

In a longer term HSBC forecasts that world output

will treble, as growth accelerates on the back of the

emerging economies. On average annual world

growth is projected to be towards 3% compared

with growth of just 2% in 2000 (Chart 5).

Emerging market growth will contribute twice as

much as that of the developed world to global

growth between now and 2050. By 2050, the

emerging world will have increased five-fold and

will be larger than the developed world to global

growth over this period.

Chinese growth in particular, is to outpace

developed countries for at least five years as inter-

regional competition and local economic

autonomy fuels the economy. HSBC economist

Karen Ward estimates that China and India will

be the largest and third-largest economies in the

world, respectively (Global Economics Quarterly

– a misfiring growth engine, Q1 2011).

Mainly supportive demographics trends

There is no finer investment for any community

than putting milk into babies.

Winston Churchill Growth in retail loans is the key driver of banking

sector expansion across EMs, and is reinforced by

the strong demographic structure of the

population (already accounting for some 85% of

the world’s total, with 4.8bn people), which is in

sharp contrast to the aging population of the

developed world. However, the number of people

being put to work will vary substantially across

economies in the coming years.

For example, Saudi Arabia with the highest fertility

rate gets a significant boost to growth with the

working population expected to grow by more than

70%. India will also enjoy strong growth.

Chart 6: Bankable population trends in: Income per capita should grow in all EM countries, but demographic patterns vary significantly.

UAE5m Saudi Arabia

26mIndia

1,173m

Brazil201m

Kazakhstan15m

Thailand66m

China1,330mUSA

310m Singapore5m

Korea49mUK

62mHK7m

France65m Germany

82m

Ukraine45mRussia

139m-5%

0%

5%

10%

15%

Ban

kabl

e po

pula

tion

grow

th (%

)

Older YoungerTrend in aging of bankable population

UAE5m Saudi Arabia

26mIndia

1,173m

Brazil201m

Kazakhstan15m

Thailand66m

China1,330mUSA

310m Singapore5m

Korea49mUK

62mHK7m

France65m Germany

82m

Ukraine45mRussia

139m-5%

0%

5%

10%

15%

Ban

kabl

e po

pula

tion

grow

th (%

)

Older YoungerTrend in aging of bankable population

Source: Central Banks, US government statistics

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On the other side of the spectrum South Korea’s

and Russia’s demographic outlook is quite poor

with the workforce shrinking by c30% by 2050.

China, Singapore and HK will also see more than

double-digit declines in total working population.

We will see a significant divergence of the growth

trends even in the medium term (Chart 6).

The structure of the population is very important

as it indicates a trend in bankable population. For

example considering the under-15 population in

India (34%), the UAE (30%) and Brazil (29%),

they are much larger than in the UK, France and

USA (20%). This population structure results in

high growth differential in bankable population

relative to developed markets for most Asian

countries in this report as well as for Brazil. The

absolute growth potential is also strong in Brazil

the Middle East, and India, which also create

encouraging conditions for the development of the

banking sector in the medium term.

Relatively low penetration, but not everywhere

Don’t judge each day by the harvest you reap but

by the seeds that you plant

Robert Louis Stevenson

Retail loans can grow even in the face of stable or

falling population trends as long as banking sector

penetration rates are increasing.

Banking loan penetration and growth patterns

vary greatly among emerging markets. Brazil,

Russia, India and Qatar have experienced

extremely strong loan growth in recent years, and

although the former three stumbled for a moment

in 2009, the resumed growth still has some steam

due to low level of credit penetration.

India shows the lowest penetration and is best

positioned to continue its high rate of credit

expansion (see Chart 7). The combination of high penetration and high

growth rates is generally a red flag, for example

China, Korea, Singapore, HK and the UAE (before

the crisis in 2008). HK’s outlier position could be

Chart 7: Total leverage levels of EM economies: most EM countries remain underleveraged

India

China

HK

Thailand

Kazakhstan

Ukraine

UAE

Qatar

Saudi Arabia Brazil

Korea

Germany

UK

France

Singapore

Russia

40%

70%

100%

130%

160%

190%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

CAGR loan growth (2007-2010)

Loan

s / G

DP

245%

India

China

HK

Thailand

Kazakhstan

Ukraine

UAE

Qatar

Saudi Arabia Brazil

Korea

Germany

UK

France

Singapore

Russia

40%

70%

100%

130%

160%

190%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

CAGR loan growth (2007-2010)

Loan

s / G

DP

245%

Source: CB county websites, HSBC, 2010

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justified by its role as a regional financial centre and

a gateway to China, which will continue to drive its

loan growth despite already high leverage relative to

country’s GDP. Similarly, Singapore’s seemingly

high leverage results from growth related to regional

trade flow, a trend that is highly correlated with the

world (and Chinese) economic activity.

In the CIS, Kazakhstan has been going through a

healthy contraction, which was needed to clean up

the system. We expect Kazakhstan to start

benefiting from improved economic conditions

and higher commodity prices. Similarly, Russia’s

low level of banking penetration is likely to

improve with stronger oil prices, even though

Russia’s recent growth trend has been distorted by

the state-sponsored substitution of foreign loans to

corporates by the local (mostly state-owned)

banks’ funding. Penetration in the Ukraine is the

highest among CIS countries and should act as a

drag on the nation’s banking system growth.

Continuing attraction of retail segment, but not for all Asian countries

You hope your buddies will win so you don’t have

to loan them any money.

Chris LeDoux

Consumer lending and small and medium-sized

enterprises (SMEs) are likely to be key growth

areas across EM with all countries under review

significantly lagging behind the developed world.

Household leverage is likely to accelerate faster

than income growth, and this typically high-

margin segment will be targeted by both local and

foreign players.

India, Russia and Saudi Arabia have significant

room for retail loan growth as access to credit and

a consumer culture has yet to be fully developed

there. In India’s case limited savings and low

GDP/capita are a constraint, although its medium

to long-term prospects are better then that of the

other two countries considering the population

trends discussed above. Qatar has the best short-

to-medium term prospects, as private sector

demand is expected to pick up. Brazil is seeing

increased appetite for retail credit, with household

indebtedness increasing from 24% of income at

the end of 2006 to 39% at the end of 2010. In

India, for example, the credit appetite of the

population is still low, therefore the main driver of

loan growth was infrastructure in 2010.

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However, in Korea retail growth will be

constrained by already relatively high leverage

among population.

Traditional banking model at the heart of system health Life is not complex. Life is simple, and the simple

thing is the right thing.

Oscar Wilde

The traditional banking model calls for funding

loans from deposits, with lower exposure to

structured products and market risk. The EM

banks have been able to maintain this model (net

interest income represents 70-80% of total income

vs close to 50% in developed world) because

faster growth and wider margins have allowed

them to maintain profitability without having to

move down the risk curve. Long-term growth

opportunities and a high margin environment

discouraged most banks from undertaking exotic

investments – with a couple of exceptions.

This business model has helped EM banks,

particularly those in Asia and Latin America, to

shake off the effects of the recent financial market

dislocation. Indications are that apart from a few

exceptions (UAE, Kazakhstan, Ukraine), the peak

of the asset quality problems are also in the past.

Brazilian credit quality could worsen slightly in

2011, as higher rates bite into

consumer delinquencies.

Structural risks still persist though, including

maturity mismatches, reliance of some sectors on

wholesale funding, varying transparency and a high

level of related party transactions in a number of

countries. In addition, corporate governance risk is

still substantial both in countries with a relatively

weaker banking supervision such as the CIS and

also in countries with a more developed and

advanced regulatory mechanisms.

EM banks will continue to enjoy strong government support

The links between banks and the governments are

particularly strong in EM world. We believe that

the emerging market governments will continue to

provide strong support to the banking sector given

its systemic nature and its extensive use in many

countries as a tool in implementing the

government’s economic policies and in indirectly

supporting the other sectors of the economy, as

Chart 8: Penetration of EM retail banking services by country: retail business will be the main driver of EM banks growth in the medium term

India

UAE

Brazil

Korea

HK

Singapore

Thailand

UK

Germany

China

RussiaKazakhstan

Ukraine

QatarSaudi Arabia

France

0%

10%

20%

30%

40%

50%

60%

70%

80%

0 10 20 30 40 50

GDP per capita (USD '000)

Ret

ail l

oans

/ G

DP

76

Source: CB county websites, HSBC, Fitch, 2010

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well as due to high government participation in

the banking sector in many countries (Chart 9).

EM policy response during the crisis was fast and

efficient in most markets, and increased the links

between banks and the government, making the

banking sector a close proxy for the sovereign.

Indeed banks were used during the crisis as a

convenient tool for conducting government

economic policy. Examples are numerous:

controlled stimulus lending in China with counter-

cyclical supervision to increase SME lending;

“leading by example” restructuring in India (5%

of the book vs 2% in private banks); VEB lending

in Russia to refinance external debt of highly

leveraged corporates; tailored liquidity support in

the UAE (facilitating DW restructuring); and

capital injection by Banco Nacional de

Desenvolvimento Economico e Social (BNDES)

for providing credit to corporates and for

infrastructure investment.

A notable exception to this trend was Kazakhstan

and, to some extent, Ukraine, which has created a

precedent that while state support is likely, it is not

always guaranteed, especially if the scale of the

problem is large in relation to the size of the

economy. For example in the BTA’s case, a

USD10bn fraud was combined with USD12bn of

external liabilities, was clearly too big to absorb for

a country with USD45bn of FX reserves at the time.

Chart 10: Government support capacity varies greatly across EM economies, 2010F

050

100150200

250300350

400450500

Qat

ar

Kaza

khst

an

UAE

Ukr

aine

Kore

a

Braz

il

Rus

sia

Indi

a

Thai

land

Saud

i Ara

bia

Exte

rnal

Deb

t/FX

Res

erve

s (%

)

Source: Moody’s

In our view the EM governments are very likely

to continue providing a safety net to the banking

sector in case of need, prioritising it over other

industries. However, if faced with a prolonged

economic downturn, the governments’ capacity

could be undermined by eroded FX reserves and

constrained liquidity and such support would be

more selective and limited to systemically

important banks. There could be a further

prioritisation of the state-linked institutions over

the privately owned and senior debt over

subordinated obligations.

Chart 9: Governments are highly involved in the banking sector across the board

75% 74%

60 %55%

44% 44%

33%28%

25%19% 17%

0% 0%0%

10%

20%

30%

40%

50%

60%

70%

80%

UAE

India

Chi

na

Rus

sia

Qat

ar

Kore

a

Braz

il

Saud

i Ara

bia

Kaza

khst

an

Thai

land

Uk

raine

Sing

apor

e

HK

Ban

king

sta

te o

wn

ersh

ip (%

)

Source: Bank data

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We are confident that the willingness of EM

governments to support their banking sectors will

be high across EMs, although capacity of the

governments could be a constraint in

some countries.

Quality of assets: the worst is over

You never know what can happen. I feel like I

have a pretty good chance, but you never know.

Carly Patterson

A side-by-side comparison of EM banks is

complicated by erratic growth, a lack of

transparency, and divergent reporting standards,

for example with restructured and re-priced loans

not always being recognised as NPLs. However, it

is clear that the effect of the crisis on EM banks

varied widely, from a momentary hiccup for most

Asian banks, to continued intensive care for

Ukranian, Kazakh and Dubai-based banks.

Broadly speaking, we believe that the NPL peak is

behind us in most markets, with 2010 being a

peak in Russia, Saudi Arabia, Qatar, HK, India

and Korea. The exception is UAE, where we

expect NPLs to peak in 2011 (Chart 11).

While overall NPL performance in many emerging

countries appears to be superior to that of Western

Europe, reported NPLs often do not take into

account restructured, re-priced or refinanced

problem loans, which is a widely used practice in

many EM countries. According to our estimation

such loans varied from 30% for Dubai-based banks

to 35% in Russia, 40% in Ukraine and 50% for some

Kazakh banks.

Contraction of loan books during the crisis

combined with a sharp deterioration of overall

economic conditions, generally caused reported

NPLs to increase dramatically. However, this

number can be distorted due to state intervention.

For example in Russia during the crisis where

government action to provide foreign funding to

large corporations through state-owned banks

(VEB, VTB and Sberbank) caused NPLs to

be understated.

Chart 11: The peak in bad loans appears to be past for all EM banks, apart from the Middle East:

0%

5%

10%

15%

20%

25%

Kazakhstan Ukraine Russia Singapore India China Korea HK Brazil Qatar Saudi

Arabia

UAE UK Germany France

NPL

(%)

2007 2008 2009 2010F 2011F 2012F

48%Russia & CIS

Asia LATAM & ME Europe

Source: CB county websites, HSBC, Moody’s

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In the UAE, which was exposed to the

construction sector, NPLs have yet to peak

(HSBC Equity Research expect this to peak in

2011), mainly driven by a possible restructuring

in Dubai Holding and Dubai group. We also

expect provisions to increase, driven partly by

new regulations and partly by under-provisioning

in previous years.

In Brazil, asset quality improved significantly in

2010 after the NPL peak in 2009, with NPLs

dropping to 5%, which is lower than pre-crisis

levels, and in line with the expected level in Western

Europe. Most Brazilian banks we met indicated that

they see the NPL level as stabilising around this

level, with limited room for further improvement

and even the probability of a slight deterioration.

Although these numbers are higher than those

reported by some Asian banks, we note that given

the high quality of disclosure and risk

management of Brazilian banks – among the best

in the emerging world – these are much more

reliable than those reported by CIS, ME and some

Asian countries.

For example reported NPLs in China are among the

lowest in our universe at 2.8%, but probably don’t

reflect the potential problem loans of local

government financing vehicles (some 26% of which

are flagged as potentially problematic). If these were

included NPLs would rise to 7%, which would be

the highest among non-CIS issuers.

Otherwise, reported NPLs in Asia were low, with

hardly a noticeable increase as effects of the crisis

were shallow and short-lived in NPL terms, with

the most recent results giving the impression of

higher asset quality because of the resumption of

loan growth.

The exception is Korea, where banks are still de-

leveraging even as high household debt and

exposure to the construction industry could result

in pressure on profitability through increased

provisioning.

Ample liquidity but maturity mismatches remain

"Reality is merely an illusion, although a very

persistent one"

Albert Einstein

EM banks benefit from generally good liquidity on

the back of a growing (albeit volatile) deposit base,

government support (both direct liquidity injections

by Central Banks and deposits from state-linked

corporates) and positive external liquidity trends

(positive current account positions). While

commodity-driven economies (Brazil, Russia) have

cash-rich corporates, in other EM countries banking

sector liquidity is also supported by positive current

account position, which is the case for all banks

included in this report except for those in Brazil,

India and Ukraine.

This strong liquidity of corporates and sovereigns

combined with still cautious lending and a limited

number of quality borrowers (in Russia and

Middle East, for example), or with counter-

cyclical regulations in other countries (China,

Brazil, India and Singapore), have resulted in a

low utilisation of balance sheets.

Chart 12: Most banks enjoy strong liquidity

0%10%20%30%40%50%60%70%80%90%

100%

Indi

a

Kore

a

Ukr

aine HK

Kaza

khst

an

Thai

land

Rus

sia

UAE

Qat

ar

Saud

i Ara

bia

Chin

a

Sing

apor

e

Braz

il

Loan

s / T

otal

ass

ets

0%10%20%30%40%50%60%70%80%90%

100%

Indi

a

Kore

a

Ukr

aine HK

Kaza

khst

an

Thai

land

Rus

sia

UAE

Qat

ar

Saud

i Ara

bia

Chin

a

Sing

apor

e

Braz

il

Loan

s / T

otal

ass

ets

Source: Central Banks, 2010

The loans/assets ratio for all countries (save for

Korea) is close to or below 60%, with Brazil around

50%, indicating a very liquid balance sheet,

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supported by strong deposit inflows and access to

government paper offered at lucrative yields.

This is partly a reflection of prudent regulation and

proactive positioning by the Brazilian Central bank,

which has learnt its lessons from previous banking

crises, and has now raised the mandatory reserve

ratio to equate to more than 30% of total deposits,

one of the highest in the world, a move which has

now been mirrored by the Chinese regulator.

Profitability improvement on upswing in credit cycle

The banks covered in this report are heavily

reliant on a traditional banking model with a high

proportion of interest income. Although this

increases stability of income, it also makes them

very dependent on both the net interest margin

(NIM) trends and growth of the loan book.

EM banks generally enjoy healthy profitability

with higher NIMs than their Western counterparts.

However these margins are under pressure from

increased competition for quality borrowers and

tightening credit conditions, and there are also

idiosyncrasies in each country (Chart 13).

Korean banks appear to be in the most

disadvantageous position, with the highest

proportion of interest income and among the

lowest NIMs, although this situation improved in

Q4 2010. NIM rebounded on the back of: 1)

benefits of the negative duration gap; 2) funding

cost savings by the replacement of high-cost funds

with lower ones; and 3) the resumption of interest

payments on once-defaulted work-out loans.

Russia and Brazil enjoy the highest level of NIM,

although in the case of Russia this is partially a

reflection of the re-pricing of bad loans and an

adjustment to more normalised margin is likely to

continue as credit conditions stabilise. At the same

time, the quality of interest income remains a

question due to a relatively high level of (non-cash)

accrued interest associated with restructured loans, a

trend which is also seen in other CIS countries.

In the case of Brazil, NIMs are moving in the

opposite direction, reflecting strong demand for

credit, better employment of balance sheet

(Loan/Deposit ratio increased from 78% in 2008 to

over 100% in 2010) and still relatively cheap

funding, despite increasing competition and

tightening spreads. Increased penetration of high

margin retail products (credit cards, car loans and

mortgages) and continuing strong demand for

Chart 13: Profitability of EM banking sectors 2009 vs. 2010: margins are healthy but under pressure due to increasing competition

HK 09

Russia 09

Kazakhstan 09

Saudi Arabia 09

Korea 09

China 10

HK 10

Singapore 10

Russia 10

Kazakhstan 10

Qatar 10

Saudi Arabia 10

Korea 10

India 09

China 09

Singapore 09

UAE 09

Qatar 09

Brazil 09

India 10

UAE 10Brazil 10

60%

70%

80%

90%

2% 3% 4% 5% 6% 7% 8%

Net interest margin

Net

inte

rest

inco

me

/ Tot

al in

com

e

HK 09

Russia 09

Kazakhstan 09

Saudi Arabia 09

Korea 09

China 10

HK 10

Singapore 10

Russia 10

Kazakhstan 10

Qatar 10

Saudi Arabia 10

Korea 10

India 09

China 09

Singapore 09

UAE 09

Qatar 09

Brazil 09

India 10

UAE 10Brazil 10

60%

70%

80%

90%

2% 3% 4% 5% 6% 7% 8%

Net interest margin

Net

inte

rest

inco

me

/ Tot

al in

com

e

Source: CB county websites, HSBC, Fitch

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credit is likely to keep margins healthy, but due to

competition there will be NIM pressure.

There is a significant divergence among countries

within in the Middle East. HSBC (Equity

Research) expects overall flat NIMs, however

Saudi Arabia is experiencing shrinking margins

(driven by contracting asset yield), while Qatar is

seeing improvements as the country benefits from

public-sector spending and has recently received a

further long-term boost with the award of the

2022 World Cup. In the UAE, high competition

drove margins to the lowest in the Middle East

because of the lack of good corporate clients and a

retail client base which is thin because of

deterrent legislation that makes loan default a

criminal offence. As a result, future growth and

profitability improvement in UAE will be

challenging, in our view.

Capital is healthy and unlikely to be target of the new regulation

The loftier the building, the deeper must the

foundation be laid.

Thomas Kempis

While most EM banks have adequate capital, the

trend in post-crisis banking regulation is towards

increasing capital requirements, which can reduce

return on equity. However, we expect a limited

effect on EM banks.

The recommendations proposed by the Basel

Committee on Banking Supervision in December

2011 (Basel III) are aimed at strengthening the

banking sector by optimising capital allocate for

securities markets operations (counterparty and

market risks and exclusion of non-Tier 1

instruments (CET1), improving leverage and

liquidity by introducing a stringent liquidity

coverage ratio (LCR), and net stable funding

requirements (NSFR).

In our view the impact of Basel III regulations on

EM banks will be muted. Not only is it unclear

which countries will implement the guidance and

when, but EM banks also present some particular

challenges: (a) the guidance will be difficult to

implement, particularly considering limited adoption

of Basel II by EM countries and more urgent policy

priorities concerning stabilising the economy; (b)

EM banks generally have a simple business model

with limited exposure to capital markets so that they

fall outside the main thrust of Basel III; and (c) EM

banks generally enjoy a strong capital position and

limited use of non-Tier 1 instruments.

In our view local regulators, which often have

limited independence and power, will likely opt

for late adoption of the guidance in order to not

put local players at a disadvantage, with the

exception of Brazil.

The first challenge to Basel III adoption is that in

addition to typical credit, market, or counterparty

risks, EM banks have substantial structural

deficiencies such as a high level of related-party

or single-borrower exposure and extremely high

loan and deposit concentration, which makes

probability-driven loss calculations superficial and

irrelevant, even if regulators do have appropriate risk

management tools, which is not always the case.

In driving industry reforms, local regulators are

hampered by limited system readiness, and often

prioritise more urgent local matters. For example

these include: containment of credit growth in

China, managing the risk of a real estate bubble

through tighter personal loan guidelines in

Singapore, encouraging restructuring and

diversification of sector exposure in India,

reducing related party exposure in Russia,

expanding the government toolbox to control the

banking sector in Kazakhstan, and imposing

tighter controls on currency speculation in

Ukraine and Brazil.

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Finally, looking at capital adequacy (Chart 14),

which is a special focus of Basel III, EM banks in

this report generally have a solid capital base that is

in many cases sufficient to both support growth that

is above that of developed markets, and also to

cushion credit losses that are also likely to be above

that of developed markets. Non-Tier 1 capital

instruments are also not as widely used in EM, and

would have limited impact even in the case of likely

early adopters such as Brazil, the UAE and HK. In

HK for example, regulatory capital calculations

already exclude non-Tier 1 instruments.

When and if Basel III is adopted, we expect NSFR

to have a more significant impact on EM banks, as

they will be more actively looking for long-term

sources of capital, including capital markets. We

believe that for most EM countries the direct

operational and financial impact of Basel III will be

limited in the short to medium term.

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Tier 1 capital ratio of EM banks: Chart 14-1: The majority of Asian banks benefit from healthy capitalisation

0%2%4%6%8%

10%12%14%16%18%20%

OCB

C

Unite

d O

vers

eas

Bank

DBS

Bank

Kore

a D

evel

opm

ent B

ank

ICIC

I Ban

k Lt

d

Shin

han

Bank

Kore

a Ex

chan

ge B

ank

Bang

kok

Bank

Han

aBa

nk

BOC

Hon

g Ko

ng

Woo

riBa

nk

Kook

min

Bank

Dah

Sing

Ban

king

Gro

up

Citic

Bank

Inte

rnat

iona

l

Bank

of E

ast A

sia

Stat

e Ba

nk o

f Ind

ia

Indu

stria

l Ban

k of

Kor

ea

Axis

Ban

k

Chi

na D

evel

opm

ent B

ank

ICBC

(Asi

a)

Bank

of I

ndia

Bank

of B

arod

a

Tier

1 c

apita

l (%

) Basel III requirement : 8.5%

0%2%4%6%8%

10%12%14%16%18%20%

OCB

C

Unite

d O

vers

eas

Bank

DBS

Bank

Kore

a D

evel

opm

ent B

ank

ICIC

I Ban

k Lt

d

Shin

han

Bank

Kore

a Ex

chan

ge B

ank

Bang

kok

Bank

Han

aBa

nk

BOC

Hon

g Ko

ng

Woo

riBa

nk

Kook

min

Bank

Dah

Sing

Ban

king

Gro

up

Citic

Bank

Inte

rnat

iona

l

Bank

of E

ast A

sia

Stat

e Ba

nk o

f Ind

ia

Indu

stria

l Ban

k of

Kor

ea

Axis

Ban

k

Chi

na D

evel

opm

ent B

ank

ICBC

(Asi

a)

Bank

of I

ndia

Bank

of B

arod

a

Tier

1 c

apita

l (%

) Basel III requirement : 8.5%

Source: Company data, Latest, see profiles

Chart 14-2: Middle Eastern and LatAm Banks: Capital should be sufficient to support growth and asset quality

0%2%4%6%8%

10%12%14%16%18%20%

Nat

iona

l Ban

kof

Abu

Dha

bi

Com

mer

cial

Bank

of Q

atar

Banc

oBr

ades

co

Emira

tes

NBD

Abu

Dha

biC

omm

erci

alBa

nk

Itau

Uni

banc

o

Saud

i Brit

ish

Bank

BND

ES

Banc

odo

Bras

il

Banc

oVo

tora

ntim

Tier

1 c

apita

l (%

)

Basel III requirement : 8.5%

0%2%4%6%8%

10%12%14%16%18%20%

Nat

iona

l Ban

kof

Abu

Dha

bi

Com

mer

cial

Bank

of Q

atar

Banc

oBr

ades

co

Emira

tes

NBD

Abu

Dha

biC

omm

erci

alBa

nk

Itau

Uni

banc

o

Saud

i Brit

ish

Bank

BND

ES

Banc

odo

Bras

il

Banc

oVo

tora

ntim

Tier

1 c

apita

l (%

)



Chart 14-3: CIS Banks: Capital is generally strong, while capital position of ATF is likely to be supported by foreign parent

0%

5%

10%

15%

20%

25%

30%

Ukr

exim

bank

VEB

Hal

ykBa

nk

KKB

Bank

of

Mos

cow

RSH

B

Alfa

Ban

k

Priva

tban

k

VTB

Sber

bank

Gaz

prom

bank

ATF

Tier

1 c

apita

l (%

)


0%

5%

10%

15%

20%

25%

30%

Ukr

exim

bank

VEB

Hal

ykBa

nk

KKB

Bank

of

Mos

cow

RSH

B

Alfa

Ban

k

Priva

tban

k

VTB

Sber

bank

Gaz

prom

bank

ATF

Tier

1 c

apita

l (%

)



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Funding and supply: who is paying?

EM banks, whether strong or weak, suffer from

one big funding problem: their assets are longer

then their liabilities (Chart 15). In our view, this

dislocation was one of the main reasons for bank

defaults in Ukraine and Kazakhstan. This

mismatch will continue to make EM banks more

vulnerable to external and internal shocks as

deposit growth is often insufficient to fund the

loan growth alone (Chart 16). Even if a bank

enjoys plenty of liquidity from a stable deposit

base, it could be eroded due to potentially volatile

nature of EM deposits, sensitive to negative

market sentiments.

Chart 16: Deposit growth is constraining loan growth and banking penetration, funding of EM banks

Turkey$576bn

France$10,480

UK$12,287

Germany$11,115

Korea$1,422

Brazil$2,206

Saudi Arabia$369bn

Qatar$139bn

UAE$420bn

Ukraine$112bn

Kazakhstan$81bn

Russia$903bn

Thailand$286bn

Singapore$1,549bn

HK$1,546bn

China$13,200

India $1,335

0%

50%

100%

150%

200%

250%

300%

350%

400%

35.0% 55.0% 75.0% 95.0% 115.0% 135.0% 155.0%

Loan-to-deposit ratio

Ban

king

ass

ets

/ GD

P

1247%

198%

Bubble size stands for asset size of banking system in particular country Source: CB county websites, HSBC, Fitch, 2010

Chart 15: Most banks suffer from maturity mismatch, funding long-term loans with short-term liabilities

-105%-85%-65%-45%-25%

-5%15%35%55%75%95%

Chi

na D

evel

opm

ent B

ank

Sber

bank

Hal

yk

Banc

oBr

ades

co

EXIM

Ukr

exim

bank

Saud

i Brit

ish

Bank

Stat

e ba

nk o

f Ind

ia

Nat

iona

l Ban

k of

Abu

Dha

bi

OC

BC

Com

mer

cial

ban

k of

Qat

ar

BOC

Hon

g Ko

ng

Bang

kok

bank

Liqu

idity

sur

plus

(gap

) as

% o

f tot

al a

sset

s

< 1 year > 1 year

-105%-85%-65%-45%-25%

-5%15%35%55%75%95%

Chi

na D

evel

opm

ent B

ank

Sber

bank

Hal

yk

Banc

oBr

ades

co

EXIM

Ukr

exim

bank

Saud

i Brit

ish

Bank

Stat

e ba

nk o

f Ind

ia

Nat

iona

l Ban

k of

Abu

Dha

bi

OC

BC

Com

mer

cial

ban

k of

Qat

ar

BOC

Hon

g Ko

ng

Bang

kok

bank

Liqu

idity

sur

plus

(gap

) as

% o

f tot

al a

sset

s

< 1 year > 1 year

Source: Bank financials

44


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Chart 17: Supply weighted towards Russia, Brazil and Korea EM financials debt outstanding by country as of Feb 2011

Russia13%

Brazil13%

S. Korea12%

China4%

Other28%

UAE7%

Mexico8%Philippines

6%

Kazakhstan3%

India3%

Venezuela3%

Russia13%

Brazil13%

S. Korea12%

China4%

Other28%

UAE7%

Mexico8%Philippines

6%

Kazakhstan3%

India3%

Venezuela3%

Russia13%

Brazil13%

S. Korea12%

China4%

Other28%

UAE7%

Mexico8%Philippines

6%

Kazakhstan3%

India3%

Venezuela3%

Source: Dealogic

EM banks are expected to be active borrowers

in external debt markets

Financials are by far the largest industry sector in

EM external debt, representing around 44% of

total (Chart 1). We expect around USD70bn of

supply in 2011 (with South Korean, Brazilian, and

Russian issuers leading the pack) as EM banks

seek to fund their growth (Chart 17).

While the banking system growth in several EM

countries outpaces by far both deposit growth and

the country’s GDP, the crisis had the painful but

healing effect of reducing leverage and improving

the funding structure as deposit accumulation and

more cautious lending policies has led to

improved loan-to-deposit ratios (Chart 18).

Chart 18: Crisis triggered de-leverage in EM economies

0%

50%

100%

150%

200%

250%

Ukr

aine

Kaza

khst

an

Kore

a

HK

Braz

il

Rus

sia

Qat

ar

UAE

Thai

land

Saud

i

Indi

a

Chi

na

Sing

apor

e

Loan

to d

epos

it ra

tio

2008 2010

Source: Central Banks websites, Fitch

However even companies with healthy loan-to-

deposit ratios (a ratio of around 100% is

considered optimal), can suffer from some form

of maturity mismatch.

These mismatches will be addressed by EM banks

continuing to access external public markets

frequently, although there will be a diversity of

needs, timing, and scale.

Issuance by EM banks in 2010 exceeded all

earlier expectations. This was driven not just by

the need to refinance public and private debt, but

also by a very low interest rate environment in the

developed world, and need to raise sources with

long-term maturities and to address demand for

hard currency by the bank’s clients (Chart 19).

In 2010 Asian financials issued some USD24bn,

well above our expectations, while just USD8.2bn

of bonds matured. Similarly, in CIS and GCC

countries the volume of issues reached USD17bn

and USD16bn, respectively.

Brazilian banks issued some USD17bn, despite

having strong liquidity and a light repayment

schedule, in attempting to fix low coupons and

extend maturity profiles.

Asian and Brazilian banks were active suppliers

of hybrid capital instruments in 2010. We do not

expect this trend to continue in the medium term

and do not favour hybrid structures, which could

be increasingly pushed to share more risks in case

of banks insolvency. Basel III treatment will also

entice banks to focus on Tier 1 capital.

Banks will continue to borrow in 2011

As the capital markets start opening up again we

expect a growing number of banks from EM to

raise international debt. We have already seen

some established names placing Eurobonds in the

post-crisis period. Also banks from less-

traditional issuer countries such as Turkey, the

UAE, Saudi Arabia and Qatar have established

45


abc

successfully their presence in the Eurobond

markets and are likely to stay there. The interest

of banks in external borrowings will be further

boosted by the demand of their corporate clients

for credit. It is much easier for banks to raise

international debt than it is for corporates, which

typically have to turn to domestic financial

institutions for funding.

Russia, Brazil, Korea and then UAE and India are

likely to be the most frequent issuers in 2011 Indeed,

2011 has already started with a strong pipeline of

issues, with USD11bn from the banks covered in

this report with those from Brazil leading the pack.

Should the low interest rate environment and

investor demand continue, we expect this trend to

lead to cUSD100bn of new issues, compared to

2011 refinancing need of USD30bn.

Asia: we expect total borrowing of USD26bn

From Asia, we expect a total USD26bn, including

USD9bn of refinancing from Korea, USD7bn to

fund growth from India, USD4bn from each

Singapore and HK and USD2bn from Thailand

and other Asian countries.

For Korea, we think issuance could reach

USD9bn, similar to levels in 2010. We think the

sector as a whole will remain in de-leveraging

mode, particularly the commercial banks. They

will likely substitute public debt with bilateral

borrowings and privately placed deals. The policy

banks will likely step up issuance as it is their

primary source of funding. Net issuance of

USD4bn is not large for the Korean banking

sector, in our view.

For example India might need about USD18bn of

funding to cover the shortfall, but given its low loan

to deposit ratio we expect that less then a half of this

amount will be funded by public borrowing.

Indian banks will likely be relatively big issuers in

2011, estimated at USD7bn given the strong

growth prospects and USD demand by Indian

corporates. Redemptions in 2011 are only

USD1bn (Chart 4), so the net issuance of USD6bn

is a relatively significant supply for issuers rated

in the BBB-category.

Singaporean banks will see redemptions of

USD2.8bn in 2011, which we expect will be

refinanced. Total issuance could reach USD4bn

taking into account growth prospects.

The level of sub-debt issuance out of Hong Kong

this year will likely not be repeated in 2011.

However, given the strength of lending abroad by

Hong Kong banks and the tighter loan-deposit

ratio of some banks, we expect issuance of about

USD4bn, particularly among subsidiaries of

mainland banks.

Indonesian and Thai banks are showing strong

growth prospects and could also potentially access

the US dollar-denominated debt market in 2011.

In the CIS, new issues should also be in the

range of USD18bn. Among the CIS countries,

which face USD9.2bn of Eurobond maturities, we

expect at least USD15bn of external issues from

Russian banks to fund projected growth of 15-

20% in 2011. Kazakh banks, particularly KKB,

might come back this year but with quite

moderate appetite.

We expect manageable supply from GCC

countries (USD12bn)

We expect lower supply from GCC countries, where

maturing debt does not to exceed USD7bn this year,

and a combination of inflows to deposit and earnings

should be sufficient cover growth in 2011. However,

given the banks’ need to refinance short- dated

deposits and bilateral funding with longer date

borrowings to match longer dated infrastructure

loans, we envisage USD12bn of supply, mainly

from UAE and Qatari banks.

46


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Brazilian banks are likely to issue USD20bn

Finally, Brazilian banks are likely to be the most

active borrowers with expected issuance to reach

around USD20bn. USD4bn having already been

placed by the middle of February 2011. Brazilian

banks have just USD2bn of public funding to be

repaid this year, but they are planning to grow

another 15%-20% this year, while deposit growth

is likely to lag.

The EM banks will be competing for investor

money with peripheral Eurozone financial

institutions as in the post-crisis world the

difference between these two issuer groups has

become rather blurred. Now the main

differentiating factor between them will be the

currency denomination of debt rather than

creditworthiness. Some emerging market bank

may be even viewed as safe haven when

compared to their Euro-zone peers decimated

during the crisis. This could fuel demand for their

paper. Traditionally the emerging market issuers

have given preference to USD denominated

facilities while Euro-zone institutions opted for

EUR. However, based on price considerations this

difference may disappear.

Overall, we believe the banking sector’s credit

metrics has improved for most EM countries, and

although the crisis is not fully over in some markets,

we believe that the industry has turned the corner.

We believe the peak in NPL has passed (barring the

UAE and probably Brazil), liquidity and capital

positions are good, and profitability, although

shrinking due to competition, remains superior to

that Western markets. Moreover, reliance on a

traditional banking model and limited exposure to

structured products and capital markets mutes the

impact of Basel III.

Chart 19: Strong supply of Eurobonds from EM banks expected in 2011

02

46

8

10

121416

18

20

Braz

il

Rus

sia

S. K

orea

Indi

a

UAE H

K

Qat

ar

Sing

apor

e

Kaza

khst

an

Thai

land

Ukr

aine

Saud

i Ara

bia

Chi

na

USD

bn

2009 2010 2011A 2011E

Source: Source: Dealogic, Bloomberg, HSBC

47


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Russia and Korea to remain active borrowers in 2011 and 2012 Chart 21a: 2011 maturity, Eurobonds

02468

101214

S. K

orea

Russ

ia

Philip

pine

s

UAE

Hun

gary

Braz

il

Chi

na

Indo

nesi

a

Mex

ico

Ukr

aine

Vene

zuel

a

Chi

le

Saud

i

Arab

ia

Kaza

khst

an

Qata

r

USD

bn

Financials Other corporates

Source: Dealogic

Chart 21b: 2012 maturity, Eurobonds

0

5

10

15

20

S. K

orea

Russ

ia

Phi

lippi

nes

UAE

Hun

gary

Braz

il

Chi

na

Indo

nesia

Mex

ico

Ukr

aine

Vene

zuel

a

Chi

le

Saud

i

Arab

ia

Kaza

khst

an

Qat

ar

USD

bn

Financials Other corporates

Source: Dealogic

Chart 20: EM Eurobond deals, 2011

Issuer Deal pricing date Amount (m) Currency Coupon Maturity type Maturity

ADCB 08/03/2011 150 CHF 3 AT MATURITY 08/12/2015 Bank of Baroda 24/02/2011 500 USD 5 AT MATURITY 24/08/2016 VTB 22/02/2011 750 USD 6.315 AT MATURITY 22/02/2018 State bank of India 22/02/2011 325 CHF 3.375 AT MATURITY 22/02/2016 VEB 17/02/2011 500 CHF 3.75 AT MATURITY 17/02/2016 Bank of India 16/02/2011 500 USD 6.25 AT MATURITY 16/02/2021 Banco Votorantim 11/02/2011 750 USD 5.25 AT MATURITY 11/02/2016 Bank of Moscow 01/02/2011 150 SGD 4.25 AT MATURITY 01/02/2013 Halyk 28/01/2011 500 USD 7.25 AT MATURITY 28/01/2021 Banco do Brasil 20/01/2011 750 EUR 4.5 CALLABLE 20/01/2016

Source: Bloomberg

48


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Chart 22a: Eurobond maturity by bank 2011

0

500

1000

1500

2000

2500

3000

3500

4000

4500

VTB

OC

BC

Kore

a D

evel

opm

ent

Bank

Expo

rt-Im

port

Ban

k of

Kor

ea

ICBC

(Asi

a)

Abu

Dha

bi C

omm

erci

al B

ank

PJSC

VEB

Emira

tes

NBD

PJS

C

Chi

na D

evel

opm

ent B

ank

DBS

Ban

k

Bank

of B

arod

a

Sber

bank

Itau

Uni

banc

o

Bank

of I

ndia

Indu

stria

l Ban

k of

Kor

ea

KKB

Kook

min

Ban

k

Woo

ri Ba

nk

Stat

e Ba

nk o

f Ind

ia

ICIC

I Ban

k Lt

d

Ukr

exim

bank

CO

MM

ERC

IAL

BAN

K O

F Q

ATAR

Saud

i Brit

ish

Bank

Gaz

prom

bank

BND

ES

Banc

o Vo

tora

ntim

Bank

of M

osco

w

Bank

of E

ast A

sia

Banc

o Br

ades

co S

A

Alfa

Ban

k

Kore

a Ex

chan

ge B

ank

Axis

Ban

k

Shin

han

Bank

Citi

c Ba

nk In

tern

atio

nal

BOC

Hon

g Ko

ng

USD

m

Source: Bloomberg

Chart 22b: Eurobond maturity by bank 2012

0

500

1000

1500

2000

2500

3000

3500

4000

Expo

rt-Im

port

Bank

of K

orea

ICIC

I Ban

k Lt

d

Kore

a D

evel

opm

ent B

ank

VTB

Alfa

Ban

k

Emira

tes

NBD

PJS

C

Han

a Ba

nk

Axis

Ban

k

Chi

na D

evel

opm

ent B

ank

Nat

iona

l Ban

k of

Abu

Dha

bi P

JSC

Kook

min

Ban

k

Shin

han

Bank

Expo

rt-Im

port

Bank

(Chi

na)

Alfa

Ukr

aine

Priv

at b

ank

Kore

a Ex

chan

ge B

ank

KKB

Indu

stria

l Ban

k of

Kor

ea

Stat

e Ba

nk o

f Ind

ia

Itau

Uni

banc

o

Ukr

exim

bank

Banc

o Br

ades

co S

A

ICBC

(Asi

a)

ATF

Rus

sian

Agr

icul

tura

l Ban

k

Bank

of E

ast A

sia

Bank

of I

ndia

Bank

of B

arod

a

Banc

o Vo

tora

ntim

DBS

Ban

k

Woo

ri Ba

nk

Citi

c Ba

nk In

tern

atio

nal

BOC

Hon

g Ko

ng

USD

m

Source: Bloomberg

49


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EM issuance by bank Chart 23a: Asia

0.00.51.01.52.02.53.03.54.0

Expo

rt-Im

port

Bank

of K

orea

Stat

e Ba

nk o

f Ind

ia

ICIC

I Ban

k

BOC

Hon

g Ko

ng

Woo

ri Ba

nk

Kore

a D

evel

opm

ent B

ank

Han

a Ba

nk

Kook

min

Ban

k

Indu

stria

l Ban

k of

Kor

ea

Shin

han

Bank

Bank

of I

ndia

Bang

kok

Bank

Bank

of E

ast A

sia

DBS

Ban

k

OC

BC

Bank

of B

arod

a

Axis

Ban

k

ICBC

(Asi

a)

Citi

c Ba

nk In

tern

atio

nal

Kore

a Ex

chan

ge B

ank

Dah

Sin

g Ba

nk

Uni

ted

Ove

rsea

s Ba

nk

Chi

na D

evel

opm

ent B

ank

Expo

rt-Im

port

Bank

of C

hina

USD

bn

2009 2010 2011

Source: Dealogic

Chart 23b: EMEA

0

1

2

3

4

5

BTA

VTB

VEB

Sber

bank

Alfa

Ban

k

Gazp

rom

bank

DBK

RSH

B

Bank

of

Mos

cow

Allia

nce

Bank

Halyk

EDB

ATF

KKB

USD

bn

200 9 2010 2 011

7

Source: Dealogic

Chart 23b: LatAm and Middle East

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Banc

o do

Bras

il

Banc

o

Brad

esco

Itau

Uni

banc

o

BND

ES

Banc

o

Voto

rant

im

Com

mer

cial

bank

of Q

atar

Nat

iona

l Ban

k

of A

bu D

habi

PJSC

Abu

Dha

bi

Com

mer

cial

Bank

Saud

i Brit

ish

Bank

Emira

tes

NBD

USD

bn

2009 2010 2011

Source: Dealogic

Glo

bal E

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EM

Ban

ks M

arch 2011

50

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cMarket overview Asia

China India Hong Kong Korea Singapore Thailand

GDP growth 2011 (HSBC forecast)

8.90% 8% 5.20% 4.90% 5.20% 5.30%

Country’s total FX reserves (USDbn)

2,847 299 258 291 223 161

System structure A total of 3,857 financial institutions, including 5 large commercial banks and 12 joint-stock commercial banks

Top 5 account for 51% of banking assets

81 commercial banks (27 public, 22 private and 32 foreign)

Relatively high concentration, with top 10 banks accounting for 57% of banking assets

State banks are prominent, with 74% of assets

23 banks incorporated in HK, with the top 5 accounting for 68% total assets

18 banks, with the top 4 banks representing 48% sector assets

205 banks, including 3 local banks (with 60% of country’s loans) and 24 foreign banks with full banking licence

34 banks, including 14 domestic banks; the top 4 banks account for 60% of banking assets, the top 10 for 88%

Market trends Still high credit growth expected (20%+); although the government is taking steps to cool it down

No explicit credit quota for 2011, as use of discounted bills and informal securitisation circumvented loan quotas in 2010

Concerns on non-performing loans to local government financing vehicles to weigh on asset quality and capital level

Competition for deposits and higher reserve requirement (currently 17.5-19.5%) are placing pressure on funding

High inflation is likely to erode savings and deposit growth

After slowdown in 2008-09, the economy has returned to pre-crisis growth level; high credit growth, which could become a concern for asset quality

Margins have been expanding on strong credit demand and cheaper CASA deposits, but are expected to reverse on funding squeeze

Strong USD demand from Indian corporates pushed up Indian banks’ offshore financing

Loan growth rebounded strongly in 2010 on robust growth in trade finance, the domestic property market and lending outside HK

Lending to corporates with end use in China rose significantly

Asset quality continues to improve but NIM is becoming squeezed in low rate environment

Deleveraging of the banking sector, with total credit/GDP declining to 177% in Q1 2010 from 184% at YE 2008, however – still high vs. peers

Banks’ funding structures improved on the back of lowered loan growth and increased deposit funding

Further restructurings and provisions to come

Expected loan growth between 4-7% in 2011

Profitability likely to remain a challenge

Economy is highly sensitive to external trade and has been very volatile

Strong growth momentum at present, although the state has restricted speculative mortgage lending

Loan demand is expected to improve, but NIM pressure to continue owing to competition

Asset quality to improve, as NPLs peaked at 2.4% in 2009

Strong performance throughout the global crisis and political turbulence

Loan growth has been limited since 2006 owing to political instability, which has resulted in few signs of an asset bubble

Cautious approach to corporate leverage and conservative lending standards

NPLs likely peaked in 2008, at 5.7% (down to 4.6% in Q3 2010)

Source: HSBC

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cMarket overview (cont’d) Brazil and CIS

Brazil Kazakhstan Russia Ukraine


5.10% 6% 4.80% 4%


302 31 497 32

System structure Concentrated system, with 2 state-owned banks accounting for 60% of deposits

Concentrated and relatively small system with only 37 banks, 11 of which have foreign participation

The top 10 banks account for 92% of the system’s assets

Large number of banks (1,087) but 55% of assets are concentrated within the top, 5 state-owned banks, which receive disproportionate support

The second tier comprises 30 private and foreign-owned banks, the rest are small financial institutions

185 commercial banks (14 in liquidation) The top 10 banks accounting for 50% of system’s

assets High level of foreign ownership: 53 banks (45%

of the system’s capital)

Market trends Improving economy and increased liquidity Strong credit growth but government’s anti-

cyclical measures aim to slow it down Competition is increasing but cheap funding will

support margins Shift of focus to liquidity and asset quality from

profitability Government banks replaced private sector

lending during the crisis, but this is now reversed (state banks lending grew 40% and 32% in 2008 and 2009, respectively, and 20% in 2010 (expected))

Three defaulting banks have been undergoing restructuring (Alliance, completed; BTA and Temir, ongoing); for others, credit growth is depressed as most NPLs are still on the balance sheet

Banks are accumulating liquidity and reluctant to lend

The system avoided a deposit run despite three failures

Shrinking NIM owing to tighter competition for deposits and low interest rates

Gradual exit from support measures Asymmetric support for top, state-owned banks Weak asset quality but reasonable capitalisation

and provisioning Likely consolidation to come

Continued deterioration in asset quality, with half of the loans being restructured or non-performing

Extensive capital shortfall in the system: NBU has requested banks to raise some USD6bn in capital

Severe run on deposits during the crisis

Source: HSBC Middle East

UAE Qatar Saudi Arabia


3.30% 9.50% 4.40%


41 113 410

System structure 52 banks in total, with top nine banks accounting for 81% of banking

assets 14 banks, with top 5 banks accounting for 75% of banking assets 12 banks, with the top 5 accounting for around 60% of banking

assets Market trends Economic environment likely to be subdued:

Progress in restructuring the debt of government-related entities Lending growth is expected to resume Increased competition for deposits to put pressure on margin Legacy exposure to real estate remains a risk factor

Very strong economic growth Healthy asset quality with low NPLs World Cup 2012: local banks will be major beneficiaries of the

expected USD54bn spending

Banks’ profitability is expected to grow in 2011 as provisioning charges have already peaked

Saudi banks should remain well capitalised. Despite a formal minimum capital adequacy requirement of 8%, banks seem to maintain a 12% floor

Efficiency is expected to remain strong

Source: HSBC

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cSummary of support measures during the crisis Asia


Support during the crisis:

Temporarily removed credit quota (ie upper lending limit) for the year

Temporarily suspended 75% loan-to-deposit ratio for small- to medium-sized banks

Relaxation by RBI of loan restructuring criteria in 2008, allowing for easier restructuring of NPLs

Capital injections in state banks with low capital and close to 51% state ownership; other banks were free to tap equity market

Temporary blanket deposit guarantee was introduced during the crisis; it expired in 2010

The state set up a bank recapitalisation fund

Purchased bad loans from banks via majority state-owned Korea Asset Management Corp

Provided certain SMEs with guarantees for bank loans

Direct liquidity and funding support

USD100bn were available in the form of guarantees for banks to issue foreign currency debt

USD16bn ‘Resilience package’ to support economic stability

Temporary blanket deposit guarantee from October 2008 to December 2010

SME guarantee to share 90% of risk with banks

Measure to reduce speculative property demand

Bilateral swap lines set up with the US Fed (USD30bn) and Dutch DNB to support banking system; lines were not used

USD48bn stimulus package introduced in 2009 through 2012

Deposit protection extended to all type of deposits – to 100%; this will decrease to USD34,000 by Aug 2012

Liquidity support Central bank has always offered liquidity support to banks in China. No extraordinary support was required during the crisis.

RBI liquidity injections in 2010 through REPO on government paper

RBI made USD liquidity line available for banks in 2008/09

Reduced the statutory liquidity ratio from 25% to 24% from 18 December 2010

Temporary measures to provide liquidity assistance from October 2008 to March 2009, including the expansion of assets acceptable to and the duration of liquidity assistance through the discount window, FX swaps and the lending of term money at the request of the banks

Incorporating FX swaps and term repo into HKMA’s ongoing market operations to offer HKD liquidity assistance to banks, starting from April 2009

The authorities made USD50bn in short-term foreign currency liquidity support available to Korean banks in a combination of a swap facility (USD10bn), a loan facility (USD30bn) and loans secured by export bills (USD10bn).

The government has given an FX guarantee commitment of up to USD100bn for three years, to enable banks to fund in the USD debt market

MAS standing facility already existed pre-crisis but the type of collateral was widened in 2009

None

Capital injections USD29bn injected into ICBC, CCB, BOC and BoComm through participation in rights issue or IPO in 2010: USD1.5bn to PSBC in 2010; USD19bn into ABC in 2008

USD3.6bn was injected into state banks in 2010, to maintain 8% Tier 1 ratio

No capital injection required, although a Contingent Bank Capital Facility was established

KRW20trn (USD15bn) bank recapitalisation fund, that was available to all banks

The government injected KRW3.4trn into major banks

None None

Bailouts/ defaults/restructuring

None No bank failures; some small private banks were acquired by state banks with no losses to debtors

None None None None

Source: HSBC

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cSummary of support measures during the crisis (cont’d) Asia (cont’d)


Most recent regulations:

State council approved new bank capital rules, incorporating new ratios proposed under Basel III

CBRC required banks to bring trust loans back on to the balance sheet in 2011

CBRC assigned higher risk weighting to non-performing lending to local government financing vehicles

Introduction in 2008 of guidance for loan restructuring and NPL provision requirements (to 70% of NPLs by September 2010)

Introduction of limitation on sector concentration (including capital markets, 40% of capital, and real estate, 15% of loans)

Minimum capital requirement for new banks is expected to increase from USD43m to USD107m

LTV ratio ceiling set at 80%, and risk weighting and provisioning requirement on residential housing loans raised

Deposit protection increased from HKD100,000 (USD13,000) to HKD500,000 (USD65,000), replacing the temporary blanket guarantee introduced during the crisis

Loan/deposit ratio should be less than 100% by end-2013

Mid- to long-term financing ratio to be raised to 100% from 90%

New limits on banks’ FX derivative positions (to 50% of equity capital for domestic banks and 250% of equity capital for foreign banks)

The government is seeking to introduce a bank levy on non-core foreign currency borrowings in H2 2011

No recent changes, as the normative ratio already exceeded global standards: Tier 1 of 6% and CAR of 10% (versus 4% and 8% globally); more stringent loan classification (requiring the monitoring of borrowers’ credit weakness, rather than only non-payments); stricter guidance on personal loans

Consumer protection measure to limit unfair bank fees (affecting some 6-10% of bank earnings)

Source: HSBC

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cSummary of support measures during the crisis (cont’d) Brazil and CIS



Looser reserve requirements, broader deposit guarantees

Banks across the system have been active in tapping international capital markets for both hybrid capital instruments and senior debt

Government cut the key base rate by 500bp to 8.75%

Limited support to banks, allowing three large banks to fail and forcing losses on bondholders

Total support amounted from the government to USD8.2bn (including USD2.9bn in capital and USD3bn in long-term deposits)

USD5bn bonds from SamrukKazyna being used in restructuring to convert into preference shares of Alliance and BTA

Quick crisis response by CBR and MinFin: support started in Q4 2008, and was largest in EM – 10% of GDP (cUSD200bn):

Mostly took the form of liquidity injections, but also capital injections and bailouts

Reduced reserve requirements on liabilities Unsecured 1-year loans from CBR (some

USD400m), now significantly reduced Extended range of securities for REPO (some

100 companies) – likely to stay in medium term Loan secured by unmarketable collateral

(interbank guarantees and loans to corporates) totalled USD750m; likely to be closed in 2011

But CBR allowed some 30 private banks to default

Initial response was relatively good, with sizeable liquidity measures equivalent to 13% of deposits

Liquidity support RUSD100bn liquidity through reduced mandatory provisioning (reinstated from March 2010)

USD3bn in long-term deposits USD100bn in short-term funding (12% of banking liabilities), including USD10bn subordinated loan to Sberbank

Increase in securities eligible for repo transactions

NBU provided USD7.8bn in loans to banks in H1 2009

NBU introduced a temporary memorandum on early deposit withdrawals in March 2009, which was eventually lifted in May 2009

Foreign-owned banks received liquidity support from parents

Capital injections USD110bn in BNDS (USD18bn to finance Petrobras shares)

USD2.9bn of capital injected into BTA, KKB, Halyk, Alliance

Total: USD27.4bn: a USD15bn sub loan to Sberbank; USD5.8bn capital injection and a USD6.7bn sub loan to VTB. Around 30 banks received sub debt from state-owned VEB in 2009

Initial capital injection of USD1.2bn into three nationalised banks to be followed by a further USD1.88bn commitment


One bank (PanAmericano): no government involvement as private owners borrowed USD1.5bn from deposit guarantee fund

Government had to nationalise BTA, Alliance BANK and Temirbank, but senior and subordinated debtholders suffered from significant haircuts

USD5.5bn bailout of Svyaz Bank, KIT Finance, Sobinbank and Globex

Default and liquidation of IIB (Mezhprombank), one of the top 20 banks, in 2010

Total banks cut from 1,136 (in 2007) to 1,087 now

3 banks nationalised and 14 went bankrupt


Curb short selling on foreign currency Anti-cyclical measures from December 2010:

increased reserve requirements from 15% to 20%, higher provisioning requirements on risky retail loans were introduced in December 2010

Extensive changes introduced, aimed at increasing state supervision of the sector:

Right for NBK to purchase over 10% of shares in banks in the event of a breach of normative ratios

Tightening of qualifications to the banks’ management

Limits placed on banks’ ownership by “offshore” entities Changes to the calculation of normative ratios

(current liquidity and liabilities-related ratios) to include off-balance-sheet liabilities

Key regulatory changes that could be introduced in 2011 include consolidated banking oversight and greater control over the banks’ single- and related-party exposure

Improvements in the capital framework, regulation of related-party exposure and securities trading

Capital requirements raised to USD3m from 2010 and to USD6m from 2012 (only 80% likely to comply)

Basel II/III unlikely to be adopted in the medium term

Measures to limit currency speculation and tighten currency controls

Planned increase in minimum capital requirement to USD15m from USD9m by 1 January 2012 was accepted by the Ukrainian court. Around 69 Ukrainian banks could be adversely affected

Anti-crisis introduction of 0% reserve requirement on foreign currency loans was abolished; 20% mandatory reserve requirement introduced from October 2010

As at November 2009, NBU prohibited foreign-exchange lending to individuals

Source: HSBC

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cSummary of support measures during the crisis (cont’d) Middle East



Government provided significant support through CBUAE short-term facilities (USD13.5bn) and MoF deposits convertible into subordinate debt (USD19bn in total):

Most deposits were converted during 2009

USD9bn support package launched in Q4 2008, including equity injections and liquidity support

Government provided significant support during the crisis in the form of deposit injections

Aggressive interest rate cuts SAMA increased dollar-swap facilities and limited issuance of T-

Bills to SAR3bn per week

Liquidity support USD13.5 short-term funding and USD13.5bn MoF deposits, convertible into Tier 2 capital

Special liquidity facility to support DW restructuring

Government purchased the entire portfolio of locally listed equities for cash and bonds

Purchase of bank loans (including real estate) Substantial deposits in all banks

Injections of SAR34bn in the form of deposits in 2008, SAR57bn in 6m of 2009

Capital injections Most banks converted MoF deposits into subordinate debt in 2009 USD4.4bn injection of perpetual Tier 1 securities by AD government

and USD1.1bn by Dubai

QCB purchased 10% stakes in local banks during 2008-09 and plans to increase it by another 10% in Q1 2011 to support continued growth

None


None None None


Tightening of provisioning requirements and recognition of bad loans

Restrictions on Islamic banking by conventional banks Reserve requirements were reduced to 7% of demand deposits and to 4% of savings and time deposits

Source: HSBC

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cRisks/strengths Asia


Strengths Strong domestic liquidity supported by high savings rate; average loan-deposit ratio of 69% for the banking system as at December 2010

Strong profitability on the back of a favourable macro backdrop

Stable retail deposit funding base

Sound liquidity

Very well capitalised compared with peers in the region

Funded through deposits and maintain relatively liquid balance sheets

Strong regulatory oversight

Reduced dependence on wholesale funding

Improving asset quality owing to recovery in the economy and massive NPL sales

Well-capitalised banking system, with average Tier 1 and capital adequacy ratios at 11.3% and 14.3%, respectively, as at H1 2010

Strong franchise supporting stable funding base;

Good liquidity (loan-to-deposit ratio of 71%) and capitalisation (CAR above 16%)

Reasonable profitability Good quality assets, suffered

limited impact during the global crisis

Conservative provisioning

Stable deposits (85-80% loan to deposits) and low level of wholesale funding resulted in strong liquidity and sector stability

improved earnings quality and capital

good asset quality owing to tight credit control

solid regulation, adoption of Basel II

Risks Reliability of information disclosure is limited by its fragmented nature, and unreported activity related to informal collateralisation and loan sell-down, which distort the size and industry breakdown of the loan portfolio

Problem loans may be masked by high credit growth

Vulnerable to real estate market and asset price correction

Capital levels are low relative to credit growth and profitability metrics

Accelerated pace of loan growth with possibility of an asset bubble, masking potential weakness of asset quality and performance of restructured loans

Potential need for capital in public banks to support growth

Low earnings diversification of public banks

Risk of excessive credit growth owing to loose monetary policy

Increase in mainland China exposure may lead to credit quality concerns

Lower NIM could hurt profitability

Household debt in Korea remains high

High exposure to construction/real estate sector

Restructuring of the shipping and shipbuilding sector in 2011 will keep loan provision high

Borrower concentration and real estate exposure remains significant (about 50% of SGD loans)

Significant exposure outside Singapore

Margin pressure from competition; fee income to remain volatile

Ongoing political uncertainty – credit inflow and strengthening currency could impair the credit quality of exporters and contribute to the creation of an asset bubble

Pressure on fee income from government consumer protection measures

High credit concentration (300% of Tier 1 for top 20 borrowers)

Source: HSBC Brazil and CIS


Strengths Its largely local funding base insulates it from the volatility in international capital markets

Strong capitalisation, stable margins None of the private banks defaulted during the

crisis

Good system liquidity Funding composition has improved in non-

defaulting banks following deleveraging, mostly through deposits from state-owned companies

Government support, particularly to top state-owned banks

Improved profitability Strong, although potentially volatile, domestic

funding base

Significant number of banks with foreign capital (47% of sector assets)

Risks Asset quality could deteriorate when new loans start to season

Medium-sized banks could have quite high external leverage

Liquidity is a still priority and a risk

Quality of assets remains a risk factor Poor transparency of loan portfolio performance Concentrated funding Corporate governance Quality of earning questionable owing to high

accruals of interest

Limited control of securities operations Gaps in monitoring of related-party transactions Risk management and corporate governance

Undercapitalisation Asset and earning quality Weak corporate governance Limited liquidity with high loans/deposits of

almost 200%

Source: HSBC

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cRisks/strengths (cont’d) Middle East


Strengths Capitalisation appears sufficient to absorb NPL increase Inter-Emirates support (by Abu Dhabi to Dubai) is a stabilising factor

Strong growth Healthy asset quality with NPLs at 1.7% Good liquidity: deposits provided a strong funding base – 2005-09

CAGR of 20% for demand deposits and 47% for time deposits Solid capitalisation

NPLs are adequately covered Comfortable liquidity levels Adequate capital adequacy ratios Prudent and strict regulator ensures Saudi banks’ readiness to cope

with downturns

Risks NPLs expected to peak in 2011 Liquidity pressure to remain;

Pressure on NIM High loan/GDP of close to 90% Concentration risk likely to increase Concentrated funding (mostly deposits) with increasing costs

High credit concentration High deposit concentration. Top 20 deposits account for 20-40% of

the total on Moody’s estimates Mismatch in maturity profile of assets and liabilities Political instability

Source: HSBC

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Credit spreads are fairly well explained by ratings alone A convenient initial reference point for investors

trying to evaluate risk/reward across regions,

industries, and countries, is a company’s credit

rating. Even though rating agencies are sometimes

criticised for being behind the curve, it is hard to

ignore that rating differences are able to explain

differences in credit spreads fairly well. For

example chart 1 shows that currently over 70% of

the average spread differences among names in

the Emerging Market Bond Index (EMBI) and

Corporate Emerging Market Bond Index

(CEMBI) are explained by their average credit

ratings from the three major agencies.

Chart 1: spreads vs ratings for EMBI and CEMBI names, 17 February 2011

y = 0.14x + 4.27

R2 = 0.71

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)

Log(

Spre

ad)


But differences in sector are also important Even though, as chart 1 demonstrates, credit ratings

account for a large part of the spread differences

among names, an aggregated chart, such as the one

above, does not reveal the systematic differences that

Relative value framework

It matters little to credit investors whether their carry comes from a

Chinese bank or a Brazilian oil producer, as long as the

underlying risk is comparable

Traditional credit analysis helps with the choice by examining

management, capital structure, and local knowledge, but pays

less attention to regional, industry, and country-specific

differences that are priced into credit spreads

HSBC introduces a framework that is able to account for these

macro-level differences systematically, and highlights trading

opportunities by giving a clearer view of how much of the

underlying story is priced into credit spreads

Keerthi Angammana Analyst HSBC Bank plc ++44 207 991 5431 [email protected]


59


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exist among spreads due to duration, industry sector,

or region. In contrast, chart 2 highlights financials in

black, and sovereigns in red to illustrate the

systematic differences between the sectors. The

fitted black line (representing financial institutions)

being to the left of (or above) the red line

(representing sovereigns) indicates that on average

financial sector credits trade as if they were lower

rated than those of a sovereign issuer of the

same rating.

Chart 2: spreads vs ratings for EMBI and CEMBI names for Sovereigns and Financials, 17 Feb 2011

y = 0.15x + 4.00

R2 = 0.72

y = 0.14x + 4.35

R2 = 0.75

4.04.5

5.05.5

6.06.5

7.07.5

0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)

Log(

Spre

ad)

Gov ernment Financial


In terms of terminology, we use the horizontal

distance between the fitted lines representing

different sectors as a measure of relative value

that is expressed in rating notches. For example in

chart 2, since on average financials offer a spread

pick-up over similarly-rated sovereigns, we would

call the financials ‘cheap’ to sovereigns, or say

that the sovereigns are “rich” relative to

financials, to a degree measured by the fitted

horizontal distance between the two lines.

There is an advantage to expressing relative

spreads in rating notches (rather than as a simple

difference in spread) because rating notches are

naturally adjusted to reflect the fact that

percentage spread differences are more important

than absolute spread differences. So, for example,

for a security to be cheaper by one notch

represents the same opportunity whether it is

relative to an A-rated security or a BB-rated

security, which makes for easier comparisons than

if richness or cheapness were expressed in terms

of a spread difference.

Richness or cheapness expressed in this way is

naturally risk-adjusted for volatility through its

association with ratings. However we emphasise

that to be a true valuation measure it has to be

combined with a fundamental and a directional

view on the likely evolution of richness and

cheapness in the relevant sector. At this stage we

focus our attention exclusively on the volatility

adjustment, without trying to understand if the

cheapness represents a true opportunity, or

whether it is just another way of expressing the

beta of a sector.

Chart 2 is for illustrative purposes, and for clarity

shows regressions for just two sectors (Financials

and Sovereigns). But in the full model we capture

multiple differences by simultaneously fitting the

sector (Government, Financial, Energy,

Communications), region (Asia, Eastern Europe,

Middle East, and Latin America), and duration.

Chart 3 shows how the differences among sectors

have evolved over time.

It can be seen from chart 3 that the financial sector,

for example, currently trades around 2½ rating

notches cheaper than sovereigns, but that difference

has been as much as four notches in the past. This

also provides a convenient way of evaluating the

downside risk associated with the extra carry of 2½

rating notches: this equates to 1½ notches, on the

assumption that conditions could revert back to

where they were in April 2009.

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Chart 3: richness/cheapness measured in rating notches (negative numbers indicate richness), EMBI + CEMBI

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

Feb-

09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug-

10

Dec

-10

Rich

/Che

ap


-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

Feb-

09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug-

10

Dec

-10

Rich

/Che

ap



Chart 4 shows the relative spread distribution over

the last two years. The fairly linear relationships

among the sectors supports the argument that the

corporate EM sectors are a leveraged play on

Sovereigns, with the Financials being the

most leveraged.

Chart 4: size- and duration-weighted sector spreads vs Government spreads, Feb 2009-Feb 2011, EMBI + CEMBI

200

400

600

800

1000

1200

1400

200 400 600Gov ernment OAS (bp)

Sect

or O

AS (b

p)

Gov t Fin Energy Comm


Regional differences also matter Chart 5 quantifies the widely held perception that

Asian credits, for example, are rich relative to

Eastern European credits. However, comparison

with chart 3 shows that regional differences are in

general smaller than the differences due to its

sector, although the recent spread widening in the

Middle East is significant.

Chart 5: richness/cheapness (in rating notches) for different regions (negative numbers indicate richness)

-1.5-1.0-0.50.00.51.01.52.0

Feb-

09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug-

10

Dec-

10

Rich

/Che

ap


-1.5-1.0-0.50.00.51.01.52.0

Feb-

09

Jun-

09

Sep-

09

Jan-

10

May

-

Aug-

10

Dec-

10

Rich

/Che

ap



Chart 6 is similar to Chart 4, and plots regional

spreads relative to Asia. In this it appears that

Eastern Europe is a leveraged play on Asia during

sell-offs (The black circles appear to fall on a line

with a higher slope than the red).

Chart 6: size- and duration-weighted sector Spreads vs Asia, Feb 2009-Feb 2011, EMBI + CEMBI

0200400600

80010001200

100 300 500 700

Asia OAS (bp)

Reg

ion

OAS

(bp)



However this chart does not show the relative

ratings of the regions, and indeed chart 7 shows

how ratings for Eastern European credits were

generally worse than for their peers during the

first half of 2009, which may be a better

explanation for worse spread performance than

assuming higher beta. Charts 5, 6, and 7 highlight

the advantage of our methodology of fitting all

sectors and regions simultaneously relative to

rating rather than the usual approach of using

index sectors, because it adjusts naturally for

credit quality.

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Chart 7: issue-weighted average rating for the different regions, February 2009 - March 2011

BB

BB+

BBB-

BBB

BBB+

A-

BB

BB+

BBB-

BBB

BBB+

A-

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct-0

9D

ec-0

9Fe

b-10

Apr-1

0Ju

n-10

Aug-

10Oc

t-10

Dec

-10

Feb-

11


BB

BB+

BBB-

BBB

BBB+

A-

BB

BB+

BBB-

BBB

BBB+

A-

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct-0

9D

ec-0

9Fe

b-10

Apr-1

0Ju

n-10

Aug-

10Oc

t-10

Dec

-10

Feb-

11



Chart 8 shows the average rating for the different

sectors has evolved over time

Chart 8: Issue-weighted average rating for different industry sectors, Feb 2009-March 2011

BB

BB+

BBB-

BBB

BBB+

A-

BB

BB+

BBB-

BBB

BBB+

A-

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct-

09De

c-09

Feb-

10Ap

r-10

Jun-

10Au

g-10

Oct-

10De

c-10

Feb-

11

Gov Fin Ener Comm

BB

BB+

BBB-

BBB

BBB+

A-

BB

BB+

BBB-

BBB

BBB+

A-

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct-

09De

c-09

Feb-

10Ap

r-10

Jun-

10Au

g-10

Oct-

10De

c-10

Feb-

11

Gov Fin Ener Comm

Source: Bloomberg, reuters, HSBC Calculations

Combining the effect of sector, region, and duration Simultaneously allowing for differences in sector,

region, and duration allows us to calculate an

adjusted measure that we call “Implied Rating”,

which is a measure that should be globally

comparable, and represents the theoretical spread

the bond would have if there were no differences

in sector, region, or duration.

The difference between the implied and actual rating

of a bond gives a measure of possible mispricing.

Obviously, at this point it is not possible to form an

opinion as to whether the mispricing is more likely

to be resolved through a spread adjustment or

through a rating change, but it does give the analyst a

clear picture of what is priced into spreads. In Chart

9 the vertical black arrow points to the actual rating

of the selected name, and the grey arrow points to

the implied rating.

Chart 9: illustration of implied rating and actual credit rating

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

0.0 5.0 10.0 15.0 20.0Av g Rating (AAA=1, C=21)

Log(

Spre

ad)

Rating


Working with an implied rating has several

advantages because it does not change if the

spread does not move relative to the market. This

is a useful feature to have, and ensures that

changes in implied ratings are driven by

idiosyncratic changes in the spread of the credit

rather than changes in overall market spreads.

Broadly speaking, all credit spreads move in the

same direction unless there is a specific reason for

a particular credit to buck the trend. The size of

the co-movement is quantified as the credit's

‘beta’, or sensitivity to the market, and represents

how many basis points the credit typically moves

when the market moves by a single basis point.

When looking for relative value trades, it is

typical to look for movements that cannot be

explained through the beta. This is a good

approach in theory, but often breaks down in

practice because betas are not stable, and it is not

clear over what period they should be calculated

in order to be relevant for the future.

However, since changes to the implied rating

exclude changes that are related to the market, and

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since the implied rating is a spot estimate that

depends on history, it is not subject to

inaccuracies resulting from a beta calculated over

a possibly unrepresentative historical period.

Differences among sovereigns must also be accounted for While we have developed a single measure of

relative valuation accounting for the differences

among regions and sectors, often two companies

from different countries are compared solely on

the basis of where they trade relative to the

sovereign, and a key question is whether the

underlying sovereign itself is trading rich or cheap.

We have developed a separate quantitative model

that attempts to answer this question using credit

ratings, consensus growth forecasts, and

consensus inflation forecasts (see Emerging

Sovereigns: A new tool for identifying

opportunities in sovereign CDS, January 2010).

The output of the model is also an ‘Implied

Rating’, which is the theoretical rating that the

credit would have if it fell exactly on the fitted

relationship between spreads and ratings, and the

Forecast Adjusted Rating (FAR) is the rating the

model assigns to the credit. A sample output is

shown below for Russia.

Chart 10: evolution of rating, implied rating, and forecast adjusted rating (FAR), Mar 2010-Mar 2011

BBB

BBB+

A-

A

BBB

BBB+

A-

A

3-M

ar

12-A

pr

22-M

ay

1-Ju

l

10-A

ug

19-S

ep

29-O

ct

8-D

ec

17-Ja

n

26-F

eb

Russia FAR Average Implied

BBB

BBB+

A-

A

BBB

BBB+

A-

A

3-M

ar

12-A

pr

22-M

ay

1-Ju

l

10-A

ug

19-S

ep

29-O

ct

8-D

ec

17-Ja

n

26-F

eb

Russia FAR Average Implied


The difference between implied- and forecast-

adjusted ratings indicate the richness or cheapness

that the countries credit spreads are currently trading

relative to their ratings, growth, and inflation

forecasts, and chart 11 shows the results for the

countries associated with the banks in this report.

Chart 11: relative richness/cheapness of selected countries expressed in rating notches (negative numbers indicate richness)

Country Rich/Cheap Country Rich/CheapBrazil -3.0 Russia -1.7China 1.8 Saudi Arabia 2.0Hong Kong -1.7 Singapore N/AIndia 0.2 Thailand -0.9Kazakhstan 0.6 Ukraine -0.4Korea 1.3 UAE 3.5Qatar 4.7

Source: HSBC Calculations

Our methodology in practice, ITAU vs Brazil

Chart 12 shows the OAS of ITAU 2020

(Baa2/NR/BBB-) and Brazil 2021

(Baa3/NR/BBB-) over the last year.

Chart 12: ITAU 2020 vs Brazil 2021, Mar 2010-Mar 2011

50

100150200250300350

400

Mar

-10

Jun-

10

Sep-

10

Dec-

10

Mar

-11

OAS

(bp)

0

50

100

150

200

250

Diff

(bp)

ITAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff

50

100150200250300350

400

Mar

-10

Jun-

10

Sep-

10

Dec-

10

Mar

-11

OAS

(bp)

0

50

100

150

200

250

Diff

(bp)

ITAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff

Source: Bloomberg, HSBC Calculations

It would seem, at first glance, that ITAU is several

rating notches cheaper than Brazil considering

that it is better rated, and offers a spread pick-up

of around 150bp. However we have seen that

financial companies generally trade at several

notches cheaper than sovereigns. Our model

adjusts for the difference in sector and calculates a

richness or cheapness using ratings that may be

compared between the two bonds. This shows that

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the risk-adjusted spread pick-up between ITAU

and Brazil is only around 1 rating notch.

Chart 13: relative richness/cheapness, ITAU vs Brazil

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Ric

h/C

heap

(not

ches

)

-1.00

0.00

1.00

2.00

3.00D

iffer

ence

I TAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Ric

h/C

heap

(not

ches

)

-1.00

0.00

1.00

2.00

3.00D

iffer

ence

I TAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff

Source: Bloomberg

Rating change or spread change?

The framework for relative value presented so far

has focused on identifying richness or cheapness

relative to ratings, region, sector, and duration.

However it is agnostic about whether the

discrepancy would be resolved through a change

in spread or through a change in rating, and

generally speaking we leave this judgement to the

analyst. However we have produced a

fundamental scorecard that tries to separate the

better credits from the weaker ones.

The usual way to make such a scorecard is to

subjectively decide the weights that are to be

used. However recognising that the market pays

different levels of attention to factors based on

current conditions, we have attempted to weight

the factors on the basis of ability to explain

implied ratings using a discriminant analysis of

the factors. The model finds that currently the

most important factors that determine where EM

bank bonds trade are, in order of importance,

sovereign support, country inflation, NPLs/total

loans, ROE, loans/deposits, costs/income, and

loans/assets. However we have found that

including sovereign support and inflation merely

generates a scorecard that mimics ratings. We

have therefore removed the sovereign support and

inflation factors and chart 14 shows the

richness/cheapness relative to the scorecard value,

and chart 15 shows the credit rating relative to the

scorecard value.

As with any technique that attempts to automate

valuations, some of the scorecard values appear

unrealistic, but we keep it as a quantitative tool

that gives an additional perspective to the analysis

of the credits.

The benchmark for measuring relative

performance of our EM fundamental

recommendations is the universe of securities in

the Emerging Market Bond Index (EMBI)

combined with those in the Corporate Emerging

market Bond Index (CEMBI).

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Richness/cheapness relative to fundamental scorecard, 3 March 2011

WOORIBVTB

VEBBNK UOBSP

UKRSIB

SDBC

SBIIN

SBERRU

SABBAB

RSHBOCBCSP

NBADUH

KKB

KEB

KDB

ITAU

INDKOR

ICICI

ICBCAS

HSBKKZ

HANABK

GPBRU

EXIM UK

EXIM CH

EURDEV

EIBKOR

DBSSP

DBKAZ

DAHSIN

COM QATCITNAT

CINDBK

BTAS

BRADES

BOIIN

BOBIN

BNKEA

BNDES

BKM OSC

BCHINA

BBLTB

BANVOR

BANBRA AXSBIN

ATFBP

ALLIBKALFARU

ADCB

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4Adjusted Scorecard

Ric

h/C

heap

Source: Bloomberg/Reuters, HSBC Calculations

Relationship between scorecard value and credit rating, 3 March 2011

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

WOORIB

VTBVEBBNK

UOBSP

UKRSIB

SDBC

SBIINSBERRU

SABBAB

RSHB

OCBCSP

NBADUH

KKB

KEB

KDB

ITAU

INDKOR

ICICI

ICBCAS

HSBKKZ

HANABK

GPBRU

EXIMUK

EXIMCH

EURDEV

EIBKOR

DBSSP

DBKAZ

DAHSIN

COMQAT

CITNAT

CINDBK

BTAS

BRADES BOIINBOBINBNKEA

BNDES

BKMOSC

BCHINA

BBLTB

BANVOR

BANBRA

AXSBIN

ATFBP

ALLIBK

ALFARU

ADCB

-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5Adjusted Scorecard

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-

WOORIB

VTBVEBBNK

UOBSP

UKRSIB

SDBC

SBIINSBERRU

SABBAB

RSHB

OCBCSP

NBADUH

KKB

KEB

KDB

ITAU

INDKOR

ICICI

ICBCAS

HSBKKZ

HANABK

GPBRU

EXIMUK

EXIMCH

EURDEV

EIBKOR

DBSSP

DBKAZ

DAHSIN

COMQAT

CITNAT

CINDBK

BTAS

BRADES BOIINBOBINBNKEA

BNDES

BKMOSC

BCHINA

BBLTB

BANVOR

BANBRA

AXSBIN

ATFBP

ALLIBK

ALFARU

ADCB

-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5Adjusted Scorecard


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Bank profiles

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Asian banks

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Credit growth and risks understated Loan growth in the first 11 months of 2010 kept

up its momentum at 19.4% y-o-y, with total new

loans (RMB and FX) spiking up to RMB7.79trn

(USD1.18trn), exceeding the government’s

RMB7.5trn new-loan target for the whole year.

Moreover, according to Fitch estimates, around

RMB3trn of additional credit, in the form of either

undiscounted acceptances or credit-related wealth

management and trust products, has not been

reflected in the banks’ balance sheets. If the

RMB3trn is incorporated, total new credit would

reach RMB10.8trn (USD1.63trn) – growth of

27% y-o-y, or 29% of nominal GDP. Comparing

the strong credit expansion against 16% nominal

GDP growth in 9M10 suggests to us a degree of

credit misallocation that is likely to be reflected in

banks’ asset quality. Year-to-date, new lending to

corporates was mainly distributed to the

infrastructure, manufacturing and real-estate

development sectors, which contributed 47%,

14% and 7% of total loans outstanding. Lending

to households grew at an unprecedented 42% y-o-

y as of September 2010, of which 55% was in the

form of mortgages. Note, loans to households

account for 20% of loans outstanding.

China banks

New credit in 2010 estimated to reach RMB10.8trn (USD1.6trn)

Local government exposure likely to weigh on asset quality

Banks’ capital structures to remain under pressure

Yi Hu Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6539 [email protected]

Devendran Mahendran Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4521 [email protected]

China – key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM

GDP growth (% y-o-y) 9.1 10.0 8.9 Balance sheet ratios: Nominal GDP (USDbn) 4,913 5,631 6,593 Total assets (USDbn) 9,128 11,536 13,526* GDP per capita (USD) 3,699 4,219 4,915 Liquid assets/total assets Total loan growth (%) 15 33 20 CPI, average (% y-o-y) -0.7 3.3 3.9 Loans/total assets (%) 51 54 54 Policy rate, end-year (%) 5.31 5.81 6.31 Retail loans/gross loans 18 19 22 Trade balance (USDbn) 196.1 176.5 180.3 Impaired loans/gross loans** 2.4 1.6 1.2* Current account balance (USDbn) 284 250 260 Reserve coverage of Impaired loans** 116 155 203* Current account balance (% GDP) 5.8 4.4 3.9 Gross loans/customer deposits 67 70 69 Total deposit growth (%) 19 28 38 Gross external debt (USDbn) 350.0 330.0 360.0 Capital/total assets (%) 6.1 5.6 6.0 Private sector external debt (USDbn) Profitability ratios: Central government balance (% GDP) -2.2 -2.8 -2.5 Cost/income ratio Gross public external debt (% GDP) 18.0 18.4 18.7 ROA 1.0 0.9 N/A International reserves (USDbn) 2,399 2,550 2,700 Net interest margin Cost of Risk Banking assets/GDP (%) 231 240* N/A Market share (as % of sector assets): Total loans/GDP (%) 125 130* N/A Largest 5 banks 51 51 50* Retail loans/GDP (%) 24 28* N/A State-controlled banks*** 60 60 N/A Total deposits/GDP (%) 180 190* N/A Foreign-owned banks 2 2 N/A

* as of Sep 2010 ** of commercial banks; *** large commercial banks & policy banks Source: The Central Bank of China, estimates HSBC Economics

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Considering both mortgage loans and loans to

property developers, lending to the real estate

sector rose by 34% y-o-y and accounted for 19%

of total loans.

Headline asset quality continued to improve, with

commercial banks’ gross NPL ratio down to 1.2% as

at September 2010, from 1.6% at end 2009, and the

provision coverage ratio up to 203% from 155%

over the same period. However, the real concerns

over the banking system’s asset quality lie in the

estimated RMB2trn of non-performing loans to local

government financing vehicles (LGFVs), which are

not yet captured in the above indicators. In July, the

Ministry of Finance, the National Development and

Reform Commission, the People’s Bank of China

and the China Banking Regulatory Commission

(CBRC) issued guidelines for cleaning up LGFVs.

In mid-October, China Securities reported that

around 26% of the RMB7.66trn lending to LGFVs is

problematic – ie has been extended to borrowers

who have encountered financial difficulties and

consequently are having problems servicing their

debt. If the implied RMB2trn is counted as NPLs,

we estimate that the NPL ratios of commercial banks

and the banking sector would rise to 5.1% and 7.0%,

from 1.3% and 2.8%, respectively (Figure 2).

According to 21st Century Business News, the

results of CBRC verification show that RMB3.6trn,

or 49% of lending to LGFVs, is guaranteed by local

governments, which equates to around 60% of

China’s current public debt level, or 10% of

nominal GDP.

The capital level of China’s commercial banking

sector has kept trending upwards. The total capital

adequacy ratio and the Tier 1 ratio edged up to

11.6% and 9.5%, from 11.4% and 9.0%,

respectively, in December 2009, thanks to strong

profit generation and recapitalisation activities.

After very strong loan growth in 2009, China’s

banks conducted, or announced, large capital-

raising plans during that year. The top five banks

alone either completed, or announced, a total of

RMB416bn (USD62bn) raised via either common

equity or convertible bonds this year. However, as

we expect credit growth to remain relatively

robust, banks’ capital structures will likely remain

under some pressure, in our view.

We believe China’s bank regulator has been well

aware of the potential risks of continuous high

loan growth and for this reason has imposed

higher capital and provision requirements (eg,

total provisions/total loans of 2.5x on top of the

existing 150% loan-loss coverage-ratio

requirement). Given China banks’ central role in

providing financing and driving economic growth,

capital misallocation is likely to persist, in our

view. In addition, we continue to have concerns

over asset quality, especially over loans

guaranteed by local governments. Consequently,

we believe the contingent risk that China’s

banking industry poses to the sovereign credit

profile is high.

Potential impact on banking system if 26% of LGFV lending were to be counted as NPLs (as of June 2010)

New (RMBm) Total loans NPLs LLRs NPL ratio Loan loss coverage

Commercial banks 34,993 455 846 1.3% 186% Policy banks & credit cooperatives 12,408 867 324 7.0% 37% Banking system 47,401 1,322 1170 2.8% 89% 26% LGFV Adj NPLs LLRs Adj NPL ratio Adj loan loss coverage

Commercial banks 1,314 1,769 846 5.1% 48% Policy banks & credit cooperatives 677 1,544 324 12.4% 21% Banking system 1,992 3,314 1170 7.0% 35%

Source: CBRC, HSBC

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China Development Bank Increasing China’s competitiveness Key events and risks to monitor

Loan provisioning could rise due to LGFV exposure Funding costs could rise if CDB bonds are designated 20% risk-weight

Credit profile outlook (Neutral)

We continue to view CDB’s credit profile as linked closely to the sovereign, given the ownership and role it plays in China’s economy. We note that the bank is commercially oriented and has a niche in financing medium-term infrastructure projects, which we view positively. The downside risk to our recommendation include: any adverse exposure to local government financing vehicles (LGFVs), which could weigh on asset quality and the bank’s capital structure. However, the credit profile of CDB is strongly linked to that of the government and is likely to move with the latter, which is both an upside and a downside risk. HSBC FI Research view

CDB’s net income rose 31% y-o-y to RMB33.2bn (USD4.9bn) in FY09, thanks to lower provisions on loans and investment securities. Loan growth was 28% during the year with most new loans flowing to public infrastructure, petrochemical projects and public highways. Asset quality deteriorated, with gross NPLs up 25%. Capital level weakened, with Tier 1 down to 8.8% in FY09 from 11.3% in FY08 on rapid credit expansion. Total CAR held up at 11.8% due to a RMB40bn sub-debt issued in the year. Note that local media outlet China Securities reported China policy banks accounted for 30% of RMB7.66trn lending to LGFVs and 26% of total LGFV loans are high risk. Given CDB’s traditional role in supporting public infrastructure projects, especially those without easy access to credit from commercial banks, CDB may have a relatively high exposure to LGFVs and its underlying asset quality may be weaker than that implied by NPL ratios. Its conversion to a commercial bank allowed it to solicit customer deposits, which grew 58% in FY09. Despite the commercialisation, CDB is wholly owned by the government and will continue to fulfil its policy role. According to CBRC, the risk-weight of RMB bonds issued by CDB before 2010 will remain at 0% but might be extended beyond 2011. CDB has a funding advantage as RMB bonds issued by other commercial banks carry a 20% risk-weight.

Analysts Devendran Mahendran Yi Hu

[email protected] [email protected]

+852 2822 4521+852 2996 6539

China Credit profile

Rating Outlook Rating Outlook

Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's Aa3 PositiveSub-debt S&P AA- StableMoody’s Senior unsecured Aa3 Positive Major shareholders (as at Dec’09) Bank-deposit Ministry of Finance 51.3%Sub-debt Central Huijin Investment Ltd 48.7%Financial strength S&P Senior unsecured AA- Stable Bloomberg Sub-debt SDBC Financial strength

Key dollar-denominated bonds

Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon

SDBC ’14 (A+/Aa3/AA-) 600m 4.75%SDBC ’15 (A+/Aa3/AA-) 1,000m 5.0%

Bank in brief

China Development Bank Corporation (CDB) was one of three policy banks established in China in 1994 pursuant to a Special Decree of the State Council (the country’s highest administrative body) as a policy-oriented statutory financial institution. In December 2008, as part of a commercialisation process, the bank was reorganised by as joint-stock corporation that is 51% owned by the Ministry of Finance and 49% by Central Huijin Investment. The bank had 35 branches and 3 representative offices. Assets totalled RMB4,540bn (USD666bn) as at Dec09.

China Development Bank Corporation: financial summary (consolidated)

Year to December (USDm) 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009

Income statement Growth (y-o-y %) Interest income 14,543 19,725 28,972 28,544 Loans 16.5 12.5 27.0 27.8Interest expense -7,919 -10,545 -17,046 -17,679 Assets 21.9 25.1 32.0 18.8Net interest income 6,624 9,180 11,926 10,865 Pre-provision profit 29.0 24.7 31.3 -13.8Other operating income -38 -505 538 746 Net income 21.4 6.9 -14.4 31.3Operating income 6,586 8,675 12,464 11,610 Profitability Operating expenses -1,046 -1,434 -2,055 -2,482 ROAA 1.3 1.1 0.8 0.8Pre-provision profits 5,540 7,241 10,409 9,128 Pre-provision profits/Average assets 2.1 2.1 2.2 1.5Provisions for loan losses -493 -1,411 -5,635 -2,976 Net interest margins 2.53 2.89 2.60 1.89Pre-tax 5,047 5,830 4,774 6,153 Cost-income ratio 15.9 16.5 16.5 21.4Taxation -1,579 -1,945 -1,133 -1,276 Asset quality Net income 3,468 3,885 3,640 4,864 Gross NPL ratio 0.72 0.59 0.96 0.94 Gross NPLs (USDm) 1,769 1,976 1,954 4,093Key balance sheet items Loan Loss Res/NPLs 191 251 210 215Deposits 19,900 20,258 35,943 56,848 Capital structure Advances 255,638 287,602 417,347 533,502 Total CAR 8.1 12.8 11.3 11.8Total assets 296,530 370,896 559,501 664,986 Tier-1 ratio na na 10.1 8.8Total equity 20,268 44,765 50,883 55,473 TCE/total tangible assets na 12.1 9.1 8.3 Funding Loan-to-deposit ratio 1285 1420 1161 938 Loan/Assets 86.2 77.5 74.6 80.2

Source: CDB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Export Import Bank of China Championing China abroad Key events and risks to monitor

Strong credit growth could lead to asset impairment down the road Profile could evolve with China’s ‘go global’ push


The state sets the strategic direction but allows management a degree of independence in balancing policy goals and commercial objectives. Information disclosure remains thin, so future performance may surprise. Nevertheless CEXIM continues to play an important policy role in promoting trade and its credit profile is inextricably linked to the China sovereign. Taken all together, we have a Neutral fundamental recommendation on the issuer. The risks to our recommendation, to both the upside and the downside, are directly linked with the owner, the state and changes in its credit profile and relationship with CEXIM. HSBC FI Research view

Export Import Bank of China’s (CEXIM) net income in 2009 rose 13% y-o-y as loan-loss provisions fell 63% y-o-y. Net interest income declined 3% over the year due to a sharp drop in net interest margin, despite strong loan growth of 34%. Disbursement on export seller’s credit increased by 33% to RMB173bn in FY09 while actual disbursement on export buyer’s credit was up 61% to RMB4.31bn. Asset quality improved with CEXIM’s NPL ratio declining to 1.10% in FY09 from 1.52% in FY08. Capitalisation improved slightly, with an equity/asset ratio of 1.3% in FY09, down from 1.2% in FY08.

CEXIM’s credit profile is underpinned by government support mechanisms designed to ensure its financial profile is not compromised while it carries out its function of facilitating trade. The support mechanism includes certain funding advantages and government fiscal subsidies to cover its policy objectives. We believe that unlike the move to commercialise CDB, CEXIM will continue to remain a policy bank, so the question of a dilution in the government’s shareholding should not arise.



+852 2822 4521+852 2996 6539

China Credit profile


Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's Aa3 PositiveSub-debt S&P AA- StableMoody’s Senior unsecured Aa3 Positive Major shareholders (as at Dec’09) Bank-deposit Government of China 100%Sub-debt Financial strength S&P Senior unsecured AA- Stable Bloomberg Sub-debt EXIMCH Financial strength



EXIMCH ’14 (A+/Aa3/AA-) 1,000m 5.25%EXIMCH ’15 (A+/Aa3/AA-) 1,000m 4.875%

Bank in brief

CEXIM is one of China’s policy banks and is directly wholly owned by the Chinese government. It was established in 1994, pursuant to a special decree of the State Council, as a policy-oriented statutory financial institution. CEXIM is the only export credit agency in China and is subject to the supervision and direction of the PBOC, CBRC, Ministry of Finance, Ministry of Commerce and NDRC. Total assets amounted to RMB792bn (USD119bn) at end-2009.

Export Import Bank of China: financial summary

Year to December (USDm) 2006 2007 2008* 2009* Year to December (%) 2006 2007 2008* 2009*

Income statement Growth (y-o-y %) Interest income 1,053 1,704 3,223 3,475 Loans 31.7 38.4 39.7 33.8Interest expense -1,003 -1,373 -2,702 -2,963 Assets 26.1 46.6 69.4 23.5Net interest income 51 331 521 512 Pre-tax income -8.9 -60.4 1480.5 23.4Other operating income 108 -141 390 353 Net income 23.2 23.6 1931.1 13.5Operating income 158 190 911 865 Profitability Operating expenses -102 -167 -290 -327 ROAA 0.04 0.03 0.44 0.35Pre-provision profits 57 24 622 538 ROAE 1.57 1.49 26.64 28.37Impairment losses - - -244 -91 Net interest margins** 0.19 0.88 0.82 0.49Non-operating profit - - 28 64 Cost-income ratio 64.2 87.6 31.8 37.8Pre-tax 57 24 407 510 Asset quality Taxation -46 -9 -87 -141 Gross NPL ratio 3.47 2.45 1.52 1.10Net income 11 14 320 369 Gross NPLs (USDm) 1,030 1,077 1,005 968 Loan Loss Res/NPLs 34.2 53.6 74.5 naKey balance sheet items Capital structure Deposits 3,875 4,351 6,471 7,511 Total CAR na na na naAdvances 29,332 43,380 64,804 86,698 Total equity/total assets 2.2 2.4 1.2 1.3Total assets 33,096 51,856 93,966 116,030 Funding Total equity 713 1,246 1,111 1,492 Loan-to-deposit ratio 757 997 1001 1154 Loan/Assets 88.6 83.7 69.0 74.7

* FY08 and FY09 numbers are stated according to new accounting standard which was adopted by the bank in 2009. **Based on HSBC estimates. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: CEXIM, HSBC

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Growth of lending into China is a concern Loan growth in the Hong Kong banking sector has

been strong, reaching 26% y-o-y as of September

2010 compared with flat loan growth as at

December 2009. Lending for financing trade grew

by 54% y-o-y while loans to be used in Hong Kong

grew by 21% y-o-y and loans to be used outside

Hong Kong grew by 41% (Figure 1). Strong

growth in trade financing is not surprising given the

sharp drop-off in trade in 2009. However, credit

expansion into Hong Kong raises some concerns,

particularly as it seems to be pouring into the

property sector (Figure 2). Lending to the property

sector in Hong Kong grew by 18% y-o-y as of

September 2010. Lending to the property sector

comprises construction, property development and

mortgages and accounted for 52% of lending in

Hong Kong, or 38% of loans of Hong Kong banks

as at September 2010.

There are signs that funds are being directed into

Mainland China by Hong Kong and Mainland

corporates although there is no clarity on how

these funds are being used in Mainland China.

Our concern is that much may be finding their

way into property.

Hong Kong Banks

Outsized banking sector reflects its financial centre status

Banks maintain liquid balance sheets and are well capitalised

Banks’ significant lending growth into China is a worrying trend



Hong Kong SAR – key data on the banking sector


GDP growth (% y-o-y) -2.8 7.0 5.2 Balance sheet ratios: Nominal GDP (USDbn) 210.6 226.8 237.08 Total Assets (USDbn) 1,364 1,350 1,546* GDP per capita (USD) 30,068 32,252 33,693 Liquid assets/total assets N/A N/A N/A Total Loan growth (%) 11 0 27* CPI, average (% y-o-y) 0.5 2.3 4.4 Loans/Total assets (%) 30 31 34* Policy rate, end-year (%) 0.50 0.50 0.50 Retail loans/gross loans 27 28 24** Trade balance (USDbn) -26.9 -39.2 -26.1 Impaired loans/gross loans 1.2 1.4 0.8** Current account balance (USDbn) 15.1 21.8 17.7 Reserve coverage of Impaired loans N/A N/A N/A Current account balance (% GDP) 7.2 8.6 7.5 Gross Loans/Customer deposits 53 50 60* Total Deposit growth (%) 3 5 5* Gross external debt (USDbn) 673.0 720.1 784.9 Capital adequacy ratio 14.8 16.8 16.1** Private sector external debt (USDbn) 663.0 Profitability ratios: Central government balance (% GDP) 1.6 2.5 3.1 Cost/income ratio 45.1 49.7 49.7** Gross public external debt (% GDP) 0.3 ROA N/A N/A N/A International reserves (USDbn) 255.8 267.0 279.4 Net interest margin 1.8 1.5 1.3** Cost of Risk N/A N/A N/A Banking assets/GDP (%) 641 692* N/A Market share (as % of sector assets): Total loans/GDP (%) 201 239* N/A Largest 5 banks 63 66 68*** Retail loans/GDP (%) 153 178* N/A State-controlled banks N/A N/A N/A Total Deposits/GDP (%) 391 394* N/A Foreign-owned banks 94 94 94***

* as of Nov 2010, ** as of Sep 2010, *** as of Jun 2010 Source: The Hong Kong Monetary Authority, estimates HSBC Economics

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1. Loans in Hong Kong by use (as at September 2010)

HKDm % y-o-y % total

Loans for financing trade 256,379 54% 6% HKD 68,611 8% FC 187,768 80% Loans for use in HK 3,050,061 21% 74% HKD 2,595,386 19% FC 454,675 29% Loans for use outside of HK 784,761 41% 19% HKD 185,442 34% FC 599,319 43% Loans where place of use unknown 34,844 29% 1% HKD 6,770 26% FC 28,074 30% Total 4,126,045 26% 100%

Source: HKMA

2. Loans for use in HK by economic sector (as of Sep-10)

HKDm % chg y-o-y

% total

Manufacturing 167,554 21% 5% Transport and transport equipment 167,179 12% 5% Electricity and gas 39,573 28% 1% Recreational activities 3,591 32% 0% Information technology 41,475 22% 1% Construction, property dev’t & inv. 813,792 23% 27% Wholesale and retail trade 233,301 53% 8% Miscellaneous 1,583,597 17% 52% Hotels, boarding houses & catering 38,063 10% 1% Financial concerns 245,130 9% 8% Stockbrokers 108,120 157% 4% Professional and private individuals 1,008,658 13% 33% purchase of flats in Home Ownership 49,562 -7% 2% purchase of other residential properties 722,543 14% 24% All others 183,626 16% 6% Loans and advances for use in HK 3,050,061 21% 100% Property related 1,585,897 18% 52%

Source: HKMA

However, concerns over credit misallocation are

mitigated by strong capital levels and the still-liquid

balance sheet of the banking sector. The capital

adequacy ratio of the sector stood at 16.2% while the

loan-deposit ratio was 59% as at June 2010.

Given its status as a financial centre, total

credit/GDP is understandably high, standing at

252% (bank credit/GDP was 221%) as at June

2010. However, the contingent risk to the

sovereign is viewed as low, in our view, given the

strength of the banking sector.

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BOC Hong Kong Leading lender in Hong Kong Key events and risks to monitor

Strong credit growth could put pressure on capital structure Vulnerable to headline risk of its parent Likely to benefit from development of renminbi business in Hong Kong


As the second-largest bank in Hong Kong, BOCHK has a strong domestic franchise and its credit profile is underpinned by the strength of its parent, Bank of China, which is majority owned by the government of China. We have a long-term fundamental recommendation of Neutral on the issuer. Risks to our view include: headline risk from its parent, for instance on provisioning regarding exposure to local government financing vehicles (LGFVs) in 2011. Thinning capitalisation as a result of credit expansion represents a downside risk to our view. Upside risks would include a significant jump in profitability.

HSBC FI Research view

BOC Hong Kong (BOCHK) reported a 7.5% increase in net income for H1 2010 to HKD7.2bn on the back of the reversal of impairment charges on both loans and investment securities. Net interest income barely changed, thanks to strong loan growth (+23% y-o-y), which offset a 21bps decline in net interest margin over the year. Loan portfolio expanded 13% h-o-h, with strong growth in property development, trade finance and use for overseas. The bank’s on-balance sheet exposure to mainland China grew 17% in H1 10, not as aggressively as other HK banks, which may be attributable to the strong presence of its parent, Bank of China. Asset quality remains strong with gross NPLs down 26% h-o-h and loan loss coverage up to 174% from 128% at end 2009. Capital levels remain strong, as reflected by its total CAR, Tier 1 and tangible common equity/total assets of 16.2%, 11.3% and 8.4% at end June 2010. Overall profitability remains good, with ROA of 1.2% in H1 10. Despite strong loan demand, HK banks may continue to come under pressure to attract deposits both in Hong Kong and the mainland. This, in our view, will put a strain on HK banks’ loan growth and downward pressure on margins. We have a Neutral fundamental recommendation on the credit.



+852 2822 4521+852 2996 6539

Hong Kong Credit profile


Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A Stable Moody's Aa1 PositiveSub-debt A- S&P AAA StableMoody’s Senior unsecured NR Major shareholders (as at Jun’10) Bank-deposit Aa3 Stable Bank of China Limited 66.06%Sub-debt A1 Stable Shareholding of Bank of China Limited Financial strength C+ Stable Central Huijin 67.53%S&P Senior unsecured A- Positive Bloomberg Sub-debt BBB+ BCHINA Financial strength B



BCHINA ’20 (A-/A1/BBB+) [LT2] 2,500m 5.55%

Bank in brief

BOCHK is the second-largest banking group in Hong Kong and is one of the three HKD note-issuing banks. In 2003, the bank was appointed by the PBOC as the sole clearing bank for renminbi business in Hong Kong. BOCHK assets totalled HKD1,302bn (USD168bn) and accounted for 13% of deposits and 14% of loans in the HK banking sector. At end-June 2010, the bank had 269 branches in Hong Kong and 23 branches and sub-branches on the mainland. In 2009, BOCHK transferred its mainland branches and sub-branches to Nanyang Commercial Bank (China), BOCHK’s wholly-owned subsidiary incorporated in China.

BOC Hong Kong: financial summary

Year to December (USDm) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010

Income statement Growth (y-o-y %) Interest income 5,903 4,531 2,797 1,373 Loans 19.1 11.7 12.3 23.1Interest expense -3,417 -1,942 -484 -220 Assets 16.8 7.5 5.7 13.6Net interest income 2,486 2,589 2,313 1,153 Pre-provision profit 34.3 -14.0 -17.0 -9.4Other operating income 1,007 690 1,048 460 Net income 11.6 -78.4 310.6 7.5Operating income 3,493 3,278 3,361 1,614 Profitability Operating expenses -996 -1,126 -1,566 -583 ROAA 1.6 0.3 1.2 1.2Pre-provision profits 2,497 2,152 1,795 1,030 Pre-provision profits/Average assets 2.0 1.5 1.2 1.3Impairment allowances -186 -1,615 154 21 Net interest margins 2.07 2.00 1.69 1.58Disposals/fair value adj 136 -15 202 77 Cost-income ratio 28.5 34.4 46.6 36.2Other income 4 2 7 -0 Asset quality Pre-tax income 2,451 524 2,157 1,128 Gross NPL ratio 0.4 0.5 0.3 0.4Taxation -424 -138 -345 -182 Net NPL ratio 0.3 0.3 0.2 0.1Minority interests -48 43 -41 -21 Gross NPLs (USDm) 231 276 228 169Net income 1,980 429 1,771 925 Loan Loss Res./NPLs 77 108 128 174 Capital structure Balance sheet summary Total CAR 13.1 16.2 16.9 16.2Deposits 101,714 103,556 108,626 114,555 Tier-1 ratio 12.2 10.9 11.6 11.3Advances 53,860 60,578 67,980 76,691 TCE/total tangible assets 8.9 7.4 8.7 8.4Total assets 136,836 148,028 156,402 167,192 Funding Total equity 12,183 10,907 13,623 14,064 Loan-to-deposit ratio 53.0 58.5 62.6 66.9 Loan/Assets 39.4 40.9 43.5 45.9

Source: BOCHK, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Bank of East Asia Looking to China for growth Key events and risks to monitor

China’s macro outlook given BEA’s 62% loan exposure to the sector Exposure to commercial real estate property in the US could weigh on earnings LD ratio of 83% is high compared with peers in Hong Kong

Credit profile outlook (Underweight)

We think BEA’s weak profitability and strong credit growth will put pressure on the bank’s capital levels. In addition, exposure to real estate in China could weigh on asset quality should there be a downturn in China property. Hence we are inclined to the view that BEA’s credit profile will weaken over two years. The upside risks to our view include substantial improvements in asset quality and capitalisation.


Bank of East Asia (BEA) reported a 65% increase in net income to HKD4.2bn. Excluding disposal gains and valuations losses on own debt issued as well as dividends on hybrid Tier 1s, the bottom line is flat compared with last year. Headline asset quality indicators improved, with gross NPLs down 35%. Loan-loss coverage improved from 55% in 2009 to 69% in 2010, but remains lower than its peers in the region. Our concerns are growing in tandem with the bank’s aggressive expansion in China. The bank’s credit growth was 22% over the year, more than 52% of which was contributed by lending to China. If the end use of credit is considered, BEA’s non-bank exposure to mainland China increased 55% and accounted for 62% of the bank’s loan book. The bank’s capital levels remained relatively unchanged in 2010, with a total CAR of 13.2% and a Tier 1 ratio of 9.8%. On a sequential basis (h-o-h), total CAR and Tier 1 slipped by 50-60bp on 6% credit growth, which pushed up risk-weighted assets by 10% in H2 2010. We think the bank will face capital pressure if it continues to increase its balance sheet at such a pace. We expect new supply from BEA to be significant this year, as the bank has GBP300m UT2 and USD600m LT2 to be called early next year, although the call is still subject to regulatory approval. We are Underweight on the credit on concerns over the bank’s underlying asset quality and capital pressure, and reiterate a sell trading call on BNKEA 8.5% ’49-19c.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured - Moody's Aa1 PositveSub-debt - S&P AAA StableMoody’s Senior unsecured A2 Stable Major shareholders (as at Jun’10) Bank-deposit A2 Criteria CaixaCorp 14.99%Sub-debt A3 Guoco Management Co Ltd 9.12%Financial strength C- S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ BNKEA Financial strength B



BNKEA ’20 (NR/A3/BBB+) [LT2] 600m 6.125%BNKEA ‘49-19c (NR/Ba3/BBB-) [T1] 500m 8.5%BNKEA ’17-12c (NR/A3/BBB+) [LT2] 600m L+52bpsBNKEA ’49-12c (NR/Baa3/BBB) [UT2] GBP300m 6.125%

Bank in brief

BEA is the largest independent local bank in Hong Kong. At June 2010, the bank’s consolidated assets were HKD478bn (USD62bn) and accounted for 3% of customer deposits in Hong Kong. The bank’s core businesses are deposit-taking and home mortgage lending in Hong Kong. BEA operates in HK, mainland China, Macau, the US, UK, Canada and Southeast Asia. Bank of East Asia (China) has 78 branches and contributed 35% of profit before tax in H110.

Bank of East Asia: financial summary

Year to December (USDm) 2007 2008 2009 2010 Year to December (%) 2007 2008 2009 2010

Income statement Growth (y-o-y %) Interest income 2,347 2,243 1,564 1,757 Loans 34.4 3.5 7.4 22.2Interest expense -1,581 -1,371 -693 -785 Assets 33.9 4.8 5.1 23.1Net interest income 766 872 870 973 Pre-provision profit 0.6 -83.6 498.7 4.0Other operating income 363 -43 444 462 Net income 20.6 -99.1 6476.9 64.7Operating income 1,130 829 1,314 1,435 Profitability Operating expenses -601 -742 -791 -890 ROAA 1.2 0.0 0.6 0.9Pre-provision profits 528 87 524 545 Pre-provision profits/Average assets 1.2 0.2 1.0 0.9Provisions for loan losses -28 -72 -143 -37 Net interest margins* 1.8 1.8 1.7 1.78Other impairment losses -23 -50 -5 -3 Cost-income ratio 53.2 89.5 60.2 62.1Disposals 138 50 14 60 Asset quality Valuation gains on inv ppty 38 -22 27 55 Gross NPL ratio 0.6 0.7 1.0 0.5Profits of associates 12 7 34 44 Net NPL ratio 0.4 0.5 0.8 0.4Pre-tax income 665 1 451 664 Gross NPLs -USDm) 159 205 316 1,592 Taxation -124 12 -111 -109 Loan Loss Res./NPLs 56.1 65.8 54.9 69.2Net income 531 5 331 545 Capital structure Balance sheet summary Total CAR 12.6 13.8 13.3 13.2Deposits 36,423 41,780 44,173 54,069 Tier-1 ratio 7.4 9.1 9.4 9.8Loans 30,171 31,448 33,762 41,217 TCE/total tangible assets 7.1 7.3 7.3 7.7Total assets 50,495 53,284 55,980 68,797 Funding Total equity 3,902 4,192 5,097 6,265 Loan-to-deposit ratio 82.8 75.3 76.4 76.2 Loan/Assets 59.8 59.0 60.3 59.9

* Based on our estimates. Source: Bank of East Asia, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Citic Bank International Leveraging China connectivity Key events and risks to monitor

Mainland exposure accounts for 44% of loan book Facilitates overseas expansion and investments by China corporates Will benefit from RMB settlement business in Hong Kong


While the bank’s franchise in Hong Kong is small, we think its standalone credit profile will remain stable in 2011 on the strength of its capital structure and a favourable business cycle in Hong Kong. The downside risks include: excessive exposure to China corporates while the upside is related to significant improvements in financial performance. Majority shareholding by China Citic Bank is a positive for CBI.


Citic Bank International’s H1 2010 net income jumped by 38% y-o-y to HKD587m on stronger net interest income (+26%) and lower impairment charges (-45%). Non-interest income increased by 13.2% y-o-y, mainly on gains from FX dealing. Overall profitability was held back by rising operating expenses (+21%), which the bank attributed to preparation for network expansion in Asia. Loans and deposits growth rebounded 20% and 19% respectively in H1 10, which the bank credited to business referral from its parent, China Citic Bank. Loan growth came mainly from lending to wholesale and retail trade (+135% h-o-h), manufacturing (+44%) and trade finance (60%). Asset quality remains stable, with gross NPLs up 7% h-o-h but down 21% from a year ago. The gross NPL ratio edged down to 1.62% in H1 10 from 1.78% in H2 09, on a higher loan base. Capital levels deteriorated slightly due to balance sheet expansion, with Tier 1 and tangible common equity/total assets down from 11.9% and 10.2% at end-2009 to 10.3% and 8.8% in H1 10, but remain adequate, in our view. Total CAR rose to 18.0% from 16.4% during the same period thanks to the USD500m sub-debt issued in June 2010. We view the bank’s credit profile as stable, do not expect any swings in core credit indicators, and have a Neutral fundamental recommendation.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured BBB+ Stable Moody's Aa1 PositiveSub-debt BBB S&P AAA StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Nov’10) Bank-deposit Baa2 Citic Int’l Financial Holdings 100%Sub-debt Baa3 Shareholding of Citic Int’l Financial Holding Financial strength D+ China Citic Bank 70%S&P BBVA 30%Senior unsecured -- Bloomberg Sub-debt -- CINDBK Financial strength --



CINDBK ’20 (BBB/Baa3/NR) [LT2] 500m 6.875%CINDBK’17-12c (BBB/Baa3/NR) [LT2] 250m L+175bpsCINDBK ’49-12c (BBB-/Ba1/NR) [UT2] 250m 9.125%

Bank in brief

Citic Bank International (CBI) was established in 1922, providing corporate and retail banking and treasury services. The bank operates with around 1,500 employees and 30 branches in Hong Kong, with a presence in Macau, Shanghai and the US. The bank is also on track to expand in the ASEAN region. At end June 2010, the bank’s assets totalled HKD143bn (USD18bn), and accounted for 1.7% of deposits and 2.1% of loans in the banking system. Its wholly owned subsidiary CITIC Ka Wah Bank (China) has gained regulatory approval to offer onshore RMB and foreign currency banking services.

Citic Bank International: financial summary (consolidated)


Income statement Growth (y-o-y %) Interest income 648 516 382 177 Loans 30.5 11.0 -2.8 20.2Interest expense -469 -318 -132 -48 Assets 23.5 10.0 -1.4 22.2Net interest income 179 199 250 129 Pre-provision profit -89.1 303.0 206.1 22.0Other operating income -12 39 162 68 Net income -88.4 20.6 642.7 38.0Operating income 168 237 412 197 Profitability Operating expenses -151 -170 -206 -93 ROAA 0.1 0.1 0.8 0.9Pre-provision profits 17 67 206 104 Pre-provision profits/Average assets 0.1 0.4 1.3 1.2Impairment allowances -13 -49 -72 -15 Net interest margins 1.86 1.53 1.73 1.69Disposals/fair value adj 10 3 10 2 Cost-income ratio 90.1 71.7 49.9 47.2Pre-tax income 14 21 144 90 Asset quality Taxation - -5 -22 -15 Gross NPL ratio 1.2 1.9 1.8 1.6Net income 14 16 123 76 Net NPL ratio 1.0 1.5 1.4 1.2 Gross NPLs (USDm) 97 179 168 179 Loan Loss Res./NPLs 38.9 36.2 47.9 45.7 Capital structure Balance sheet summary Total CAR 15.8 14.7 16.4 18.0Deposits 10,768 12,301 12,153 14,387 Tier-1 ratio 10.1 9.6 11.9 10.3Advances 8,683 9,701 9,419 11,251 TCE/total tangible assets 8.7 7.8 10.2 8.8Total assets 14,199 15,717 15,491 18,396 Funding Total equity 1,235 1,230 1,577 1,618 Loan-to-deposit ratio 80.6 78.9 77.5 78.2 Loan/Assets 61.2 61.7 60.8 61.2

Source: Citic Bank International, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Dah Sing Banking Group More risk for higher profits Key events and risks to monitor

Overall margins still under pressure Overseas lending grew 21% h-o-h and accounts for 25% of loan book Policy tightening in China could have asset-quality implications


We believe the cyclical strength of the economies of Hong Kong and China will allow the bank to preserve its credit profile in 2011. We have a Neutral recommendation on its fundamentals. Risks to our recommendation, to both the upside and the downside, are related to the profitability in the home market, also the growth in lending into China may become an asset-quality risk.


Dah Sing Banking Group reported a 65% increase in net income to HKD507m for 1H10. The improvement was driven by lower operating expenses (-33% y-o-y) and a marked decrease in loan-loss provisions (-87%). Net interest income dropped 6% y-o-y, dragged down by weakening net interest margin (-12bps). The loan portfolio expanded 11% h-o-h in H1 2010, on property-related lending, trade finance and overseas loans. Overseas loan growth came mainly from lending in China, which more than doubled in H1 2010. The expansion in China may have benefited from tighter credit quotas faced by mainland lenders, especially in certain industries, which we see as a potential risk to asset quality should the economy slow or the property market correct. Asset quality has improved significantly, with gross NPLs dropping 36% in H1 2010 and loan-loss coverage ratio up to 162% from 123% at end-2009. Capital levels remains sound, with CAR, Tier 1 and tangible common equity/total assets standing at 17.2%, 10.7% and 9.0%, respectively. As we had expected, net interest margin may remain under pressure from strong competition in asset pricing and deposit taking. Room for further credit-cost reduction is likely to be limited. Although overall profitability is low, there is enough improvement in credit metrics for ratings to remain stable, in our view.



+852 2822 4521+852 2996 6539



Credit rating profile (on DSB) FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A- Stable Moody's Aa1 PositiveSub-debt BBB S&P AAA StableMoody’s Senior unsecured A3 Stable Major shareholders (as at Jun’10) Bank-deposit A3 Dah Sing Financial Holdings 74.13%Sub-debt Baa1 Shareholding of DSFH Financial strength C David Shou-Yeh Wong 40.15%S&P Mitsubishi UFJ Financial Gp 15.07%Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB DAHSIN * Note: S&P ratings are unsolicited



DAHSIN’20 (BBB+/Baa1/NR) [LT2] 225m 6.625%DAHSIN’13 (A-/A3/NR) 175m L+138bpsDAHSIN ’49-17c (BBB/Baa2/BBB-) [UT2] 200m 6.253%DAHSIN ’17-12c (BBB+/Baa1/BBB) [LT2] 150m 5.451%DAHSIN ’16-11c (BBB+/Baa1/BBB) [LT2] 150m L+75bps

Bank in brief

Dah Sing Banking Group (DSBG) is the holding company for the DSFH Group’s banking subsidiaries, including Dah Sing Bank (DSB), MEVAS Bank Ltd and D.A. H. Holdings. DSB accounts for 96% of DSBG’s assets. DSBG holds 48 branches in Hong Kong and 15 branches in Macau. The group also owns 20% interest in Bank of Chongqing. The group has assets totalling HKD119bn (USD15bn) and shares 1.3% of the sector’s deposits. DSFH also operates in insurance business. Lending outside HK accounts for 25% of the loan portfolio.

Dah Sing Banking Group: financial summary


Income statement Growth (y-o-y %) Interest income 750 592 390 167 Loans 26.5 6.2 -3.6 2.6Interest expense -485 -309 -114 -38 Assets 13.6 -3.1 1.1 -0.6Net interest income 265 284 275 128 Pre-provision profit 18.5 -13.7 -58.2 112.4Other operating income 115 104 26 24 Net income -33.1 -76.4 218.5 65.3Operating income 380 387 301 152 Profitability Operating expenses -163 -200 -223 -83 ROAA 0.7 0.2 0.5 0.9Pre-provision profits 217 187 79 70 Pre-provision profits/Average assets 1.6 1.3 0.5 0.9Provisions for loan losses -23 -85 -55 -5 Net interest margins 2.16 2.11 1.95 1.9Gains on disp/revaluation 46 -8 7 1 Cost-income ratio 43.0 51.6 73.9 54.4Profits of associates/JVs 11 16 26 14 Asset quality Gain on sub debt buyback - - 31 -7 Gross NPL ratio 0.46 1.70 0.96 0.53Impairment on AFS/HTM -133 -84 - - Net NPL ratio 0.22 0.80 0.40 0.22Pre-tax income 117 27 88 73 Gross NPLs (USDm) 36 134 71 45Taxation -14 -3 -11 -8 Loan Loss Res./NPLs 128.8 81.9 123.4 162.0Net income 103 24 78 65 Capital structure Balance sheet summary Total CAR 15.5 15.2 16.8 17.2Deposits 9,733 10,566 11,551 11,542 Tier-1 ratio 9.1 8.1 10.2 10.7Advances 8,387 8,968 8,638 9,544 TCE/total tangible assets 7.2 6.5 8.8 9.0Total assets 14,860 14,501 14,654 15,223 Funding Total equity 1,185 1,057 1,392 1,479 Loan-to-deposit ratio 86.2 84.9 74.8 82.7 Loan/Assets 56.4 61.8 58.9 62.7

Source: Dah Sing Banking Group, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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ICBC (Asia) Tapping cross-border flows Key events and risks to monitor

Strong lending growth into China and China-related corporates raises concerns Potential strain in funding as it does not have the retail funding breadth of peers


Considering the potential support from its parent, we view the bank’s credit profile as stable and have a Neutral recommendation on the credit. However the bank’s standalone profile is likely to slip in 2011. The downside risks to our view include: strong loan growth puts pressure on the capital structure and funding. The upside risk is related to significant improvement in credit indicators.


ICBC (Asia) H1 2010 net income rose 32% y-o-y to HKD1,229m on higher interest income (+16%) and lower provisions (-21%). Higher interest income is in line with robust loan growth of 43% y-o-y. The sharpest credit expansion was in loans for trade finance (+404% y-o-y, 108% h-o-h) and for use outside Hong Kong (+45% y-o-y, 16% h-o-h). Lending for overseas use, the property-related sector, and trade finance accounted for 30%, 27% and 18% of the bank’s loan book. By geography, mainland China has taken over Hong Kong as the ultimate risk counterpart of ICBC (Asia)’s loan portfolio, accounting for 51% of the bank’s loan balance. This is due to the bank’s strong credit growth in mainland China (+104% y-o-y, 51% h-o-h), which is partly attributable to client referrals from the bank’s parent, ICBC, and tighter credit quotas for mainland banks in H1 2010. Asset quality remains comfortable with gross NPLs down 11% h-o-h and provision coverage up to 86% in H1 2010 from 66% in FY09. Strong credit growth has put the bank’s funding and capital levels under pressure, with the loan-to-deposit ratio up to 102% in H1 2010 from 91% in FY09 and the bank’s tier-1 capital ratio down to 8.4% from 9.0% in the same period, which is the lowest among the HK banks we cover. Note that at end December 2009, the bank’s HKD loan-to-deposit ratio had reached 124%. With continued strong credit growth, the bank’s funding and capitalisation should remain under pressure, which could be partly eased by the USD500m sub-debt issue this year.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured A- RWP Moody's Aa2 PositiveSub-debt BBB+ S&P AAA StableMoody’s Senior unsecured NR Stable Major shareholders (as at Nov’10) Bank-deposit A2 ICBC 72.81%Sub-debt A3 Shareholding of ICBC (as at Jun’10) Financial strength C- Central Huijin 35.4%S&P Ministry of Finance 35.3%Senior unsecured -- Bloomberg Sub-debt -- ICBCAS Financial strength --



ICBCAS ’20 (BBB+/A3/NR) sub 500m 5.125%

Bank in brief

ICBC (Asia) is the HK subsidiary of Industrial & Commercial Bank of China (ICBC) and is to be privatised by its parent by December 2010. ICBC (Asia) was established in 1964 as Union Bank Limited and acquired by ICBC in 2000. It provides retail, commercial and corporate banking services, with 44 branches in Hong Kong. The bank’s assets totalled HKD256bn (USD33bn) as of June 2010, and accounted for 3% of deposits and 5% of loans in the HK banking sector. The bank also conducts offshore RMB business and banking services in mainland China through its wholly owned subsidiary, Chinese Merchant Bank.

ICBC (Asia): financial summary

Year to December (USD m) 2007 2008 2009 H1 2010 Year to December (%) 2007 2008 2009 H1 2010

Income statement Growth (y-o-y %) Interest income 1,134 996 578 323 Loans 60.9 12.6 7.3 43.3Interest expense -828 -611 -190 -102 Assets 31.4 1.2 11.0 17.2Net interest income 306 385 388 222 Pre-provision profit 23.7 22.3 13.3 20.8Other operating income 101 97 152 71 Net income 29.2 -39.8 160.7 32.3Operating income 407 482 541 293 Profitability Operating expenses -145 -161 -175 -88 ROAA 0.9 0.5 1.2 1.0Pre-provision profits 262 321 365 206 Pre-provision profits/Average assets 1.2 1.3 1.4 1.4Impairment provisions -17 -156 -75 -27 Net interest margins 1.47 1.55 1.56 1.51Gains on revaluation/disp 4 -29 102 11 Cost-income ratio 35.7 33.4 32.4 29.8Profits of associates 1 0 3 1 Asset quality Pre-tax income 250 137 396 190 Gross NPL ratio 0.53 0.65 0.92 0.66Taxation -44 -12 -70 -32 Net NPL ratio 0.43 0.44 0.62 0.41Net income 206 124 326 158 Gross NPLs (USDm) 83 115 175 156 Loan Loss Res./NPLs 51.9 74.4 65.9 85.8 Capital structure Balance sheet summary Total CAR 13.0 13.6 14.9 13.4Deposits 17,627 17,830 20,784 23,198 Tier-1 ratio 7.3 7.3 9.0 8.4Advances 15,598 17,688 18,960 23,701 TCE/total tangible assets 7.3 6.7 8.0 7.2Total assets 24,647 25,104 27,849 32,844 Funding Total equity 1,924 1,798 2,356 2,483 Loan-to-deposit ratio 88.5 99.2 91.2 102.2 Loan/Assets 63.3 70.5 68.1 72.2

Source: ICBC (Asia), HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Wing Hang Bank Growth in property and China Key events and risks to monitor

HK property market accounts for 37% of loan portfolio China and Macau account for 33% of loans


Wing Hang’s capitalisation is strong. However, its balance sheet has become less liquid as it pushes for earnings growth. As a result, its loan-to-deposit ratio and loan-to-asset ratio is at its highest for at least the past five years. The fast expansion in China and property market represents one of the main downside risks to our Neutral view should the economy correct. The upside risks include: substantial lowering of sector concentration in its loan portfolio. However, the strength of the Hong Kong and China economies should ensure stability in the bank’s credit profile in 2011.


Wing Hang Bank’s H1 2010 net profits increased by 49% y-o-y to HKD761m, on the back of strong loan growth (+16% y-o-y) and a write-back of loan-loss provisions. Net interest margin improved to 1.91% from 1.79% a year ago, boosted by the bank’s treasury operations and higher proportion of loan assets. The main drivers of loan growth are the HK property sector, and loans for use in China and Macau. Over the year, loans for use in China grew 49% and accounted for 20% of the bank’s loan book. Deposit growth has not kept pace with loan expansion, as the 1.6% decline in the deposit base in H1 10 shows. As a result, the loan-to-deposit ratio edged up to 74.4%, close to the upper limit of the bank’s target (70%-75%). Asset quality continued to improve, with gross NPLs down 18% h-o-h and provision coverage ratio up to 65% from 60% at end 2009. Capital indicators remain adequate with total CAR and Tier 1 at 17.0% and 10.4% in H1 10. The bank’s overall profitability has trended up, with ROA progressing to 1.0% in H1 10 from 0.7% in H1 09. However, fast expansion in China is a risk factor to be watched carefully in our view, especially when the economy slows or the property market sees significant correction. We expect the bank’s credit ratings to remain stable and maintain a Neutral recommendation on the credit.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AA+ StableSenior unsecured A- Stable Moody's Aa1 PositiveJunior sub-debt BBB S&P AAA StableMoody’s Senior unsecured - Stable Major shareholders (as at Jun’10) Bank-deposit A2 The Bank of New York Mellon 20.28%Junior sub-debt Baa1 The Fung Family 20.07%Financial strength C+ Aberdeen Asset Mgmt & sub 8.00%S&P Senior unsecured - Bloomberg Sub-debt - WINHAN Junior sub-debt -



WINHAN ‘49-17c (BBB/Baa1/NR) [UT2] 400m 6.0%WINHAN ’49-13c (BBB/Baa1/NR) [UT2] 225m 9.375%

Bank in brief

Wing Hang Bank is the holding company and the principal operating company of the group, providing corporate and retail banking, FX and treasury services. The bank has a network of 65 branches, with a presence in Macao and mainland China through subsidiaries Banco Weng Hang and Wing Hang Bank (China) Ltd. At end June 2010, the bank’s assets totalled HKD146bn (USD19bn). The bank has deposits of HKD124bn, accounting for 2% of the sector’s deposits. The bank’s exposure to mainland China accounts for 22% of its loan portfolio.

Wing Hang Bank: financial summary


Income statement Growth (y-o-y %) Interest income 939 749 507 264 Loans 26.5 6.0 1.3 15.5Interest expense -629 -435 -190 -94 Assets 14.3 -3.8 9.5 3.5Net interest income 310 314 317 170 Pre-provision profit 6.6 12.0 -42.4 16.9Other operating income 112 172 51 35 Net income 22.3 -42.8 3.7 48.5Operating income 422 486 368 205 Profitability Operating expenses -167 -200 -203 -100 ROAA 1.6 0.8 0.9 1.0Pre-provision profits 255 286 165 105 Pre-provision profits/Average assets 1.5 1.6 0.9 1.1Provisions for loan losses -0 -57 -7 6 Net interest margins 1.90 1.84 1.82 1.91Impairment losses on AFS - -38 10 1 Cost-income ratio 39.7 41.2 55.1 48.8Gains on revaluation/disp 31 4 12 7 Asset quality Profits of associates 15 -20 5 1 Gross NPL ratio 0.44 0.71 0.51 0.37Pre-tax income 300 175 185 119 Net NPL ratio 0.29 0.41 0.40 0.29Taxation -40 -26 -29 -21 Gross NPLs (USDm) 42 73 53 43Net income 260 149 155 98 Loan Loss Res./NPLs 74.4 75.4 60.4 65.2 Capital structure Balance sheet summary Total CAR 16.7 15.4 17.8 17.0Deposits 14,607 14,860 16,273 15,944 Tier-1 ratio 8.5 8.4 10.7 10.4Advances 9,840 10,499 10,630 11,870 TCE/total tangible assets 6.7 7.0 7.7 8.3Total assets 17,899 17,341 18,973 18,801 Funding Total equity 1,347 1,368 1,617 1,716 Loan-to-deposit ratio 67.4 70.7 65.3 74.4 Loan/Assets 55.0 60.5 56.0 63.1

Source: Wing Hang, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Macro backdrop favourable but supply risk is high The credit cycle remains strong in India with

banking-sector loan growth of 19% y-o-y as of

September 2010, supporting economic growth

that HSBC’s economists expect to reach 8.8% in

the fiscal year 2010/11. Compared with its peers

in Asia, this credit cycle probably has a long way

to run. Overall indebtedness in the country

remains low with total credit/GDP of 58% as at

June 2010. Such a trend should sustain the

profitability of Indian commercial banks as

measured by return on average assets (ROAA) at

above 1% in the foreseeable future, particularly

given the favourable backdrop.

Higher policy rates in 2011 may lead to valuation

losses at banks on government bond portfolios in

2011 but we doubt that will derail the credit

growth cycle. Note HSBC Economics forecasts

the policy rate will rise 125bps to 7.5% in 2011.

Overall asset quality looks good; commercial

banks had a net NPL ratio of 2.52% as at March

Indian Banks

Strong credit growth raises concerns on underwriting standards

India’s favourable macro backdrop should help banks’ profitability

Increasing USD demand by corporates raises the risk of more

USD supply by banks



India – key data on the banking sector


GDP growth (% y-o-y) 7.4 9.1 8.1 Balance sheet ratios: Nominal GDP (USDbn) 1,227 1,533 1,874 Total Assets (USDbn) 1,029 1,335 N/A GDP per capita (USD) 1,037 1,305 1,578 Liquid assets/total assets N/A N/A N/A Total Loan growth (%) 21.1 16.6 N/A CPI, average (% y-o-y) 10.9 11.8 7.1 Loans/Total assets (USDbn) 57.3 58.0 N/A Policy rate, end-year (%) 4.75 6.25 7.50 Retail loans/gross loans 21.3 19.0 N/A Trade balance (USDbn) -106.5 -136.5 -162.0 Impaired loans/gross loans 2.4 2.5 N/A Current account balance (USDbn) -27.0 -57.5 -74.4 Reserve coverage of Impaired loans 52.1 51.5 N/A Current account balance (% GDP) -2.2 -3.8 -4.0 Gross Loans/Customer deposits 73.9 73.6 N/A Total Deposit growth (%) 22.4 17.0 N/A Gross external debt (USDbn) 262.3 300.0 370.0 Capital/total assets 7.0 7.1 N/A Private sector external debt (USDbn) N/A N/A N/A Profitability ratios: Central government balance (% GDP) -6.9 -5.5 -4.8 Cost/income ratio 45.4 45.8 N/A Gross public external debt (% GDP) 5.3 N/A N/A ROA 1.1 1.1 N/A International reserves (USDbn) 81.31 75.06 N/A Net interest margin 2.7 2.7 N/A Cost of Risk N/A N/A N/A Banking assets/GDP (%) 101 N/A N/A Market share (as % of sector assets): Total loans/GDP (%) 59 N/A N/A Largest 20 banks 57.0 56.7 N/A Retail loans/GDP (%) 10 N/A N/A State-controlled banks 71.9 73.7 N/A Total Deposits/GDP (%) 80 N/A N/A Foreign-owned banks 8.5 7.2 N/A

Data pertain to fiscal year, e.g. 2009 numbers are for FY2009/10 (April 2009 – March 2010) Source: Reserve Bank of India, CIA, estimates HSBC Economics.

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2010. But quality has slipped among banks that

have reported in Q2 FY2011 (for the period

ending September 2010). That was probably

caused by aggressive loan growth and less-than-

stringent underwriting standards, in our view. We

think loan losses will remain elevated in 2011 but

will remain manageable with the favourable

backdrop and strong profitability.

Banking-sector funding is stable, coming largely

through deposits, with the loan-to-deposit ratio at

73% as at September 2010.Capitalisation of

commercial banks appears adequate; the total

capital adequacy ratio (CAR) was 14.5% as of

March 2010, up from 14% a year earlier.

We view the contingent risk to the government as

low, particularly due to the low level of private

indebtedness in the country.

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Axis Bank Strong growth Key events and risks to monitor

Strong credit growth raises concerns about credit underwriting standards Rapid growth in international operations suggests higher USD debt supply risk Profitability supports credit profile


Concern over the bank’s rapid balance sheet expansion is offset by demonstrated profitability and India’s favourable macro outlook, in our view. We think the bank’s credit profile will remain stable in the year ahead. Excessive debt supply is the downside risk to our recommendation, while a substantial improvement in the bank’s financial performance is the upside risk. HSBC FI Research view

Axis Bank reported a 36% jump in net income for Q3 FY 2011 (the three months ending Dec 2010) to INR8.91bn (USD199m), on higher interest income and lower loan loss provisions. Overall profitability was good, with an ROAA of 1.8% in the quarter. Lending growth was 46% y-o-y. Lending to real-estate-related sectors grew by 53% y-o-y and accounted for 17% of the loan book. Asset quality remains stable: the net non-performing asset ratio fell to 0.3% from 0.5% a year ago and the loan loss coverage ratio rose to 83% from 69% over the same period. However, we advise caution given the bank’s strong loan growth and relatively high concentration on the property sector, which makes it vulnerable to any correction in the real estate market. Robust loan growth has put the bank’s capital structure under some pressure, with total CAR and Tier 1 ratio sliding to 12.5% and 8.9%, respectively, from 16.8% and 11.8% a year ago. If we included 9M FY 2011 profits, the ratios would be higher at 13.8% and 11.2%. Management indicates that the bank will start to address the Tier 1 ratio in FY 2012 aiming for a target range of 8.5-9%. Therefore, a capital increase could be on the cards if the bank’s asset growth continues at the current rate. International assets rose 83% y-o-y and 21% q-o-q on strong demand from Indian corporates overseas. We suspect further new supply from the bank if the current strong demand is sustained



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India Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt BB+ S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010) Bank-deposit Ba1 Stable Unit Trust of India 23.78%Sub-debt Baa3 Stable Life Insurance Corp of India 9.60%Financial strength C- Stable General Insurance Corp 1.89%S&P Overseas Investors 46.02%Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ AXSBIN Financial strength C



AXSBIN’15 (NR/Baa2/BBB-) 350m 5.25%AXSBIN’16 (NR/Baa2/BBB-) 500m 4.75%

Bank in brief

Axis Bank is the tenth largest domestic bank and third largest private sector bank in India. It began operations in 1994 as UTI Bank and was renamed Axis Bank in 2007. The bank had assets of INR1,998bn (USD45bn) as at September 2010. The public shareholding is 53.81%. The bank operates with 1,095 branches and over 4,846 ATMs, and has a market share of about 3% of banking system deposits.

Axis Bank: financial summary (non-consolidated)

Year to March (USDbn) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011

Income statement Growth (y-o-y %) Interest income 1.6 2.2 2.5 0.9 Loans 61.8 36.7 27.9 45.7Interest expense -1.0 -1.5 -1.4 -0.5 Assets 49.6 34.8 22.3 37.4Net interest income 0.6 0.8 1.1 0.4 Pre-provision profit 76.1 67.3 40.7 20.6Other operating income 0.4 0.6 0.9 0.3 Net income 62.5 69.5 38.5 35.9Operating income 1.0 1.4 2.0 0.6 Profitability Operating expenses -0.5 -0.6 -0.8 -0.3 ROAA 1.2 1.4 1.5 1.8Pre-provision profits 0.5 0.8 1.1 0.4 Pre-provision profits/average assets 2.4 2.9 3.2 3.3Provisions for loan losses -0.1 -0.2 -0.3 -0.1 Net interest margins 3.5 3.3 3.8 3.8Pre-tax 0.4 0.6 0.8 0.3 Cost-income ratio 49.2 43.4 41.4 42.4Taxation -0.1 -0.2 -0.3 -0.1 Asset quality Net income 0.2 0.4 0.5 0.2 Gross NPAs (USDbn) 0.11 0.19 0.30 0.30 Key balance sheet items Net NPA ratio 0.36 0.35 0.36 0.34Deposits 20.2 24.3 31.6 34.6 Coverage ratio 49.8 63.6 72.4 82.7Advances 13.7 16.9 23.3 27.5 Capital structure Total assets 25.2 30.5 40.4 46.0 Total CAR 13.7 13.7 15.8 12.5Total equity 2.0 2.1 3.6 4.1 Tier-1 ratio 10.2 9.3 11.2 8.9FX assets & liabilities TCE/total tangible assets 8.0 6.9 8.9 9.0FX assets 1.8 3.9 4.2 n.a Funding FX liabilities 1.6 2.4 3.7 n.a Loan-to-deposit ratio 68.1 69.5 73.8 79.3 Loan/assets 54.4 55.2 57.8 59.8

Source: Axis Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Bank of Baroda Focused on quality of growth Key events and risks to monitor

Growth and exposure to foreign lending could entail material risk NPAs may be understated owing to the presence of restructured loans Funding position is strong with a loan-to-deposit ratio of 74%


We have some concerns about BOB’s rapid credit growth, which could translate into asset quality concerns in future. Nevertheless its credit profile is underpinned by the government’s majority stake in the bank and hence our outlook for the bank’s credit profile remains stable. Downside risk includes that aggressive loan growth put capital under pressure, while a substantial improvement in the bank’s financial performance is the upside risk.


Bank of Baroda reported a 28% increase in net income to INR10.7bn (USD0.2bn) for Q3 FY 2011 (three months ending Dec 2010) on higher net interest income (+43% y-o-y). Margin expansion has been impressive, up 25bp over the year to 3.20%. Provisions were up by 25% y-o-y, mainly owing to provisions for depreciation on investment. Loan loss provision itself, however, fell 6.5% over the year. Overall profitability was strong, as reflected by ROAA of 1.3% in Q3 FY 2011, driven by extremely strong credit growth of 33% y-o-y and 7.4% q-o-q. Lending overseas rose by 37% y-o-y and 7.7% q-o-q, and accounted for 27% of the bank’s loan book. The bank’s asset quality was stable, as reflected by a gross NPA ratio of 1.3% and loan loss coverage of 85.5% at end-Dec 2010, which is relatively unchanged from the previous quarter. The strong credit growth has put a strain on the bank’s capital structure, as the total CAR and Tier 1 ratio fell to 12.5% and 7.7% in Q3 FY 2011 from 13.2% and 8.2% in Q2 FY 2011, respectively. In April-December 2010, the bank raised INR7.1bn in Tier 1 and INR15bn in UT2 securities, and it has said its strategy is to continue above-average credit growth rate. Although this will boost the bank’s profitability on the back of a favourable macro backdrop, capital levels will come under pressure, in our view.



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Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt [UT2] BB- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010) Bank-deposit Ba1 Stable Government of India 53.81%Sub-debt Baa3 Stable Life Insurance Corp of India 7.08%Financial strength D+ Stable S&P Senior unsecured BBB- Stable Bloomberg Sub-debt [UT2] BB BOBIN Financial strength C



BOBIN’15 (BBB-/Baa2/NR) 500m 5%

BOBIN’15 (BBB-/Baa2/NR) 350m 4.75%BOBIN’22-17c (BB-/Baa3/BB) [UT2] 300m 6.625%

Bank in brief

BOB was established in 1908 and was listed in 1996. It had assets totalling INR3,129bn (USD70bn) as at Sep 2010. The bank had 38,960 employees, 3,100 domestic branches and 48 foreign branches as at Mar 2010. Its market share of domestic deposits is at 5.6%. International assets account for 25% of the bank’s balance sheet. BOB has a strong presence in agricultural lending, with 59% of branches in rural and semi-urban areas.

Bank of Baroda: financial summary (non-consolidated)


Income statement Growth (y-o-y %) Interest income 2.7 3.1 3.7 1.3 Loans 27.6 34.3 22.2 32.7Interest expense -1.8 -2.1 -2.4 -0.7 Assets 25.5 26.2 22.8 30.8Net interest income 0.9 1.1 1.3 0.5 Pre-provision profit 21.3 43.8 15.3 46.3Other operating income 0.5 0.6 0.6 0.1 Net income 39.8 55.2 37.3 28.4Operating income 1.4 1.6 1.9 0.7 Profitability Operating expenses -0.7 -0.7 -0.8 -0.2 ROAA 0.89 1.10 1.21 1.34Pre-provision profits 0.7 0.9 1.1 0.4 Pre-provision profits/average assets 1.81 2.07 1.92 2.32Provisions for loan losses -0.2 -0.2 -0.2 -0.1 Net interest margins 2.90 2.91 2.74 3.2Pre-tax 0.5 0.7 0.9 0.3 Cost-income ratio 50.9 45.9 44.0 37.6Taxation -0.2 -0.2 -0.3 -0.1 Asset quality Net income 0.4 0.4 0.7 0..2 Gross NPAs (USDbn) 0.46 0.38 0.54 0.62Key balance sheet items Net NPA ratio 0.47 0.31 0.34 0.38Deposits 35.0 39.8 53.9 62.6 Coverage ratio 75.1 75.6 74.9 85.5Advances 24.6 29.6 39.1 46.1 Capital structure Total assets 41.4 46.9 62.3 72.8 Total CAR 12.9 14.1 14.4 12.5Total equity 2.5 2.7 3.4 4.0 Tier-1 ratio 7.6 8.5 9.2 7.7FX assets & liabilities TCE/total tangible assets 6.1 5.6 5.4 5.5FX assets 10.4 12.1 17.5 n.a Funding FX liabilities 10.8 12.7 18.0 n.a Loan-to-deposit ratio 70.2 74.5 72.6 73.6 Loan/assets 59.4 63.2 62.9 63.3

Source: BOB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Bank of India Corporate focus Key events and risks to monitor

Lending to corporate sector is high, accounting for 57% of domestic loans Strong growth in FX loans raises concerns about further USD debt supply Rising rates could strain corporate cash flows


While some of the bank’s credit metrics are showing the strain caused by rapid growth, we think the bank’s credit profile will remain stable against the backdrop of a favourable macro environment. Hence we maintain our Neutral fundamental recommendation on the credit. The downside risk to our recommendation is significant deterioration in credit metrics, while the upside risk is further improvement in profitability. HSBC FI Research view

Bank of India (BOI) reported a 61% jump in net income to INR6.53bn (USD0.1bn) for Q3 FY 2011 (three months ending Dec 2010) on higher net interest income and declining provisions. The improvement in net interest margins (+49bp over the year) and robust loan growth (23% y-o-y) have held profitability up. Margin expansion mainly came from a 37bp rise in the yield on advances and a 29bp drop in the cost of deposits. Overall profitability was still behind peer levels, as reflected by ROAA of 0.9% duringQ3 FY 2011. Domestic credit expansion came mainly from lending to corporates, which grew 47% y-o-y and accounted for 58% of the bank’s domestic loan book. At the industry level, lending to infrastructure rose by 54% y-o-y and had a share of 13% of total domestic credit. Asset quality improved, with gross NPAs down 7% over the quarter and loan loss coverage up to 74.5% from 70% a quarter ago. However, the bank’s capital structure was under pressure, owing to sub-par profitability and strong loan growth. The total CAR and Tier 1 ratio slipped to 12.4% and 8.0% in Q3 FY 2011, respectively, from 13.0% and 8.4% in Q3 FY 2011. Financial Chronicle reported that the bank has said it will explore various options to raise capital, which is reasonable to support future credit growth.



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Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured -- Moody's Baa3 StableSub-debt -- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Mar 2010) Bank-deposit Ba1 Stable Government of India 64.47%Sub-debt Baa3 Stable Life Insurance Corp of India 8.56%Financial strength D+ Stable Lazard Asset Management 2.71%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ BOIIN Financial strength C



BOIIN’15 (--/Baa2/BBB-) 750m 4.75%

BOIIN’21 (--/Baa2/BBB-) 500m 6.25%

BOIIN’21-16c (--/Baa3/BB) [UT2] 240m 6.625%

Bank in brief

Established in 1906, BOI is the fifth-largest bank in India, with assets totalling INR2,896bn (USD65bn) as at Sep 2010. The bank operates 3,208 branches domestically, has a network of 29 overseas branches and has 40,155 employees. It has a 5.0% share of domestic banking deposits. BOI’s subsidiaries include BOI Shareholding Ltd (a joint venture with the Stock Exchange of Mumbai to manage clearing activities), Star Dai-Ichi Life Insurance, PT Bank Swadesi in Indonesia and BOI Tanzania in Tanzania.

Bank of India: financial summary (non-consolidated)

Year to March (USDm) 2008 2009 2010 Q3 2011 Year to March (%) 2008 2009 2010 Q3 2011

Income statement Growth (y-o-y %) Interest income 2.8 3.4 3.9 1.2 Loans 33.3 25.9 17.9 22.8Interest expense -1.9 -2.2 -2.7 -0.8 Assets 26.1 26.1 21.9 19.9Net interest income 1.0 1.1 1.3 0.4 Pre-provision profit 54.5 47.4 -13.8 22.9Other operating income 0.5 0.6 0.6 0.1 Net income 78.9 49.7 -42.1 61.1Operating income 1.5 1.8 1.8 0.6 Profitability Operating expenses -0.6 -0.6 -0.8 -0.3 ROAA 1.3 1.5 0.7 0.9Pre-provision profits 0.9 1.1 1.0 0.3 Pre-provision profits/average assets 2.3 2.7 1.9 1.9Provisions for loan losses -0.2 -0.3 -0.5 -0.1 Net interest margins 3.0 3.0 2.5 3.1Pre-tax 0.6 0.9 0.5 0.2 Cost-income ratio 41.7 36.2 43.8 47.3Taxation -0.2 -0.2 -0.2 -0.1 Asset quality Net income 0.5 0.6 0.4 0.1 Gross NPAs (USDbn) 0.44 0.51 1.09 1.01Key balance sheet items Net NPA ratio 0.52 0.44 1.31 0.88Deposits 34.5 39.2 51.4 56.2 Coverage ratio 81.3 74.6 65.5 74.5Advances 26.1 29.5 37.7 42.9 Capital structure Total assets 41.2 46.6 61.5 66.5 Total CAR 12.0 13.0 12.6 12.4Total equity 2.4 2.8 3.2 3.6 Tier-1 ratio 7.7 8.9 8.6 8.0FX assets & liabilities Total equity/total assets 5.9 6.0 5.2 5.4FX assets 1.7 1.7 2.7 n.a Funding FX liabilities 1.4 2.1 2.3 n.a Loan-to-deposit ratio 75.6 75.3 73.3 76.3 Loan/assets 63.5 63.4 61.3 64.4

Source: BOI, HSBC Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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ICICI Bank Growth challenges Key events and risks to monitor

Credit growth and domestic acquisitions are likely to put downward pressure on capital

Rollover risk from over USD3bn in redemptions in 2012 Rising domestic rates likely to weigh on securities portfolio


The bank has always indicated that it would resume growth once a better foundation was in place; this means there will be some pressure on its credit metrics and the risk of fresh USD supply is now much higher, in our view. The bank is still more profitable than peers and the macro environment remains favourable. We therefore expect its credit profile to be stable in the year ahead. The downside risk to our recommendation is excessive acquisition appetite and credit growth, while the upside risk is lower-than-expected bond supply.


ICICI Bank reported a 31% rise in net income to INR14.37bn (USD0.3bn) for Q3 FY 2011 (the three months ending Dec 2010) on higher interest income and lower loan loss provisions. Overall profitability was impressive, as reflected by ROAA of 1.5% for the quarter. However, the bank expects margin pressure owing to higher funding costs. Loan growth was 15% y-o-y and 6% q-o-q, the strongest growth being in domestic corporates. Loan loss coverage edged up to 72% in Q3 2011 from 69% in Q2 2011. The bank has achieved the 70% coverage requirement three months earlier than the deadline set by the RBI. A strong provisioning level pushed down the net NPA ratio to 1.16% from 1.37% a quarter ago, and its capital structure is superior to those of peers, with total CAR and Tier 1 ratios of 20.0% and 13.7% at end-Dec 2010. The loan-to-deposit ratio worsened to 95% in Q3 FY 2011 from 87% in Q2 FY 2011, but remains adequate, in our view. Overall in our view this is a good set of results that further strengthens the bank’s credit profile. However, we think the risk of new US dollar supply is relatively high, given that: (1) the bank has indicated a 20% credit growth target for FY 2012; and (2) ICICI faces redemptions of around USD3bn in 2012. We have a Neutral recommendation on the credit.



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Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt [UT2] BB- S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Jul 2010) Bank-deposit Ba1 Stable Deutsche Bank Trust (ADRs) 28.9%Sub-debt Baa3 Stable Life Insurance Corp India 10.5%Financial strength C- Stable Temasek Holdings 5.7%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB ICICI DebtFinancial strength C ICICIBC IN Equity



ICICI’16 (--/Baa2/BBB-) 500m 5%ICICI’20 (--/Baa2/BBB-) 1,000m 5.75%ICICI’20 (--/Baa3/--), [LT2 issued by UK sub] 150m 7%ICICI’15 (--/Baa2/BBB-) 750m 5.5%ICICI’49-16c (--/Ba1/--), [UT2 issued by UK sub] 150m 6.375%ICICI’22-17c (BB-/Ba1/BB), [UT2] 750m 6.375%ICICI’49-16c (--/Ba2/BB), [T1] 340m 7.25%

Bank in brief

ICICI Bank used to be a development financial institution before it transformed itself into a diversified financial group in the 1990s. It is now the second-largest commercial bank in India, with assets totalling USD88bn, as well as shares of 6% of loans and 5% of deposits in the banking system at end-Sep 2010. The bank has 2,012 branches and over 35,000 employees. It has a presence in the UK through its subsidiary, ICICI Bank UK Plc, and in Canada through its subsidiary, ICICI Bank Canada.

ICICI Bank: financial summary (non-consolidated)


Income statement Growth (y-o-y %) Interest income 7.1 6.4 5.6 1.5 Loans 15.2 -3.2 -17.0 15.30Interest expense -5.4 -4.7 -3.8 -1.0 Assets 16.0 -5.1 -4.2 10.30Net interest income 1.7 1.7 1.8 0.5 Pre-provision profit 35.5 12.1 9.0 -1.10Other operating income 2.0 1.6 1.6 0.4 Net income 33.7 -9.6 7.1 30.50Operating income 3.7 3.3 3.4 0.9 Profitability Operating expenses -1.9 -1.5 -1.3 -0.4 ROAA 1.1 1.0 1.1 1.50Pre-provision profits 1.8 1.8 2.1 0.5 Pre-provision profits/average assets 2.1 2.3 2.6 2.40Provisions for loan losses -0.7 -0.8 -1.0 -0.1 Net interest margins 2.2 2.4 2.5 2.60Pre-tax 1.2 1.1 1.2 0.4 Cost-income ratio 50.6 44.1 37.6 42.30Taxation -0.2 -0.3 -0.3 -0.1 Asset quality Net income 1.0 0.8 0.9 0.3 Gross NPLs (USDbn) 1.75 2.00 2.12 2.27Key balance sheet items Net NPA ratio 1.49 1.96 1.87 1.37Deposits 56.3 45.1 45.2 48.4 Coverage ratio* 57.3 53.5 59.5 71.80Advances 51.9 45.1 40.5 46.0 Capital structure Total assets 92.1 78.4 81.3 87.4 Total CAR 14.0 15.5 19.4 20.00Total equity 10.7 10.2 11.5 12.3 Tier-1 ratio 11.8 11.8 14.2 13.70FX assets & liabilities TCE/total tangible assets* 9.0 9.2 10.3 n.aFX assets 15.2 16.1 14.6 n.a Funding FX liabilities 16.4 16.1 15.2 n.a Loan-to-deposit ratio 92.3 100.0 89.7 94.90 Loan/assets 56.4 57.6 49.9 52.60

* Based on our estimate. The intangible asset deducted here, on a consolidated basis, includes deferred tax assets, goodwill and adjustments for less liquid positions Source: ICICI, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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State Bank of India Sovereign proxy Key events and risks to monitor

Recent gains from margin improvements will likely end as rates rise Strong credit growth could translate into future loan losses Capital ratios are likely to face pressure from growth


Strong credit growth in recent years raises concerns about credit underwriting standards and could keep loan provisions high. However, the macro backdrop remains favourable and, as SBI is the largest bank in India and is majority owned by the government, we continue to view its credit profile as stable and hence maintain our Neutral recommendation. The downside risk to our recommendation is substantial deterioration in credit indicators, while the upside risk is the significant improvement in asset quality.


State Bank of India (SBI) net income rose by 14% to INR28.3bn (USD0.6bn) for Q3 FY 2011 (three months ending Dec 2010). The improvement is mainly due to strong growth in net interest income thanks to significant margin expansion (+79bp) over the year. The better margins were helped by a 72bp decline in costs of deposit on a higher CASA ratio over the year. Provisions jumped 140% y-o-y, as SBI is gradually catching up to meet 70% loan loss coverage requirement by Mar 2012. The bank’s loan loss coverage therefore edged up to 64% in Q3 FY 2011 compared to 56% in Q3 FY 2010. Asset quality showed stabilisation, with gross NPAs up 1% q-o-q and the net NPA ratio down to 1.6% from 1.7% a quarter ago. Lending growth was 21% y-o-y and 7% q-o-q, with the strongest growth coming from the large corporate sector (+28%). Deposit growth has been relatively moderate, at 14% y-o-y and 3% q-o-q, which, together with robust loan growth, has increased the loan-to-deposit ratio to 83% from 78% a year ago. SBI’s capital structure remains stable, with total CAR and Tier 1 staying at 13.2% and 9.6% at end Dec 2010. Note that the bank is currently awaiting approval for the INR200bn rights issue from the government, which holds a 59.4% stake in the bank.



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Credit rating profile FC government bond ratings Fitch Fitch BBB- Stable Senior unsecured BBB- Stable Moody's Baa3 StableSub-debt - S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (as at Jun 2010) Bank-deposit Ba1 Stable Government of India 59.41%Sub-debt Baa3 Stable Life Insurance Corp of India 6.07%Financial strength C- Stable The Bank of New York 3.22%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt BB+ SBIIN Financial strength C



SBIIN ’15 (BBB-/Baa2/BBB-) 1,000m 4.5%SBIIN ’14 (BBB-/Baa2/BBB-) 750m 4.5%SBIIN ’49-17c (BB-/Ba2/BB) [T1] 400m 6.439%SBIIN ’49-17c (--/Ba2/BB) [T1] 225m 7.14%

Bank in brief

SBI is the oldest and largest domestic commercial bank in India, with total (non-consolidated) of INR11,045bn (USD248bn) at end-Sep 2010. SBI operates over 12,500 branches and has 200,000 employees. It has an estimated market share amounting to 17% of the banking system’s deposits (23% if we include its associates). The SBI group includes five associated banks, in which SBI has interests ranging from 75% to 100%.

State Bank of India: financial summary (non-consolidated)

Year to March (USDbn) 2008 2009 2010 Q3 FY 2011 Year to March (%) 2008 2009 2010 Q3 FY 2011

Income statement Growth (y-o-y %) Interest income 11.3 13.2 15.5 4.7 Loans 23.5 30.2 16.5 21.3Interest expense -7.4 -8.9 -10.3 -2.7 Assets 27.4 33.7 9.2 n.aNet interest income 3.9 4.3 5.2 2.0 Pre-provision profit 31.1 36.7 2.3 46.5Other operating income 2.0 2.6 3.3 0.7 Net income 48.2 35.5 0.5 14.1Operating income 5.9 6.9 8.4 2.7 Profitability Operating expenses -2.9 -3.2 -4.4 -1.2 ROAA 1.0 1.1 0.9 0.9Pre-provision profits 3.0 3.7 4.0 1.5 Pre-provision profits/average assets 2.0 2.1 1.8 2.2Provisions and contingencies -0.6 -0.8 -1.0 -0.5 Net interest margins 3.1 2.9 2.7 3.61Pre-tax 2.4 2.9 3.0 1.0 Cost-income ratio 49.0 46.6 52.6 45.3Taxation -0.9 -1.0 -1.0 -0.4 Asset quality Net income 1.6 1.9 2.0 0.6 Gross NPAs (USDbn) 2.95 3.25 4.36 5.20Key balance sheet items Net NPA ratio 1.8 1.8 1.7 1.6Deposits 123.7 153.4 179.9 195.5 Coverage ratio 57.6 52.7 56.1 64.1Advances 96.0 112.2 141.3 161.6 Capital structure Total assets 166.1 199.4 235.6 n.a Total CAR 12.6 14.3 13.4 13.2Total equity 11.3 12.0 14.7 n.a Tier-1 ratio 9.1 9.4 9.5 9.6FX assets & liabilities TCE/total tangible assets 6.1 5.7 5.9 n.aFX assets 18.3 27.3 31.8 n.a Funding FX liabilities 18.1 23.0 28.8 n.a Loan-to-deposit ratio 77.6 73.1 78.6 82.7 Loan/assets 57.8 56.3 60.0 n.a

Source: SBI, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Deleveraging continues The sector has been deleveraging as expected,

with credit growth in the low single digits. In

particular, foreign currency lending by Korean

banks is showing year-on-year declines. Hence

the level of indebtedness in Korea as measured by

private credit/GDP has declined from a peak of

184% in December 2008 to 177% in Q1 2010,

although it remains higher than its peers’. Note,

private credit includes private external debt and

corporate debt, which is in addition to loans at

banks and non-bank financial corporations. A

closer inspection reveals that the household sector

remains highly leveraged, which suggests

policymakers may have less flexibility to drive

growth should global growth slow.

Banks’ fundamentals have largely stabilised,

helped by sound regulatory oversight, in our view.

The authorities have shifted from providing

liquidity or capital support to fixing the structural

weaknesses of the banking sector in funding,

liquidity and volatile capital flows. The authorities

Korea – key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 Sept. 2010 LTM**

GDP growth (% y-o-y) 0.2 6.1 4.9 Balance sheet ratios: Nominal GDP (USDbn) 842.4 1,002 1,154 Total assets (USDbn) 1,363 1,412 1,511 GDP per capita (USD) 17,287 20,492 23,538 Liquid assets/total assets N/A N/A N/A Total loan growth (%) 17.5 0.6 1.6 CPI, average (% y-o-y) 2.8 3.0 3.8 Loans/total assets (%) 68 71 69 Policy rate, end-year (%) 2.00 2.50 3.50 Retail loans/gross loans 33 35 35 Trade balance (USDbn) 56.1 56.1 52.1 Impaired loans/gross loans 1.14 1.24 2.32 Current account balance (USDbn) 42.7 36.0 31.0 Reserve coverage of Impaired loans 146.3 139.9 94.1 Current account balance (% GDP) 5.1 3.6 2.7 Gross loans/customer deposits 133 126 122 Total deposit growth (%) 17.0 6.2 4.5Gross external debt (USDbn) 399.8 335.0 330.0 Capital/total assets 5.8 6.8 6.8 Private sector external debt (USDbn) 332.0 266.4 256.8 Profitability ratios: Central government balance (% GDP) -4.2 -2.7 -2.0 Cost/income ratio 93.3 90.2 81.2 Gross public external debt (% GDP) 8.0 6.9 6.3 ROA 0.5 0.4 0.5 International reserves (USDbn) 270.3 311.6 355.9 Net interest margin 2.30 1.98 2.30*** Cost of Risk N/A N/A N/A Banking assets/GDP (%) 155 151* N/A Market share (as % of sector assets): Total loans/GDP (%) 131 126* N/A Largest 4 commercial banks 49 49 48 Retail loans/GDP (%) 50 51* N/A State-controlled banks*** 44 45 44 Total Deposits/GDP (%) 181 185* N/A Foreign-owned banks 8 7 8

* as of Sep 2010, ** 9M2010, *** including policy banks, Banking industry indicators are banking account only Source: BOK, FSS, CEIC, estimates HSBC Economics. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

Korean Banks

Deleveraging as expected, with credit growth in low single digits

Authorities have acted to clean up bank balance sheets and

improve funding

Restructuring of the shipping sector will keep provisions elevated



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have also carried out corporate restructurings that

are helping to clean up bank balance sheets.

One area where we think the authorities have not

moved aggressively enough is the build-up of

household debt. We believe they recognise the

problem, and in the past have instituted measures

such as debt-to-income and loan-to-value limits to

curb speculation and safeguard banks’ loan books.

The government also had in place property tax

measures and a supply of public housing that was

meant to prevent an acceleration of home prices.

However, the government seems to be easing off

on some of those measures to alleviate the

downturn in the construction sector.

In addition, household debt in Korea remains

high. Aggregate household debt/GDP was 68% as

at March 2010. Moreover, based on flow of funds

data (comparable across OECD countries) and

stated over disposable income, Korea’s household

debt/disposable income was much higher at 145%

at the end of 2009.

The recent trend in the banking sectors

fundamentals has been mixed. Asset quality

indicators have slipped; the sector’s net non-

performing loan (NPL) ratio rose from 1.24% in

December 2009 to 2.32% in September 2010.

Although asset quality has deteriorated following

the government-initiated corporate restructuring,

there is clarity and predictability to the process

that is reassuring. While we expect provisions to

be elevated, they should be manageable and offset

by current earnings in most cases.

The sector’s capital adequacy ratio (CAR)

improved slightly from 14.4% in December 2009

to 14.6% in September 2010. Similarly, the

funding positions of banks have improved with

the loan-deposit ratio of commercial banks

declining from 109% at the end of 2009 to 106%

at the end of September 2010.

Challenges remain, as we expect the restructuring

of the shipping and ship-building sector in 2011

will keep loan provisions elevated. In addition

banks should need to do more to improve

operating efficiencies and lift profitability, but this

should not detract from the stability of banks’

credit profiles. We still see the contingent risk

posed by banks sector to the sovereign as average,

which takes into account the fact that lending by

policy or specialised banks – KDB, IBK, KEXIM,

NACF and NFFC – accounts for 35% of bank

lending or 40% of GDP as at Q3 2010.

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Export-Import Bank of Korea Globalising the national economy Key events and risks to monitor

Vulnerable to global demand and geopolitical risks


We take a favourable view of the level of government support, which should ensure that the ratings move in tandem with the sovereign. We expect total foreign currency funding needs for 2011 to be in the region of USD7-8bn. The risks to our view, to both the upside and downside, are mostly related to the movements in the credit standing of the KEXIM’s owner, the government.


Export-Import Bank of Korea’s (KEXIM) non-consolidated net income in 2009 decreased by 73% y-o-y to KRW26bn (USD21m) on lower net interest income and higher loan loss provisions. The net interest margin declined to 0.65% in 2009 from 1.45% in 2008 on higher funding costs. Loans grew by 14% y-o-y, mainly attributable to growth in lending to the manufacturing sector (+33%). Disbursements for export credit and import credit during the year were KRW25,251bn and KRW3,623bn, growth of 53% and 3%, respectively. Overseas investment credit disbursement, however, declined by 25% to KRW3,970bn. Funding mainly comes from borrowings. During the year, the bank issued KRW8,150bn won-denominated bonds and USD4bn in the offshore market, of which USD3.5bn in bonds were denominated in US dollars and USD0.5bn in other currencies. The bank’s foreign currency term borrowings outstanding at end-2009 were USD15.4bn, with 40% due before end-2012. The total CAR improved to 11.2% from 8.7% a year ago, thanks to the KRW1,050bn capital injection by the government, which equals to 21% of the capital base before the recapitalisation. Currently the government is encouraging Korean companies to venture abroad to sell services (for instance build power plants) and acquire/develop resources – which we see as areas of growth for KEXIM.



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Korea Credit profile


Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit - - Korean government 73.67%Sub-debt - - Bank of Korea 23.26%Financial strength - - Korea Finance Corporation 3.07%S&P Senior unsecured A Stable Bloomberg Sub-debt - - EIBKOR Financial strength - -



EIBKOR 01/21 (A+/A1/A) 1,000m 4%EIBKOR 1/14 (A+/A1/A) 2,000m 8.125%EIBKOR 1/15 (A+/A1/A) 1,500m 5.875%EIBKOR 9/15 (A+/A1/A) 1,000m 4.125%EIBKOR 6/20 (A+/A1/A) 1,250m 5.125%EIBKOR 02/14 (A+/A1/A) 700m 5.25%

Bank in brief

The Export-Import Bank Korea (KEXIM) was established in 1976 as a special financial institution under the Export-Import Bank of Korea Act to facilitate trade. Under the KEXIM Act, the government has to ensure the solvency of KEXIM. The bank had 10 domestic branches, 4 overseas subsidiaries and 15 overseas offices as of Dec 2009. The Ministry of Finance and Economy supervises and oversees the budget of KEXIM. KEXIM’s assets totalled USD36bn at end-2009.

Export-Import Bank of Korea: financial summary (non-consolidated)

Year to December (USDbn) 2006 2007 2008 2009 Year to December (USDbn) 2006 2007 2008 2009

Income statement Growth (y-o-y) Interest income 0.8 1.2 33.4 29.9 Advances 24.0 39.6 58.6 14.0Interest expense -0.5 -0.9 -25.5 -25.3 Assets 15.1 35.5 52.2 16.8Net interest income 0.3 0.3 7.9 4.6 Pre-provision profits -20.5 -13.3 -6.3 29.3Other operating income 0.6 1.1 84.7 52.0 Net income -25.0 9.5 -49.0 -72.5Operating income 0.8 1.4 92.6 56.6 Profitability Operating expenses -0.5 -1.1 -85.9 -48.9 ROAA 1.0 0.9 0.3 0.1Pre-provision profits 0.4 0.3 6.6 7.7 Pre-provision profits/average assets 2.2 1.5 1.0 1.0Provisions for loan losses -0.1 -0.1 -2.1 -7.0 Net interest margins 7.6 4.0 1.4 0.6Pre-tax income 0.2 0.3 4.5 0.7 Cost-income ratio 55.1 76.7 92.8 86.4Taxation -0.1 -0.1 -2.3 -0.2 Asset quality Net income 0.2 0.2 2.2 0.5 Gross NPL ratio 0.34 0.38 0.62 1.13Key balance sheet items Gross NPLs (USDbn) 0.05 0.08 0.16 0.35Borrowings 1.9 2.1 4.2 2.5 Loan Loss Res./NPLs 1301.3 937.3 507.6 304.2Advances 15.5 21.7 26.8 31.2 Capital structure Total assets 18.8 25.6 30.3 36.1 Total CAR 11.9 11.0 8.7 11.2Total equity 5.1 5.3 4.3 5.6 Tier-1 ratio 10.0 9.2 n.a n.aSummary of FX balance sheet TCE/total tangible assets 27.3 20.9 14.1 15.4Borrowings 1.4 1.9 3.8 2.1 Funding Bonds 10.2 15.2 16.0 17.0 Loan-to-deposit ratio n.a n.a n.a n.aLiabilities 11.8 17.2 20.1 19.2 Loan/assets 82.5 85.0 88.6 86.5Assets 12.8 18.2 22.2 20.5 FX loan-to-deposit ratio n.a n.a n.a n.a

Source: Kexim, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Korea Development Bank IPO in the works Key events and risks to monitor

The government expects to have a large majority stake post privatisation Funding in the wholesale market could be more expensive post IPO Finding a profitable niche post IPO is likely to be challenging


Management has clarified that KDB’s debt outstanding at the point of the initial sale will be fully guaranteed by the Korean government, as authorised by the revised KDB Act. An initial public offering (IPO) is expected in 2011. Management has indicated that KDB will focus on corporate banking activities, namely providing term facilities in key sectors, and will increase its commercial focus over time. We expect KDB to continue its track record as a stable performer. The downside risks to our recommendation include aggressive global expansion strategy, while the upside risks are related to more explicit government guarantee.


Korea Development Bank (KDB)’s consolidated net income rose by 131% to KRW761bn (USD654m) in 2009. The improvement was due to lower net losses from derivatives. Net interest income dropped by 8% y-o-y on lower loan balances (-5% ) and margins (-3bp). Asset quality deteriorated significantly, with gross NPLs up 82% over the year and loan loss coverage ratio down to 83% from 104% a year earlier, despite loan loss provision charges being 1.5 times higher in the year. Capital levels improved, with the total CAR and Tier 1 ratio up to 16.4% and 14.7% in 2009 from 13.6% and 12.2% in 2008, respectively, thanks to a decline in the asset base after KDB transferred KRW19trn in securities holdings and KRW4trn in loan receivables to Korea Finance Corp. During the year, the Korean government injected capital of KRW900bn. In October 2009, KDB Financial Group (KDBFG) and Korea Finance Corporation (KoFC) were established in line with a previously announced move to privatise the commercial operations of KDB while shifting its policy functions to KoFC. KoFC, which was established under the KoFC Act in October 2009, will be wholly owned by the Korean government. KoFC’s mandated policy role will be to assist SMEs and to extend capital to promote national economic growth, while KDBFG will be privatised.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at May 2010) Bank-deposit A1 - Korea Finance Corporation 94.2%Sub-debt - - Korea Government 5.8%Financial strength D Stable S&P Senior unsecured A Negative Bloomberg Sub-debt - - KDB Financial strength - -



KDB 3/16 (A+/A1/A) 900m 3.25%KDB 1/14 (A+/A1/A) 2,000m 8%KDB 8/15 (A+/A1/A) 750m 4.375%KDB 9/13 (A+/A1/A) 750m 5.75%KDB 1/13 (A+/A1/A) 1,000m 5.3%

Bank in brief

KDB was incorporated under The Korea Development Act in 1954 to help finance the development of Korean industries. The Act requires the government to ensure the solvency of the bank. The bank had assets totalling USD119bn and operates with 2,327 employees as at end 2009. It has 47 domestic branches and operations in 10 countries. Currently, KoFC holds a 94.3% stake in KDB FG, which owns KDB, Daewoo Sec, KDB Capital, KIAMCO and KDB Asset Mgmt.

KDB: financial summary (consolidated)

Year to December (USDbn) 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009

Income statement Growth (y-o-y %) Interest income 4.2 5.5 6.2 4.4 Loans 1.2% 15.8% 30.2% -4.8%Interest expense -3.6 -5.0 -5.2 -3.7 Assets 9.0% 20.1% 29.3% -26.7%Net interest income 0.6 0.5 0.9 0.7 Pre-provision profit 63.7% 134.1% -68.9% 119.9%Other operating income 1.6 3.6 1.1 1.3 Net income -13.4% -3.4% -83.9% 130.5%Operating income 2.3 4.2 2.0 2.1 Profitability Operating expenses -1.1 -1.5 -1.3 -0.7 ROAA 1.8% 1.5% 0.2% 0.5%Pre-provision profits 1.1 2.7 0.7 1.3 Pre-provision profits/average assets 0.9% 1.9% 0.5% 1.0%Provisions for loan losses -0.0 -0.2 -0.3 -0.7 Net interest margins* 0.2% 0.5% 0.7% 0.7%Non-operating profit 1.3 1.1 0.4 0.5 Cost-income ratio 50.6% 35.4% 65.3% 34.8%Pre-tax income 2.4 3.6 0.7 1.1 Asset quality Taxation 0.1 -0.9 -0.2 -0.2 Gross NPL ratio 0.84% 0.98% 1.19% 2.24%Minority interests -0.3 -0.5 -0.2 -0.3 Gross NPLs (USDbn) 0.52 0.71 0.90 1.67Net income 2.2 2.2 0.3 0.6 Loan Loss Res./NPLs 135% 127% 104% 83%Key balance sheet items Capital structure* Deposits 12.8 13.0 16.5 13.4 Total CAR 17.2% 16.5% 13.6% 16.4%Loans 56.4 65.6 66.5 64.7 Tier-1 ratio 14.8% 14.0% 12.2% 14.7%Total assets 131.5 158.8 159.8 119.5 TCE/total tangible assets 15.5% 14.5% 9.8% 12.3%Total equity 20.7 23.4 16.0 14.9 Funding Summary of FX balance sheet Loan-to-deposit ratio 441% 504% 404% 483%Borrowings 12.2 14.5 14.3 10.7 Loan/assets 42.9% 41.3% 41.6% 54.1%Debentures 10.6 12.7 13.3 9.8 FX loan-to-deposit ratio 1969% 1712% 593% 861%Liabilities 28.9 36.8 38.2 29.5 Assets 41.0 36.6 36.1 27.1

* Non-consolidated. Source: KDB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Industrial Bank of Korea SMEs the primary focus Key events and risks to monitor

Restructuring of shipping sector in 2011 keeps provisions high Weakness in external demand could weigh on SME asset quality Strategy to grow retail deposits should improve funding structure


Management is being more cautious about extending FX loans to SMEs and expects to gradually reduce FX loans by USD1.2bn over the next five years. According to management, exposure to the vulnerable shipping and construction sectors is less than 7% of the loan portfolio, which is low. Recent results show stability in IBK’s credit profile. We expect its ratings to remain stable over the next year. The upside risks to our view include better funding structure, while the downside risks come from underperformance of SME sector which would weigh on asset quality.


Industrial Bank of Korea’s (IBK) net income rose 66.2% y-o-y to KRW365bn (USD324m) in Q3 2010. Loan loss provisions, having peaked in Q2 2010, declined 31% in the quarter while net interest income, which is up 21% on the year, was flat over the quarter. Loan growth has been above average, at 8.2% y-o-y and 1.7% q-o-q. Lending has been channelled into the SME and household sector, which grew by 6.1% y-o-y and 19% y-o-y, respectively, and accounted for 78% and 20% of outstanding loans as of Q3 2010. Asset quality slipped in the quarter, with gross NPLs rising 9.2% q-o-q. This is in line with the industry trend and is related to the restructuring and classification of construction and project finance loans in the quarter. Nonetheless, IBK’s overall NPL ratio of 1.85% in Q3 2010 (compared to 1.71% in Q2 2010) remains manageable, while its loan loss reserves/NPLs of 118% remains adequate in our view. IBK’s capital structure remains stable, with a CAR of 12.2% and Tier1 ratio of 9% in Q3 2010 compared to 12% and 8.8%, respectively, in Q2 2010. While the CAR is not particularly high by comparison with the industry, we view it as stable and maintain our Neutral fundamental recommendation on the credit.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A+ Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit A1 - Korean government 65.0%Sub-debt A2 - Korea Finance Corporation 8.9%Financial strength D+ - KEXIM 2.3%S&P Senior unsecured A Stable Bloomberg Sub-debt A- - INDKOR Financial strength C+ -



INDKOR 14 (A+/A1/A) 1,000m 7.125%INDKOR 15 (A+/A1/A) 350m 4.375%

Bank in brief

IBK was set up in 1961 under the IBK Act to promote the independent economic activities of small- and medium-sized enterprises in Korea. Under the Act, the government is obligated to ensure the solvency of the bank. IBK has 595 branche,s and 8 overseas offices and subsidiaries with around 7,178 employees. At end-Sep 2010, the bank’s assets totalled USD145bn, with USD81bn in loans to SMEs. IBK accounted for 20% of the total SME loan market of Korea at end-Jun 2010.

Industrial Bank of Korea: financial summary (non-consolidated)

Year to December (USDbn) 2007 2008 2009 Q3 2010 Year to December (USDbn) 2007 2008 2009 Q3 2010

Income statement Growth (y-o-y %) Interest income 7.4 7.6 6.4 1.8 Loans 14.5 17.7 10.6 8.2Interest expense -4.4 -4.7 -3.6 -0.9 Assets 15.3 18.8 6.4 5.8Net interest income 3.1 2.9 2.8 0.9 Pre-provision profit 22.4 2.8 -13.3 53.2Other operating income 0.8 0.4 -0.1 0.1 Net income 10.9 -34.3 -7.4 66.2Operating income 3.8 3.4 2.7 1.0 Profitability Operating expenses -1.4 -1.2 -1.1 -0.3 ROAA 1.0 0.6 0.5 0.9Pre-provision profits 2.4 2.1 1.6 0.7 Pre-provision profits/average assets 8.1 7.1 5.5 2.0Provisions for loan losses -0.8 -1.1 -0.9 -0.3 Net interest margins 2.53 2.53 2.44 2.71Non-operating profit 0.1 0.0 0.0 0.0 Cost-income ratio 36.3 36.9 40.3 28.4Pre-tax income 1.7 1.0 0.7 0.4 Asset quality Taxation -0.5 -0.3 -0.1 -0.1 Gross NPL ratio 0.72 1.43 1.20 1.85Net income 1.3 0.7 0.6 0.3 Gross NPLs (USDbn) 0.72 1.31 1.20 2.07Key balance sheet items Loan Loss Res./NPLs 203 129 145 118Deposits 39.9 33.9 41.8 48.0 Capital structure Loans 96.5 88.5 95.9 107.7 Total CAR 11.1 11.5 11.9 12.2Total assets 129.0 119.3 124.5 142.4 Tier-1 ratio 8.2 7.4 8.5 9.0Total equity 7.2 6.3 7.6 8.8 TCE/total tangible assets 5.4 4.9 5.7 5.8Summary of FX balance sheet Funding Loans 4.7 6.4 5.3 na Loan-to-deposit ratio 242 261 229 224Deposits 1.6 2.2 2.2 na Loan/assets 74.8 74.1 77.0 75.6Borrowings 3.1 4.4 4.3 na FX loan-to-deposit ratio 287 286 244 naBonds 4.2 4.5 4.6 na

Source: IBK, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Hana Bank Acquisition presents uncertainty Key events and risks to monitor

Regulatory approvals and acquisition funding remain hurdles to the acquisition Longer-term integration issues between KEB and Hana could present risks Niche in household sector and wealth management in Korea


Hana Bank’s parent Hana Financial Group (HFG) has signed an agreement to purchase a 51% stake in Korea Exchange Bank (KEB) from Lone Star Funds for KRW4.75trn (USD4.1bn). The purchase is subject to necessary approvals, which are not expected until March 2011. KEB’s total assets of KRW96trn as at Q4 2010 are equal to 61% of HFG’s consolidated assets as at Q4 2010. Our Neutral fundamental recommendation is based on our expectation of stable performance of key credit indicators. The main risk, to both the upside and downside, is related to the acquisition and its integration with KEB. HSBC FI Research view

Hana Bank reported a 36% y-o-y increase in net profits to KRW268bn for Q4 2010, on higher net interest income, gains on disposals and valuation, and lower loan loss provisions. Loan growth was more robust than for the banking industry as a whole at 4.8% y-o-y and 1.4% q-o-q. Lending to large corporates and household was strong, while lending to SMEs contracted. In contrast to other Korean banks, Hana Bank’s asset quality slipped during the quarter, with gross NPLs up 4% q-o-q, despite this the coverage ratio remains unchanged. The deterioration in asset quality was mainly in the SME sector. Strong lending growth has kept the bank’s loan-to-deposit ratio high, at 111% at end December 2010, which is a higher figure than for its peers in Korea. The bank’s capital structure has come under pressure, with total CAR and tier-1 ratios down to 14.2% and 12.4% in Q4 2010 from 15.7% and 12.5% in Q3 2010, due to around KRW2.4trn dividends paid to its shareholding company for KEB acquisition.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Neg (rfd) Major shareholders (as at Dec 2009) Bank-deposit A1 Hana Financial Group 100%Sub-debt A2 Shareholder of HFG Financial strength C- Angelica Investment Ptd. Ltd 9.62%S&P GS Dejakoo, L.L.C. & affiliates 8.66%Senior unsecured A- Neg (cwn) Korea National Pension Services 4.11%Sub-debt BBB+ - Bloomberg Financial strength C+ - HANABK



HANABK 15 (A-/A1/A-) 500m 4.5%HANABK 12 (A+/A1/A-), [Govt guaranteed] 1,000m 6.5%HANABK 16-11c (BBB+/A2/BBB+) [LT2] 400m 5.875%HANABK 17-12c(BBB+/A2/BBB+) [LT2] 500m 5.375%HANABK 49-12c (BB+/NR/BBB) [T1] 200m 8.748%

Bank in brief

Hana Bank, a wholly owned subsidiary of Hana Financial Group (HFG), is the fourth-largest commercial bank in Korea. The bank accounts for 88% of the group’s assets and shares around 11% of Korea banking system’s deposits. The bank operates with 8,528 employees and 660 branches. At end-September 2010 HFG had 8 subsidiaries, including Hana Bank and Hana Daetoo Securities, with assets totalling KRW158trn (USD139bn).

Hana Bank: financial summary (non-consolidated)

Year to December (USDbn) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010

Income statement Growth (y-o-y %) Net interest income 2.3 2.0 1.5 0.6 Loans 3.6 16.1 -0.8 4.8Other operating income 1.2 0.7 0.5 0.1 Assets 5.5 25.4 -7.6 2.6Operating income 3.5 2.7 2.0 0.7 Pre-provision profit 13.8 -10.7 -29.7 40.2Operating expenses -1.3 -1.1 -1.0 -0.3 Net income 0.5 -54.9 -42.3 35.5Pre-provision profits 2.1 1.6 1.0 0.4 Profitability Provisions for loan losses -0.4 -1.1 -0.6 -0.1 ROAA 0.9 0.4 0.2 0.8Non-operating profit -0.1 0.1 -0.0 -0.0 Pre-provision profits/average assets 1.7 1.3 0.9 1.4Pre-tax income 1.6 0.6 0.3 0.3 Net interest margins 2.31 2.06 1.72 2.24Taxation -0.5 -0.1 -0.1 -0.1 Cost-income ratio 38.8 41.6 51.2 39.6Net income 1.1 0.4 0.2 0.2 Asset quality Key balance sheet items Gross NPL ratio 0.77 1.20 1.05 1.50Customer deposits 84.7 76.8 74.2 82.6 Gross NPLs (USDbn) 0.74 1.06 0.91 1.4Loans 92.8 83.9 81.5 91.7 Loan Loss Res./NPLs 169 127 130 106Total assets 126.4 123.4 111.8 123.0 Capital structure Total equity 8.3 7.5 7.6 7.4 Total CAR 11.7 13.5 15.0 14.2Summary of FX balance sheet Tier-1 ratio 7.7 9.4 11.3 12.4Loans 4.5 5.6 3.8 n.a TCE/total tangible assets 6.6 6.0 6.7 5.9Deposits 2.4 3.5 3.0 n.a Funding Borrowings 6.0 5.5 3.5 n.a Loan-to-deposit ratio 109 109 110 111Bonds 2.1 2.2 2.8 n.a Loan/assets 73.4 68.0 72.9 74.6 FX loan-to-deposit ratio 183 159 128 n.a

Source: Hana Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Kookmin Bank Strengthening controls, trimming costs Key events and risks to monitor

Most exposed to the household sector, which accounts for 57% of its loans Bank CenterCredit in Kazakhstan (42% owned) may require more capital


Kookmin had a poor Q2 2010 which management attributes to conservative provisioning policies following the appointment of new CEOs for Kookmin Bank and its parent KB Financial Group. It appears the bank has new priorities focused on strengthening internal controls and trimming costs ahead of growth through acquisitions. We expect few surprises on asset quality and view the credit and rating profile of the bank as stable. The main risks to our view, to both the upside and the downside, are related to significant unexpected changes in key credit metrics in either direction.


Kookmin Bank reported a net loss of KRW305bn for Q4 2010, due to one-off expenses from the Early Retirement Program amounting to KRW650bn, which is positive for cost cutting in the long run and has been expected by the market. Net interest income rose 10.6% y-o-y on the sharpest margin improvement among the Korean banks we cover. Net interest margin expanded by 33bps over the year to 2.94% thanks to higher market rates and lower funding costs. Loan growth was muted over the year at 0.6% while deposits grew by 7.1% y-o-y and eased the loan-to-deposit ratio to 107% in Q4 2010 from 114% in Q4 2009. Deposit growth mainly came from saving deposits while CDs dropped 88% y-o-y and accounted for only 2% of the bank’s KRW deposits versus 15% a year ago. Asset quality showed impressive improvement, as the bank made significant write offs of NPLs, and new NPL formation reached the lowest level in the past two years. As a result, the gross NPL ratio declined to 1.79% in Q4 2010 from 2.30% in Q3 2010 while loan loss coverage ratio improved to 120% from 106% during the same period. Capital structure remains strong, as reflected by total CAR, tier-1 and tangible common equity/total assets of 13.4%, 10.9% and 7.5% respectively, as at end December 2010. We have a Neutral recommendation on the issuer.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A Stable Moody's A1 StableSub-debt - - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Mar10) Bank-deposit A1 - KB Financial Group 100%Sub-debt A2 - Shareholding of KBFG Financial strength C- - Korea National Pension Service 4.98%S&P ING Bank N.V. 5.02%Senior unsecured A Stable Sub-debt A- - Bloomberg Financial strength B - CITNAT



CITNAT 14 (NR/Aa1/AA) [Covered bond] 1,000m 7.25%CITNAT 11 (A/A1/A) 500m FloatCITNAT 12 (A/A1/A) 300m 5.875%

Bank in brief

Kookmin Bank is the largest bank in Korea with assets of KRW262trn (USD230bn) as at end-September 2010. In October 2008, the banking group was reorganised into a bank holding company, KB Financial Group (KBFG). KBFG is listed, has 9 subsidiaries including Kookmin, which accounts for 97% of the group’s assets. Kookmin had 1,483 branches, 18,422 employees, and 21% of the sector’s deposits at end-September 2010.

Kookmin Bank: financial summary (non-consolidated)


Income statement Growth (y-o-y %)

Interest income 14.7 15.0 11.3 3.1 Loans 14.5 15.8 -1.8 0.6Interest expense -7.2 -8.5 -6.4 -1.4 Assets 12.1 19.8 -2.1 -0.6Net interest income 7.5 6.6 4.9 1.6 Pre-provision profit 8.4 -21.8 -17.3 -50.0Other operating income 1.7 0.3 0.4 -0.0 Net income 12.2 -45.5 -57.9 -1812Operating income 9.2 6.9 5.2 1.6 Profitability Operating expenses -4.0 -3.5 -2.8 -1.3 ROAA 1.3 0.6 0.2 -0.5Pre-provision profits 5.2 3.4 2.5 0.4 Pre-provision profits/average assets 2.3 1.6 1.2 0.6Provisions for loan losses -0.7 -1.8 -1.9 -0.5 Net interest margins 3.45 2.99 2.41 2.9Non-operating profit 0.3 0.3 -0.0 -0.1 Cost-income ratio 43.2 50.0 52.9 78.2Pre-tax income 4.9 2.0 0.5 -0.2 Asset quality Taxation -1.9 -0.6 -0.0 -0.0 Gross NPL ratio 0.74 1.26 1.11 1.79Net income 3.0 1.4 0.5 -0.3 Gross NPLs (USDbn) 1.4 2.2 2.0 3.2 Key balance sheet items Loan Loss Res./NPLs 193 133 153 120Deposits 150.1 133.7 146.4 158.6 Capital structure Loans 185.5 167.2 167.6 173.5 Total CAR 12.6 13.2 14.0 13.4Total assets 236.6 220.6 220.4 230.2 Tier-1 ratio 9.7 9.9 10.8 10.9Total equity 17.3 14.6 16.6 17.0 TCE/total tangible assets 7.2 6.5 7.5 7.5Summary of FX balance sheet Funding Loans 6.3 7.3 4.8 n.a Loan-to-deposit ratio 124 125 114 107Deposits 1.8 2.4 2.7 n.a Loan/assets 78.4 75.8 76.0 77.0Borrowings 6.1 7.0 5.2 n.a FX loan-to-deposit ratio 349 308 182 n.aBonds 2.9 3.1 3.6 n.a

Source: Kookmin Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Korea Exchange Bank Strength in FX and trade Key events and risks to monitor

Acquisition by Hana Financial Group should benefit credit profile FX funding accounts for 26% of funding, 62% of which is sourced through

deposits The bank’s credit metrics compare well against peers


There is uncertainty over Korea Exchange Bank’s ultimate shareholder as the sale of a majority stake by Lone Star remains incomplete. Risks to our fundamental recommendation, to both the upside and the downside, include the eventual sale by Lone Star and a participation of a banking institution in the shareholder structure. In the meantime the outlook for Korea Exchange Bank’s credit profile remains stable and we maintain our Neutral fundamental recommendation.


Q4 2010 profits for Korea Exchange Bank (KEB) were KRW236bn, down 23% y-o-y. The decline is attributable to losses in NPL sales and higher taxation. Loan growth has been muted, up 0.3% q-o-q but declining 0.3% y-o-y. New lending has been extended to households and credit cards, while lending towards SMEs and large corporates have seen contraction. Asset quality showed impressive improvement on a sequential basis, with gross NPLs down 13% q-o-q and loan loss coverage up to 131% from 117% a quarter ago, thanks to sales of NPLs. The bank’s loan-to-deposit ratio eased to 103% in Q4 2010 from 105% in Q3 2010 on strong deposit growth. More encouragingly, most of the new deposits came from time deposits (+8% q-o-q) while CDs dropped 27% q-o-q. The bank’s capital structure continues to strengthen, as total CAR and tier-1 ratio went up to 16.3% and 13.2% in Q4 2010 from 15.6% and 12.6% in Q3 2010. This set of results further strengthened KEB’s credit metrics, which already compare well against peers. However, uncertainty remains as the acquisition by HFG is still subject to approval.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ S&P A StableMoody’s Senior unsecured A2 Positive (rfu) Major shareholders (as at Jun 2010) Bank-deposit A2 LSF-KEB Holdings 51.02%Sub-debt A3 KEXIM 6.25%Financial strength C- BOK 6.12%S&P Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB KEB Financial strength C+



KEB 16 (NR/A2/BBB+) 500 4.875%KEB 12 (A-/A2/BBB+) 300 Float

Bank in brief

KEB was established in 1967 as a policy bank specialising in FX and trade finance. In 2003, US investment fund Lone Star became the largest shareholder with a 51% stake but has been attempting to sell the stake for the past five years. KEB is the fifth-largest commercial bank in Korea, with a 7% deposit share. The bank operates with 354 domestic branches and 27 overseas branches. At the end of September 2010, assets totalled KRW99trn (USD87bn).

KEB: financial summary (non-consolidated)


Income statement Growth (y-o-y %) Net interest income 2.0 2.0 1.5 0.5 Loans 19.1 19.2 -2.8 -0.3Other operating income 1.1 0.8 0.7 0.1 Assets 18.1 26.4 -7.1 -0.4Operating income 3.2 2.8 2.2 0.6 Pre-provision profit -3.5 7.0 -20.6 -9.2Operating expenses -1.2 -1.0 -1.0 -0.3 Net income -4.5 -18.6 13.9 -22.9Pre-provision profits 2.0 1.8 1.2 0.3 Profitability Provisions for loan losses -0.3 -0.7 -0.6 -0.1 ROAA 1.3 0.8 0.9 1.0Pre-tax income 1.6 1.1 0.6 0.3 Pre-provision profits/average assets 2.4 2.1 1.6 1.6Taxation -0.6 -0.3 0.1 -0.1 Net interest margins 3.23 2.90 2.39 2.82Net income 1.0 0.7 0.7 0.2 Cost-income ratio 37.3 36.8 44.0 42.6 Asset quality Key balance sheet items Gross NPL ratio 0.61 1.09 0.94 1.26Deposits 48.0 47.5 48.9 53.7 Gross NPLs (USDbn) 0.39 0.65 0.57 0.77 Loans 58.4 54.2 53.8 55.2 Loan Loss Res./NPLs 204 142 153 131Total assets 88.7 87.3 82.7 84.9 Capital structure Total equity 7.2 5.6 6.8 7.1 Total CAR 11.4 12.6 14.9 16.3 Tier-1 ratio 8.6 8.8 11.0 13.2Summary of FX balance sheet TCE/total tangible assets 8.0 6.4 8.2 8.2Loans 5.9 7.6 6.8 n.a Funding Deposits 10.0 10.7 11.6 n.a Loan-to-deposit ratio 122 114 110 102.8Borrowings 6.4 5.9 4.7 n.a Loan/assets 65.9 62.1 65.0 65.1Bonds 0.9 0.9 1.0 n.a FX loan-to-deposit ratio 59 71 58 n.a

Source: KEB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Shinhan Bank New management keeps the course Key events and risks to monitor

Investigation into management conduct raises governance issues Exposure to shipbuilding, real estate and construction sectors at 12% of loans Margins set to improve on higher rates, in our view


The restructuring of the shipping and shipbuilding sector in 2011 could weigh on earnings. The recent controversy surrounding the CEO of Shinhan Financial Group raises questions about the bank’s internal controls, although we view the problem as contained and unlikely to affect the bank’s credit profile. The main risks to our view, both to the upside as well as the downside, are related to significant changes in key credit metrics in either direction.


Shinhan Bank’s Q4 2010 net income rose by 5.2% y-o-y to KRW194bn on higher net interest income and declining loan loss provisions. Net interest margin rose markedly to 2.17% in Q4 2010 from 2.01% in Q4 2009 on re-pricing of high-cost deposits. Loan growth was 5.9% y-o-y and 1.5% q-o-q, with strongest growth coming from large corporates and mortgage. Asset quality showed significant improvement, with gross NPLs down 25% q-o-q thanks to NPL write-offs and sales during the quarter. As a result, the bank’s gross NPL ratio declined from 1.77% in Q3 2010 to 1.31% in Q4 2010 and loan loss coverage ratio rose to 133% from 109% during the same period. The funding structure has been strained, as the loan-to-deposit ratio edged up to 101% from 98% a quarter ago, due to outflow of deposits (-1.5% q-o-q). Shinhan’s capital structure remains strong with total CAR of 15.9% and tier-1 of 13.2%. Overall profitability is weak as reflected by ROAA of 0.7% for 2010 and 0.3% for Q4 2010. This is within our expectation, and we have a Neutral recommendation on the bank.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A Negative Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Dec 2009) Bank-deposit A1 - Shinhan Financial Group 100%Sub-debt A2 - Shareholding of SFG: Financial strength C- - BNP Paribas 6.35%S&P Korea National Pension Fund 4.45%Senior unsecured A- Stable Bloomberg Sub-debt BBB+ SHNHAN Financial strength C+



SHNHAN 09/15 (NR/A1/A-) 700m 4.375%SHNHAN 12 (NR/A1/A-) 500m 6%SHNHAN 2/16-11c (BBB+/NR/BBB) [UT2] 300m 5.75%SHNHAN 35-15c (BBB+/Ba1/BBB) [T1] 300m 5.663%SHNHAN 36-16c (BBB+/Ba1/BBB) [T1] 350m 6.819%

Bank in brief

Shinhan Bank is part of the Shinhan Financial Group (SFG), which is the second-largest financial group in Korea with assets totalling KRW311trn (USD273bn) at end-September 2010. It is the third-largest bank in Korea with approximately 17% of the sector’s deposits at end-September 2010. The bank accounts for 77% of the group’s assets, and operates 951 branches and had 10,659 employees at end-June 2010.

Shinhan Bank: financial summary (consolidated)


Income statement Growth (y-o-y %) Interest income 10.4 10.6 7.7 2.0 Loans 13.8 13.2 -3.3 5.9Interest expense -6.3 -6.9 -4.8 -1.1 Assets 17.7 19.8 -6.4 0.3Net interest income 4.0 3.8 2.9 0.9 Pre-provision profit 64.0 -20.3 -12.2 6Other operating income 2.4 0.8 0.9 0.4 Net income 26.1 -29.5 -48.3 5.2Operating income 6.4 4.6 3.8 1.3 Profitability Operating expenses -2.6 -2.0 -1.9 -0.5 ROAA 1.1 0.6 0.3 0.3Pre-provision profits 3.8 2.6 1.9 0.8 Pre-provision profits/average assets 1.8 1.2 1.0 1.0Provisions for loan losses -0.6 -0.8 -1.0 -0.3 Net interest margins 2.26 2.12 1.72 2.17Non-operating profit -0.1 -0.0 -0.1 0.0 Cost-income ratio 40.3 44.0 48.8 53.8Pre-tax income 3.1 1.7 0.8 0.5 Asset quality Taxation -0.9 -0.4 -0.3 -0.1 Gross NPL ratio 0.73 1.00 1.00 1.31Net income 2.2 1.3 0.6 0.4 Gross NPLs (USDbn) 1.06 1.29 1.29 1.80 Key balance sheet items Loan Loss Res./NPLs 191 164 164 109Deposits 126.2 108.7 119.6 127.2 Capital structure Loans 134.8 118.9 117.4 128.0 Total CAR 12.1 13.4 15.1 15.9Total assets 225.2 210.0 200.6 207.3 Tier-1 ratio 7.6 9.3 11.6 13.2Total equity 12.2 10.1 11.5 13.3 TCE/total tangible assets 6.5 5.6 6.2 7.3Summary of FX balance sheet Funding Loans 8.9 8.1 5.3 n.a Loan-to-deposit ratio 107 109 98 101Deposits 5.0 5.8 4.3 n.a Loan/assets 59.9 56.6 58.5 61.7Borrowings 8.1 7.2 6.6 n.a FX loan-to-deposit ratio 178 139 124 n.aBonds 3.3 3.1 2.6 n.a

Source: Shinhan Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Woori Bank Capital pressure Key events and risks to monitor

Restructuring of shipping/shipbuilding sector in 2011 is likely to weigh on capital

Vulnerable to shipbuilding, real estate and construction sectors (25% of loans)


The outlook for the bank seems uncertain at the moment with the government intent on privatising the bank and asset quality concerns still weighing on earnings. With the local banks out of the picture the likelihood of Woori being privatised in 2011 is low, in our view. With 19% of the Korean banking system’s deposits, we believe the level of government support for the bank will remain very high and thus we maintain our Neutral fundamental recommendation on the company. The downside risks to our view include: privatisation, a significant deterioration in profitability due to high exposure to vulnerable sector. The upside risks are related to improvement in credit metrics or a potential sale to a very strong investor. HSBC FI Research view

Woori Bank Q4 2010 net income rose 14% y-o-y to KRW233bn, on higher interest income and lower loan loss provisions. However, on a sequential basis, provisioning for loan losses jumped 28%. Net interest income grew 6.8% y-o-y on margin expansion from lower funding costs. Gross NPLs dropped 17% q-o-q and loan loss coverage improved to 71% from 63% a quarter ago, but the coverage level remains low compared to last year (114%) and to its peers in Korea. Deleveraging continues, as the bank’s loan book contracted by 2.9% y-o-y and 1.2% q-o-q, which together with strong deposit growth pushed down the loan-to-deposit ratio to 102% in Q4 2010 from 105% in Q3 2010 and 110% a year ago. Capital structure appeared stable during the quarter with total CAR of 14.4% and tier-1 ratio of 11.3%. The overall profitability of the franchise remains weak, as reflected by ROAA of 0.4% for Q4 2010 and 0.5% for 2010. The under-reserving for NPLs and the bank’s ambition to expand in Southeast Asia may put pressure on capital. Media articles are citing the bank’s CEO that Woori is making a shortlist for possible M&A targets in Southeast Asia. We have a Neutral recommendation on the issuer.



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Credit rating profile FC government bond ratings Fitch Fitch A+ StableSenior unsecured A- Stable Moody's A1 StableSub-debt BBB+ - S&P A StableMoody’s Senior unsecured A1 Stable Major shareholders (as at Oct 2010) Bank-deposit A1 - Woori Financial Group 100%Sub-debt A2 - Shareholding of WFG Financial strength C- - Korea Deposit Insurance Corp 56.97%S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ - WOORIB Financial strength C+



WOORIB 02/15 (A-/A1/A-) 800m 7%WOORIB 10/15 (A-/A1/A-) 500m 4.5%WOORIB 01/16 (A-/A1/A-) 600m 4.75%WOORIB 16-11c (BBB+/A2/BBB+) [LT2] 1,000m 6.125%WOORIB 37-17c ((BB+/Ba2/BBB) [T1] 1,000m 6.208%

Bank in brief

Woori Bank (Woori) is part of the Woori Financial Group (WFG), which is the largest financial group in Korea. The bank accounts for 79% of the group’s assets and remains the largest profit contributor. Woori has an estimated 18% share of the banking system’s deposits and operates 911 branches with 14,461 employees. WFG had assets totalling KRW297trn (USD260bn) at end-September 2010.

Woori Bank: financial summary (consolidated)


Income statement Growth (y-o-y %) Interest income 11.4 12.2 9.0 2.5 Loans 18.7 18.5 -1.1 -2.9Interest expense -6.8 -7.8 -5.4 -1.3 Assets 17.8 16.9 -2.5 0.6Net interest income 4.6 4.3 3.6 1.2 Pre-provision profit 2.2 -27.8 40.2 -11.8Other operating income 0.9 -0.4 0.5 0.1 Net income 2.9 -86.2 307.6 14.1Operating income 5.4 4.0 4.0 1.3 Profitability Operating expenses -2.3 -2.1 -1.7 -0.6 ROAA 0.9 0.1 0.4 0.4Pre-provision profits 3.2 1.9 2.3 0.7 Pre-provision profits/average assets 1.6 1.0 1.3 1.4Provisions for loan losses -0.7 -1.4 -1.5 -0.4 Net interest margins 2.45 2.24 1.88 2.31Non-operating profit 0.0 0.1 0.1 0.0 Cost-income ratio 41.8 51.6 42.2 44.6Pre-tax income 2.4 0.6 0.9 0.3 Asset quality Taxation -0.6 -0.3 -0.2 -0.1 Gross NPL ratio 0.63 1.19 1.60 3.24Net income 1.8 0.2 0.7 0.2 Gross NPLs (USDbn) 0.99 1.77 2.34 5,453 Key balance sheet items Loan Loss Res./NPLs 211 144 114 71Deposits 131.3 120.8 130.4 140.7 Capital structure Loans 154.0 142.0 143.3 143.3 Total CAR 11.7 11.7 14.3 14.4Total assets 215.0 195.7 194.8 202.0 Tier-1 ratio 7.8 7.7 10.3 11.3Total equity 13.2 10.0 11.7 12.6 TCE/total tangible assets 6.1 4.8 5.7 n.aSummary of FX balance sheet* Funding Loans 8.7 10.9 8.4 n.a Loan-to-deposit ratio 117 118 110 102Deposits 4.2 5.7 6.2 n.a Loan/assets 71.6 72.6 73.6 70.9Borrowings 7.9 8.2 6.9 n.a FX loan-to-deposit ratio 209 190 136 n.aBonds 5.6 5.5 5.9 n.a

Source: Woori Bank, HSBC; *FSS standard, non-consolidated bank account. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Well prepared for Basel III Loan growth of the Singapore banks reached 14%

y-o-y as of November 2010 compared with 1.4%

as of December 2009. Loan growth here includes

the growth of the banks’ regional businesses.

Asset quality improved, with the non-performing

loan ratio declining from 2.33% in December

2009 to 1.73% in September 2010. The

capitalisation of the sector is the highest in the

region – the weighted capital adequacy ratio

(CAR) of the three local banks stood at 17.1% as

at September 2010.

Overall indebtedness as measured by total

credit/GDP stood at 354% as at June 2010, which

has been relatively stable over the past two years.

Lending by local banks or bank credit/GDP

(comprising the three local banks) was much

lower at 129% as of September 2010. Given

Singapore’s status as a financial centre, the level

of outstanding credit in relation to the economy is

manageable, in our view. Hence, we judge the risk

posed by the banking sector to the sovereign to be

low, particularly given the strong credit metrics of

the Singaporean banks.

Singaporean Banks

Deposit funding is strong

Asset quality shows improvement

Capitalisation of the sector is the highest in the region



Singapore – key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 Sep 2010 LTM

GDP growth (% y-o-y) -1.3 14.8 5.2 Balance sheet ratios: Nominal GDP (USDbn) 182.6 225.4 266.0 Total assets (USDbn) 1,376 1,372 1,549 GDP per capita (USD) 36,619 43,460 46,681 Liquid assets/total assets N/A N/A N/A Total loan growth (%) 11.9 1.4 13.6 CPI, average (% y-o-y) 0.6 2.8 3.2 Loans/Total assets (%) 29 31 32 Policy rate, end-year (%) 0.68 0.50 1.10 Retail loans/gross loans 26 28 28 Trade balance (USDbn) 30.2 45.6 53.4 Impaired loans/gross loans** 1.6 2.3 1.7* Current account balance (USDbn) 32.5 45.5 59.2 Reserve coverage of Impaired loans** 109 94 111* Current account balance (% GDP) 17.8 20.2 22.3 Gross loans/customer deposits 80 77 84 Total deposit growth (%) 1.7 6.0 3.7Gross external debt (USDbn) N/A N/A N/A Capital/total assets** 9.4 11.0 10.5* Private sector external debt (USDbn) N/A N/A N/A Profitability ratios: Central government balance (% GDP) -1.4 0.5 0.7 Cost/income ratio** 41.9 38.5 40.0* Gross public external debt (% GDP) N/A N/A N/A ROA** 1.0 1.0 1.2* International reserves (USDbn) 187.2 240.7 286.0 Net interest margin** 2.2 2.2 1.9* Cost of risk N/A N/A N/A Banking assets/GDP (%) 779 746* N/A Market share (as % of sector assets): Total loans/GDP (%) 238 235* N/A Largest 3 banks 31 33 34* Retail loans/GDP (%) 63 63* N/A State-controlled banks 0 0 0* Total Deposits/GDP (%) 311 283* N/A Foreign-owned banks 69 67 66*

* as of Sep 2010 ** asset-weighted average of three local banks. Source: MAS, CEIC, local banks’ company reports, estimates HSBC Economics

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DBS Bank Margin pressure Key events and risks to monitor

Margins are likely to remain under pressure in a low rate environment Exposure to property accounts for 39% of loans (includes mortgages)


Notwithstanding the headline improvement, the bank seems to be facing challenges in growing its various lines of business. This is reflected by its lower profitability compared to its peers with its return on average assets (ROAA) at 1%. DBS’ standalone credit profile is among the highest in Asia. We view its ratings profile as stable and like this credit as a defensive play. The downside risk to our recommendation is the deterioration in asset quality and capitalisation, while the upside risk is the substantial lowering of sector concentration in its loan portfolio.


DBS Group Q4 2010 net income jumped 38% y-o-y to SGD678m on lower loan loss provisions for non-Asia exposure. In Q4 2009 The bank disclosed SGD558m bilateral loans to Dubai World Finance and therefore increased provisioning against the exposure during the quarter. Net interest income dropped 2% y-o-y, despite strong credit growth, due mainly to a sharp margin contraction (-23bps over the year) on lower yields on customer loans. Loan growth was strong at 16.7% y-o-y and 3.1% q-o-q, with most significant growth in Greater China ex-HK, at 20% y-o-y and 19.2% q-o-q. The bank’s loan exposure to Greater China as a whole accounted for 32% of the bank’s loan book. Asset quality improved, with gross NPL ratio down to 1.9% in Q4 2010 from 2.1% in Q3 2010 and loan loss coverage ratio up to 91% from 87% during the same period. The bank’s total CAR and tier-1 ratio rose to 18.4% and 15.1% in Q4 2010 from 16.3% and 13.1% in Q3 2010, due mainly to SGD2.5bn preference shares issued in the quarter to replace the tier-1s that are to be called this year, though the call is subject to regulatory approval. DBS’ credit profile is among the highest in Asia; however, aggressive and fast expansion in China raises our concern over the bank’s asset quality in the future should the economy correct. In the year ahead, we still expect DBS’ rating profile to remain stable and have a Neutral recommendation on the credit



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Singapore Credit profile


Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Temasek Holdings 27.6%Sub-debt Aa2 Stable Financial strength B Stable S&P Senior unsecured AA- Stable Bloomberg Sub-debt A DBSSP Financial strength B+



DBSSP ’15 (AA-/Aa1/AA-) 1,000m 2.375%DBSSP ’17-12c (A+/Aa2/A+) (LT2) 1,500m L+22bpsDBSSP ’17-12c (A+/Aa2/A+) (LT2) 500m 5.125%DBSSP ’19-14c (A+/A1/A) (UT2) 750m 5%DBSSP ’21-16c (A+/A1/A) (UT2) 900m L+61bps

Bank in brief

DBS Bank (DBS) is wholly owned by the DBS Group. It is the largest bank in Singapore with assets totalling SGD279n (USD212bn) as at September 2010. DBS has an estimated 43% share of deposits in the domestic banking system. Its Hong Kong franchise is the sixth-largest by assets. It operates with over 200 branches and 14,000 employees in 15 markets. Singapore and HK accounted for 62% and 21%, respectively of DBS’ operating profit in the first nine months in 2010.

DBS Group: financial summary (consolidated)

Year to December (USDm) 2007 2008 2009 Q4 2010 Year to December (%) 2007 2008 2009 Q4 2010

Income statement Growth (y-o-y %) Interest income 6,033 5,741 4,206 1,041 Loans 24.9 18.3 3.3 16.7Interest expense -3,306 -2,701 -1,141 -253 Assets 18.0 10.2 0.8 9.7Net interest income 2,726 3,040 3,064 788 Pre-provision profit 15.5 -4.1 17.7 8.8Other operating income 1,364 1,238 1,478 444 Net income 0.4 -15.3 5.8 37.5Operating income 4,090 4,279 4,542 1,232 Profitability Operating expenses -1,737 -1,877 -1,791 -556 ROAA 1.1 0.8 0.8 1.0Pre-provision profits 2,353 2,402 2,751 676 Pre-provision profits/average assets 1.6 1.4 1.6 1.3Allowances for credit and other losses -409 -628 -1,068 -112 Net interest margins 2.17 2.04 2.02 1.79Share of profits of associates 73 53 45 17 Cost-income ratio 42.5 43.9 39.4 45.1Pre-tax income 2,016 1,827 1,729 582 Asset quality Taxation -391 -315 -196 -51 Gross NPL ratio 1.1 1.5 2.9 1.9Minority interest -113 -148 -129 -48 Net NPL ratio 0.7 0.9 1.8 1.1Net income 1,512 1,364 1,404 483 Gross NPLs (USDbn) 796 1,330 2,759 2,878 Loan Loss Res/NPLs 114.8 96.2 73.2 91.3 Capital structure Key balance sheet items Total CAR 13.4 14.0 16.7 18.4Deposits 98,630 111,000 127,018 134,106 Tier-1 ratio 8.9 10.1 13.1 15.1Advances 72,466 85,507 92,514 108,387 TCE/total tangible assets 7.5 7.0 9.3 7.7Total assets 158,748 174,436 184,101 202,708 Funding Total equity 15,781 16,310 20,997 23,651 Loan-to-deposit ratio 73.5 77.0 72.8 80.8 Loan/assets 45.6 49.0 50.3 53.5

Source: DBS Group, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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OCBC Building wealth management Key events and risks to monitor

Margins under pressure from low rates Managing and integrating BOS franchise is key to improving profitability


The move to acquire ING’s private banking assets in Asia will differentiate and strengthen its franchise, in our view. We think the bank is underrated by S&P and has room for a 1-notch upgrade in the year ahead. In our view credit indicators will remain stable and therefore we have a Neutral fundamental recommendation on OCBC. The main risks to our view are related to significant changes in key credit metrics in both directions.


OCBC’s 2010 net income was up 15% to SGD2.25bn on higher fee and commission income and lower credit losses, and also reflects the consolidation of Bank of Singapore (previously ING Asia private bank) during the year. The bank’s Q4 2010 results were flat at SGD505m compared with a year earlier due to lower profits from its life insurance business. The bank also experienced narrower margins and higher expenses versus a year earlier due to the consolidation of BOS, which has lower-yielding, higher-quality assets. The pace of loan growth was strong at 23% y-o-y (excluding BOS); the housing, general commerce, and building and construction sectors grew 26%, 52% and 18%, respectively. OCBC’s credit metrics showed improvement, with the net NPL ratio declining to 0.6% in Q4 2010 from 1.1% in Q4 2009. The bank’s CAR and tier-1 ratio increased to 17.6% and 16.3%, respectively, from 16.4% and 15.9%; this improvement was due to issue of shares as scrip dividends and the issue of SGD1bn LT2 by OCBC’s Malaysian and Indonesian subsidiaries. We think the bank is well positioned regionally to capture growth opportunities.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Lee Family 27%Sub-debt Aa2 Stable - Lee Foundation 19.28%Financial strength B Stable Aberdeen Asset Management 5.44%S&P Senior unsecured A+ Stable Bloomberg Sub-debt A OCBCSP Financial strength B+



OCBCSP ’22-17c (A+/Aa2/A) [LT2] 500m 3.75%OCBCSP ’11 (A/A1/A-) [UT2] 1250m 7.75%OCBCSP ’19-14c (A+/Aa2/A) [LT2] 500m 4.25%

Bank in brief

Overseas-Chinese Banking Corporation (OCBC) is one of the three largest banks in Singapore and accounts for an estimated 28% share of deposits and 33% of loans in the domestic banking system. The bank’s assets totalled SGD224bn (USD170bn) as at September 2010. Its insurance subsidiary, Great Eastern Holdings, is the largest insurance group in Singapore and Malaysia by assets. Outside Singapore, the bank has a strong presence in Malaysia, which contributed 25% of pre-tax income in 9M 2010. Insurance and consumer banking account for 33% of profits. OCBC operates 530 branches and has more than 19,500 employees in 15 countries.

OCBC: financial summary (consolidated)


Income statement Growth (y-o-y %) Interest income 3,494 3,723 2,881 828 Loans 20.2 11.9 1.3 29.8Interest expense -2,005 -1,756 -938 -280 Assets 15.5 3.9 7.1 18.0Net interest income 1,489 1,967 1,943 548 Pre-provision profit 3.7 -1.1 17.3 -1.3Other operating income 1,352 1,162 1,369 399 Net income 3.4 -15.5 12.2 0.6Operating income 2,841 3,129 3,312 947 Profitability Operating expenses -1,115 -1,311 -1,235 -442 ROAA 1.3 1.0 1.1 1.0Pre-provision profits 1,726 1,819 2,077 505 Pre-provision profits/average assets 1.6 1.4 1.6 1.3Amortisation of intangible assets -31 -33 -32 -11 Net interest margins 2.10 2.27 2.23 1.96Provisions for asset impairment -24 -316 -295 -34 Cost-income ratio 39.2 41.9 37.3 46.7Share of profits of associates 14 4 - - Asset quality Pre-tax income 1,685 1,474 1,749 459 Gross NPL ratio 1.7 1.5 1.7 0.9Taxation -236 -159 -268 -64 Net NPL ratio 1.1 0.8 1.1 0.6Minority interest -74 -78 -132 -35 Gross NPLs (USDbn) 864 803 985 711 Net income 1,374 1,236 1,350 360 Loan Loss Res/NPLs 115 129 105 142.9 Capital structure Key balance sheet items Total CAR 12.4 15.1 16.4 17.6Deposits 60,503 63,925 71,630 88,097 Tier-1 ratio 11.5 14.9 15.9 16.3Advances 48,597 54,228 57,567 75,014 TCE/total tangible assets 7.3 7.5 8.7 7.9Total assets 118,983 123,249 138,302 163,820 Funding Total equity 11,475 12,611 15,502 16,894 Loan-to-deposit ratio 80.3 84.8 80.4 85.1 Loan/assets 40.8 44.0 41.6 45.8

Source: OCBC, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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United Overseas Bank Regional focus Key events and risks to monitor

Acquisitions within the region are a possibility based on public company information Domestic market remains competitive Exposure to property (including mortgages) comprises 54% of loans


UOB has a resilient franchise and has recovered well from the recession. The bank has a good customer base in the SME and consumer sectors, and it has been more profitable than peers in Singapore. Its standalone profile is among the strongest in the region and remains stable, in our view. The bank’s credit profile is on an improving trend and it comfortably sits in the AA category, in our view. We expect that S&P will raise UOB’s senior debt rating to AA- in the year ahead. We have a Neutral fundamental recommendation on UOB, as we believe that the standalone profile is stable. The risks to our recommendation, to both the upside and the downside, are mainly related to potential acquisitions and resulting integration challenges.


United Overseas Bank (UOB) produced a good set of Q3 2010 results, with net income up 38% y-o-y to SGD688m on the back of strong trading and fee income (+48%) and lower loan loss provisions (-43%). Despite credit growth of 8.9% y-o-y, interest income declined 4.5% y-o-y as margins narrowed 32bps to 2.07% over the past year. Overall profitability is strong with return on average assets (ROAA) of 1.4% in Q3 2010. Asset quality improved from a year earlier but slipped in the most recent quarter with gross NPLs rising 2%. Still the bank’s gross NPL ratio of 1.9% and net NPL ratio of 1.1% is unchanged from three months earlier and is among the lowest in our coverage. The strength of the bank’s capital structure is unbeatable in this region with a CAR of 19.9%, tier-1 ratio of 15.1% and common equity/tangible assets of 7.4% as at Q3 2010. The bank’s funding position is strong with a loan-deposit ratio of 81% remaining relatively liquid with loan/assets of 53% as at Q3 2010.



+852 2822 4521+852 2996 6539



Credit rating profile FC government bond ratings Fitch Fitch AAA StableSenior unsecured AA- Stable Moody's Aaa StableSub-debt A+ S&P AAA StableMoody’s Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010) Bank-deposit Aa1 Stable Wee Cho Yaw 17.39%Junior sub-debt A1 Stable Financial strength B Stable S&P Senior unsecured A+ Stable Bloomberg Sub-debt A UOBSP Financial strength B+



UOBSP ’13 (A/A1/A-) [UT2] 1000m 4.5%UOBSP ’19-14c (A/A1/A-) [UT2] 1000m 5.375%UOBSP ’49-16c (A/A3/A-) [T1] 500m 5.796%

Bank in brief

United Overseas Bank (UOB) is one of the three largest banks in Singapore with assets totalling SGD202bn (USD154bn). UOB takes around a 35% share of loans in Singapore. The bank’s efforts to diversify its franchise geographically are proceeding meaningfully. In 9M 2010, Malaysia, Indonesia and Greater China contributed 12%, 7% and 4% of pre-tax income respectively. The bank has more than 500 offices in 19 countries including 65 branches in Singapore.

United Overseas Bank: financial summary (consolidated)



Interest income 4,892 4,846 3,549 959 Loans 20.5 7.7 -0.6 8.9Interest expense -2,913 -2,319 -1,021 -285 Assets 8.5 4.6 1.4 15.0Net interest income 1,978 2,528 2,527 674 Pre-provision profit -8.0 12.1 4.1 12.3Other operating income 1,256 1,184 1,191 446 Net income -17.9 -8.2 -1.8 37.6Operating income 3,233 3,711 3,718 1,120 Profitability Operating expenses -1,339 -1,449 -1,427 -424 ROAA 1.3 1.1 1.0 1.4Pre-provision profits 1,894 2,262 2,291 696 Pre-provision profits/average assets 1.7 1.8 1.8 1.9Amortisation of intangible assets -7 -8 -7 -2 Net interest margins 2.04 2.27 2.36 2.07Provisions for asset impairments -199 -570 -771 -102 Cost-income ratio 41.4 39.0 38.4 37.8Share of profits of associates & JVs 137 73 74 22 Asset quality Pre-tax income 1,825 1,757 1,586 614 Gross NPL ratio 1.8 2.0 2.2 1.9Taxation -380 -368 -265 -85 Net NPL ratio 1.1 1.2 1.3 1.1Minority interest -44 -19 -13 -4 Gross NPLs (USDbn) 1,167 1,401 1,609 1,652Net income 1,400 1,369 1,308 525 Loan Loss Res/NPLs 112 106 113 123 Capital structure Key balance sheet items Total CAR 14.5 15.3 19.0 19.9Deposits 72,891 80,296 86,484 103,228 Tier-1 ratio 10.0 10.9 14.0 15.1Advances 63,148 67,840 70,611 83,450 TCE/total tangible assets 7.4 5.2 7.0 7.4Total assets 119,216 124,306 132,093 157,741 Funding Total equity 12,079 10,681 13,634 16,355 Loan-to-deposit ratio 86.6 84.5 81.6 80.8 Loan/assets 53.0 54.6 53.5 52.9

Source: UOB, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Bangkok Bank Better times ahead Key events and risks to monitor

Political risk, although subdued, remains a concern


We think the ratings of Bangkok Bank will get a lift from a sovereign rating upgrade in 2011. The bank’s credit metrics are strong and its ratings by S&P and Fitch are currently being constrained by the sovereign, in our view. Consequently we have Neutral fundamental recommendation on the bank. The downside risk to our recommendation is sudden political instability, while the upside risk is very strong improvement in financial performance. HSBC FI Research view

Bangkok Bank’s Q4 2010 earnings declined 5.3% y-o-y to THB5.6bn on higher tax expenses. Pre-tax income rose 25% y-o-y due to strong net interest income, investment gains, and fee and service income. Loan growth was healthy at 10% y-o-y, with most of the growth occurring in the fourth quarter, due mainly to demand for working capital from the agro industry. The bank also saw strong domestic and overseas demand for loans for corporate business expansion, which is expected to continue in 2011. Overall profitability is good, as reflected by an ROAA of 1.2% during the quarter, despite credit growth having accelerated. Asset quality has improved significantly, with gross NPLs declining 16% q-o-q and loan loss coverage rising to 159% (from 134% a year ago). The bank’s capital ratios have come down slightly as the total capital adequacy ratio and tier-1 ratio slipped to 16.1% and 12.5%, from 17.0% and 13.6% a quarter ago, attributable to balance sheet expansion and the implementation of new accounting standards. The bank’s funding profile remains adequate, with a loan-to-deposit ratio of 85% in Q4 2010 compared with 79% in Q4 2009 on modest deposit growth over the year. The bank’s balance sheet remains very liquid, as cash and money market funds accounted for 20% of total asset as of December 2010. Overall we believe the bank’s credit profile remains sound and stable, and we view the result as credit neutral. We have a Neutral fundamental recommendation on the issuer.



+852 2822 4521+852 2996 6539

Thailand Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB NegSenior unsecured BBB+ Stable Moody's Baa1 StableSub-debt BBB S&P BBB+ NegMoody’s Senior unsecured A3 Stable Major shareholders (as at Mar 2010) Bank-deposit Baa1 Stable Sophonpanich family 1.1%Sub-debt Baa1 Stable Thailand Securities Depository Co 4.18%Financial strength D+ Stable State Street Bank and Trust Co 4.08%S&P Senior unsecured BBB+ Stable Bloomberg Sub-debt BBB BBLTB Financial strength C



BBLTB ’15 (BBB+/A3/BBB+) 400m 3.25%BBLTB ’20 (BBB+/A3/BBB+) 800m 4.8%BBLTB ’29 (BBB/Baa1/BBB) [LT2] 450m 9.025%

Bank in brief

Bangkok Bank is the largest bank in Thailand, with assets totalling THB1,832bn (USD61bn) and deposits of THB1,352bn (USD45bn) as at September 2010. The bank has an estimated 19% share of deposits in Thailand’s banking system and operates 896 domestic branches. The bank was established in 1944 by the Chin Sophonpanich family. The bank has a presence in Hong Kong, Singapore, China, Taiwan, Indonesia, Malaysia, and Vietnam.

Bangkok Bank: financial summary (consolidated)



Interest income 2,325 2,417 1,899 538 Loans 9.4 16.8 -5.4 9.8Interest expense -963 -830 -459 -121 Assets 6.2 6.9 4.5 10.0Net interest income 1,362 1,587 1,439 417 Pre-provision profit 3.0 5.7 2.3 22.0Other operating income 671 646 783 267 Net income 7.6 5.3 2.6 -5.3Operating income 2,033 2,233 2,222 684 Profitability Operating expenses -1,044 -1,152 -1,147 -349 ROAA 1.2 1.2 1.2 1.2Pre-provision profits 989 1,081 1,075 335 Pre-provision profits/average assets 2.2 2.2 2.1 2.3Provisions for loan losses -162 -197 -221 -55 Net interest margins 3.2 3.4 3.0 3.0Pre-tax income 828 884 853 280 Cost-income ratio 51.4 51.6 51.6 51.0Taxation -267 -275 -245 -106 Asset quality Minority interest -3 -2 -4 -2 Gross NPL ratio 7.86 4.65 4.86 3.62Net income 557 607 605 172 Gross NPLs (USDbn) 2,436 1,586 1,668 1,410 Loan Loss Res/NPLs 82.2 109.5 117.1 158.9 Capital structure Key balance sheet items Total CAR 14.5 13.8 15.5 16.1Deposits 37,893 38,062 40,777 43,117 Tier-1 ratio 12.0 11.2 12.6 12.5Advances 29,003 32,881 32,374 36,684 Total common equity/total assets 10.4 10.5 11.1 11.9Total assets 47,042 48,794 53,100 60,287 Funding Total equity 4,943 5,055 5,917 7,154 Loan-to-deposit ratio 76.5 86.4 79.4 85.1 Loan/assets 61.7 67.4 61.0 60.8

Source: Bangkok Bank, HSBC. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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EMEA banks

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The banking system of Kazakhstan has made

good progress on its way to recovery. Asset

quality has stabilised with some modest signs of

improvement, the level of capital has edged back

into positive territory and profitability is also on

the rise. But while the worst seems to be over,

there are still many challenges ahead, the key ones

being a fragile domestic operating environment

and the unfavourable conditions prevailing in

global financial markets.

Growth rates are likely to remain constrained by

the difficult economic environment in the near to

medium term. In addition, banks are now focusing

more on quality rather than on balance sheet size.

The government of Kazakhstan, prompted by the

recent financial crisis, has adopted a number of

measures aimed at stabilising its domestic

banking system. The state interventions coupled

with an increasingly positive macroeconomic

story have started to bear fruit.

Most importantly the capitalisation of the banking

system, insolvent during the crisis, has returned

into positive territory. Tier 1 capital amounted to

KZT1,424.9bn (USD9.82n) while Tier 2 capital

stood at KZT456.3bn (USD3.15bn) as of 1

January 2011.

Tier 1 capital and total capital funded 11.8% and

15.2% of the aggregate banking assets,

respectively, as of 1 January 2011. This result

represented a real turnaround over the situation

one year before when the total banking capital

was negative.

An adequate capital buffer is a crucial

precondition for restoring the health and stability

to the Kazakh banking system. Even though

significant improvement has already been

achieved, the highly risky operating environment

may require still more robust capital levels.

Banking system asset growth has been lagging

behind the economy. The consolidated assets of the

banking sector increased by 4.2% y-o-y to

KZT12,038.1bn (USD83.0bn) as of 1 January 2011

while GDP expanded by 7% in real terms in 2010.

However, the lending operations remained

burdened by asset quality problems and the weak

operating environment. The aggregate loan

portfolio contracted by 5.9% or KZT572.8bn

(USD3.95bn) during 2010. Loans accounted for

75.3% of total assets of the sector as of 1 January

2011, down from 83.4% a year before. The

scarcity of funding and very limited, if any, access

to international resources are likely to hamper the

Kazakh banks

Bank capital returning to positive territory

Loan growth lagging economy and likely to remain subdued in

2011

Changing funding mix favours deposits

Accruals on troubled loans may be inflating profits

Pavel Simacek, CFA Analyst HSBC plc +44 20 7992 3714 [email protected]

Ksenia Mishankina Analyst HSBC plc +44 20 7992 3703 [email protected]

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ability of banks to resume active lending

operations and constrain their growth in the near

to medium-term.

The whole concept of funding banking operations

in Kazakhstan has been shattered by the financial

crisis. The banks – historically heavily dependent

on external borrowings – were suddenly cut off

from international capital markets. The resulting

scarcity of international funding led to substantial

shifts in the funding mix and triggered a fierce

competition for deposits. The external debt of

banks was reduced by some USD29bn during the

crisis and the aggregate banking assets shrank.

During 2010, the total liabilities of the sector

dropped 14.5% to KZT10,715.4bn (USD73.86bn).

This contraction could not be offset even by a

12.5% growth in corporate deposits and 16.2% in

retail deposits. The shortfall was covered by the

government with state loans advancing by 22.9%

during 2010.

The aggregate net income for the banking sector,

excluding Alliance Bank, Temirbank and BTA

Bank, which completed restructuring, amounted to

KZT1,426.7bn (USD9.83bn) as of 1 January 2011, a

material improvement on the massive loss of

KZT2,834.2bn (USD19.4bn) reported in 2009. The

banking system of Kazakhstan seems to be on its

way to restoring profitability and overcoming the

devastating impact of the global financial crisis.

However, caution is needed when interpreting the

profitability data. The banks have restructured a

significant portion of their loan books hit by the

crisis and granted the borrowers repayment

holidays of up to three years. A portion of these

restructured exposures may never become

performing, while the interest income on them is

still being accrued by lenders thus inflating the

real bottom line profitability and capital.

Kazakhstan – key data on the banking sector


GDP growth (% y-o-y) 1.2 7.0 6.5 Balance sheet ratios Nominal GDP (USDbn) 116.2 133.05 152.3 Total assets (USDbn) 100.16 78.95 82.98 GDP per capita (USD) 6,918 8,969 11,424 Liquid assets/total assets 15.0% 26.4% 18.4% Total loan growth (%) 4.1 -15.1 -5.3 CPI, average (% y-o-y) 6.5 7.3 8.0 Loans/total assets (USDbn) 77.6 83.4 75.3 Policy rate, year end (%) 7.0 7.0 7.5 Retail loans/gross loans 16.2 20.0 24.8 Trade balance (USDbn) 15.2 24.3 31.9 Impaired loans/gross loans 8.0% 36.5% 32.5% Current account balance (USDbn) -4.2 4.9 7.4 Reserve coverage of Impaired loans 138% 103% 95% Current account balance (% GDP) -3.9 1.4 3.9 Gross loans/customer deposits 1.14 1.36 1.28 Total deposit growth (%) 19.3 -28.7 0.4Gross external debt (USDbn) 111.7 111.7 116.7 Capital/total assets 12.3 -8.5 11.0 Private sector external debt (USDbn) 108.5 107.7 112.0 Profitability ratios Central government balance (% GDP) -3.1 -1.2 -1.3 Cost/income ratio NA NA 71.4% Gross public external debt (% GDP) 3.2 4.0 4.7 ROA 0.00% -0.02% 0.01% International reserves (USDbn) 44.5 55.9 73.7 Net interest margin 3.33% 3.86% 3.04% Cost of risk NA NA 3.8 Banking assets/GDP (%) 68.0 62.4 NA Market share (% of sector assets) Total loans/GDP (%) 55.1 46.6 NA Largest 20 banks 99.1 98.6 98.0 Retail loans/GDP (%) 11.0 11.6 NA State-controlled banks NA 26.5 22.3 Total deposits/GDP (%) 40.3 36.1 NA Foreign-owned banks NA NA 31.3

Source: AFN, Fitch, estimates HSBC Economics

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Alliance BankStill on life support Key events and risks to monitor

Alliance Bank has yet to demonstrate the viability of its current business model. The level of capitalisation remains low with IFRS total capital still negative. The bank may face problems in recovering some troubled loans.

Credit profile outlook (initiate at Underweight)

Alliance Bank is currently majority owned by the state through Samruk-Kazyna National Welfare Fund (SK). This quasi-sovereign ownership is the key to its creditworthiness. However, SK has declared its intention to sell its stake in Alliance Bank. The bank’s stand-alone credit profile is rather weak. The uncertainty surrounding the future ownership structure and weak fundamentals support our Underweight view. Risks to our view include a sale to a strong strategic investor.


Alliance Bank is the sixth-largest bank in Kazakhstan with around 4.1% of total banking assets on its balance sheet (USD2.7bn as of 30 September 2010). Before the crisis pushed Alliance Bank into default, it was one of the fastest-growing financial institutions in Kazakhstan, with the majority of its pre-crisis liabilities consisting of debt denominated in foreign currencies. An inability to refinance maturing debt coupled with a deposits outflow and alleged fraudulent activities brought the bank down in April 2009. The bank has come out of debt restructuring recently with a new strategic focus on small and medium size enterprises and retail. The bank reported a net profit of KZT340.87bn (USD2.3bn) for 9M10 inflated by a one-off restructuring income of KZT320.36bn (USD2.2bn) and a positive contribution from FX operations. This was a significant improvement over a loss reported for the corresponding period of 2009. However, in 2011 management expects a much lower result of around KZT36.07bn (USD24.9m).

Analysts Pavel Simacek, CFA Ksenia Mishankina


+44 20 7992 3714+44 20 7992 3703

Kazakhstan Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured Caa2 Dev Major shareholders (as of Jan 2011) Bank-deposit B3 Samruk-Kazyna National Sub-debt (dom) Caa3 Welfare Fund 67%Financial strength E S&P Senior unsecured B- Stable Bloomberg Sub-debt CCC ALLIBK


Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m)

Coupon

ALLIBK 10 ½ 17 (B-/Caa2/B-) (sinkable) USD615 10 ½%ALLIBK Var 03/20 (B-/Caa2/B-) (sinkable) USD219 4.7% (variable)

Bank in brief

Samruk-Kazyna National Welfare Fund is the majority shareholder of Alliance Bank with 67% of common shares. Following the default of the bank on its obligations in April 2009, creditors became owners of 33% in a debt-to-equity swap. The debt restructuring was completed in March 2010 and the bank received a capital injection of USD3.7bn while the regulatory capital reached USD344.6m.

Alliance Bank: financial summary

Year to December (USDm) 2007 2008 2009 LTM June 2010

Year to December (%) 2007 2008 2009 LTM June 2010

Income statement Growth (y-o-y) Interest income 1,483 1,380 577 321 Loans 32.2 -47.1 -43.8 -14.5Interest expense -758 -837 -546 -337 Assets 26.1 -35.5 -44.0 -6.6Net interest income 725 544 31 -15 Pre-provision profit 144.0 -75.8 na naOther operating income 127 -197 -731 13 Net income 204.7 na na naOperating income 853 347 -700 -2 Profitability Operating expenses -183 -182 -136 -147 ROAA 4.1 -40.5 -51.1 40.1Pre-provision profits 670 165 -836 -149 Pre-provision profits/average assets 7.9 2.1 -21.2 -5.4Provisions for loan losses -208 -3,378 -1,183 -906 Net interest margins 16.4 6.6 0.5 -0.3Non-operating profit 0 0 0 2,175 Cost-income ratio 21.4 52.4 -19.5 naPre-tax income 462 -3,213 -2,020 1,120 Asset quality Taxation -105 3 0 -17 Gross NPL ratio na 15.2 52.5 72.9Net income 348 -3,210 -2,020 1,103 Gross NPLs (USDm) na 886 2,470 3,002Key balance sheet items Loan loss res./NPLs na 251.9 123.9 90.1Deposits 2,006 1,564 1,036 1,150 Capital structure Loans 6,796 3,586 1,642 1,411 Total CAR 19.0 na na naTotal assets 9,631 6,191 2,824 2,652 Tier-1 ratio 17.0 na na naTotal equity 1,319 -1,879 -3,543 -859 Funding Summary of FX balance sheet Loan-to-deposit ratio 338.8 229.3 158.5 122.6Loans 3,464 1,761 870 719 Loan/assets 70.6 57.9 58.2 53.2Deposits 369 440 121 116 FX loan-to-deposit ratio 939.9 400.5 718.1 620.0Borrowings 2,874 3,187 1,704 168 Bonds 2,570 2,191 2,276 1,061

Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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ATF BankForeign owner improves credit profile Key events and risks to monitor

Significant erosion of asset quality. Implementation of more efficient cost control. Thinning capitalisation levels.


ATF Bank is owned by UniCredit Group of Italy and is being increasingly integrated into the parent organisation. The strengthening ties with a reputable international parent are the main factor underpinning the credit profile of ATF Bank. Despite the high likelihood of support from UniCredit the weak credit indicators support our Neutral recommendation. Risk to our view is mostly driven by any changes in the relationship with the owner.


ATF Bank’s profitability came under significant pressure during H1 2010, when the bank reported a loss of KZT17.6bn (USD121m). The bottom line was constrained by escalating fee and commission expenses, which reached KZT9.63bn (USD66.35m), 14 times the H1 2009 figure.

The bank is exposed to the troubled real estate and construction sectors, which represented 14.7% and 5% respectively of the loan book as at 30 June 2010. The exposure to those sectors could further constrain performance and erode the capital base. ATF Bank has been lessening its reliance on external public markets funding and in October 2010 repaid a USD200m Eurobond.

Total equity fell to KZT48.6bn (USD330m) in H1 2010 and funded 4.4% of total assets at the end of the period. The level of capitalisation seems to be thin and additionally depressed by negative bottom-line results.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Watch

negative Moody's Baa2 Stable

Sub-debt BBB- S&P BBB StableMoody’s Senior unsecured Ba2 Stable Major shareholders (as at June 2010) Bank-deposit Ba2 UniCredit Group 99.71%Sub-debt B1 Financial strength E+ S&P NR Senior unsecured Bloomberg Sub-debt ATFBP Financial strength



Coupon

ATFBP 9 05/11/16 (BBB/Ba2/NR) USD350 9%ATFBP 9 ¼ 02/14 (BBB/Ba2/NR) USD297 9 ¼%ATFBP 9 ¼ 04/12 (BBB/Ba2/NR) USD200 9 ¼%

Bank in brief

ATF Bank is the fifth largest bank in Kazakhstan by assets and is fully owned (by UniCredit Group (99.71% as at 30 June 2010). ATF Bank offers a portfolio of services to both retail and corporate clients in Kazakhstan, Russia, and Kyrgyzstan, but its main focus is the domestic market.

ATF Bank: financial summary



Income statement Growth (y-o-y %) Interest income 883 988 797 683 Loans 49.6% 2.0% -2.5% -7.4%Interest expense -590 -624 -503 -457 Assets -0.6% 3.5% 3.1% 5.1%Net interest income 293 364 294 226 Pre-provision profit 63.2% 63.0% 14.9% -54.8%Other operating income 63 117 124 30 Net income 68.6% na na naOperating income 356 481 418 256 Profitability Operating expenses -166 -166 -123 -124 ROAA 0.7% -0.7% -5.3% -7.0%Pre-provision profits 190 315 295 132 Pre-provision profits/Average assets 2.4% 3.8% 4.2% 1.8%Provisions for loan losses -96 -388 -705 -704 Net interest margins 5.3% 5.0% 4.5% 3.4%Non-operating profit 16 - - 8 Cost-income ratio 46.7% 34.6% 29.5% 48.3%Pre-tax income 109 -73 -411 -570 Asset quality Taxation -50 13 40 56 Gross NPL ratio na 2.3% 14.3% 35.3%Net income 59 -60 -371 -508 Gross NPLs na 163 900 2,187Key balance sheet items Loan Loss Res./NPLs na 331.1% 114.8% 59.1%Deposits 3,158 2,841 3,381 3,852 Capital structure Loans 6,498 6,611 5,249 4,896 Total CAR 14.1% 16.5% 12.1% naTotal assets 8,169 8,435 7,087 7,499 Tier-1 ratio 9.2% 11.0% 8.2% naTotal equity 621 793 408 330 Funding Summary of FX balance sheet Loan-to-deposit ratio 205.8% 232.7% 155.3% 127.1%Loans na na 3,796 na Loan/assets 79.5% 78.4% 74.1% 65.3%Deposits na na 2,190 na FX loan-to-deposit ratio na na 173.3% naBorrowings na na 2,562 na Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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BTA BankClimbing back after falling off a cliff Key events and risks to monitor

Bank’s profitability is likely to suffer from a high level of problematic assets. The bank receives funding from the owner, but it comes at a relatively high cost. The ability to collect NPLs could boost performance and increase recovery rates.

Credit profile outlook (initiate at Underweight)

BTA Bank has turned from a privately owned into a quasi-sovereign institution held by the Samruk-Kazyna National Welfare Fund (SK). The relationship with SK is the bank’s main credit driver. However, the bank is struggling to recover from its recent failure, the credit fundamentals remain weak further undermined by very high NPLs, as a result of which we establish an Underweight recommendation. The downside risks to our recommendation include inability to clean up its loan portfolio while on a sale to a strong strategic investor would represent a significant upside risk.


BTA Bank defaulted on its liabilities in April 2009 and has since restructured its obligations, a process it completed in September 2010. Since then, the bank has worked hard to restore its business and its credibility. The profitability of the bank is likely to remain under pressure, although release of provisions might improve it.

In February 2011, the bank filed another claim, amounting to USD1.2bn, against its former chairman, Mukhtar Ablyazov, bringing the total claims against him to USD3.3bn. It is questionable whether any of the claims can be successful.

BTA Bank’s government stake may be divested through a so-called “people’s IPO” or direct sale or a mixture of the two. The most discussed strategic investor in press reports is Sberbank. We would view a significant participation of the Russian banking giant in the ownership structure as positive for the credit profile and potential upside risk to our view.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured NA Major shareholders (as at March 2011) Bank-deposit Caa3 RUR Samruk-Kazyna 81.5%Sub-debt NA Financial strength E S&P Senior unsecured B- Stable Bloomberg Sub-debt NA BTAS



Coupon

BTAS Var 07/20 (restructured, NR) USD5,211 VariableBTAS 10 ¾ 07/18 (B-/NR/NR) USD2,082 10 ¾%BTAS7.2 07/01/25 (CC/NR/NR) (sinkable) USD497 7.2%

Bank in brief

BTA Bank is the third largest bank in Kazakhstan. After a massive default on its obligations, the bank was effectively nationalised, with Samruk-Kazyna, the National Welfare Fund, taking an 81.5% stake. During the restructuring, debt was reduced to USD4.2bn from USD16.65bn and its maturity was substantially extended.

BTA Bank: financial summary



Income statement Growth (y-o-y) Interest income 2,640 3,295 1,609 1,079 Loans 77.1 -32.1 -35.6 -28.1Interest expense -1,463 -1,732 -1,744 -1,666 Assets 47.7 -28.4 -10.3 -11.6Net interest income 1,177 1,563 -135 -587 Pre-provision profit 88.2 -21.4 nm nmOther operating income 454 -64 -2,057 -162 Net income 65.6 nm nm nmOperating income 1,631 1,499 -2,192 -749 Profitability Operating expenses -463 -564 -410 -459 ROAA 2.5 -45.2 -53.5 -30.5Pre-provision profits 1,168 935 -2,603 -1,208 Pre-provision profits/Average assets 5.6 4.3 -18.5 -9.7Provisions for loan losses -592 -10,616 -4,945 -3,016 Net interest margins 5.9 6.2 -0.6 -2.8Non-operating profit 32 -194 9 421 Cost-income ratio 28.4 37.6 -18.7 -61.2Pre-tax income 608 -9,875 -7,539 -3,804 Asset quality Taxation -80 1 -4 17 Gross NPL ratio 0.8 49.3 77 naNet income 528 -9,874 -7,543 -3,787 Gross NPLs (USDbn) 165 11,560 16,409 naKey balance sheet items Loan Loss Res./NPLs [is this correct?] 689.2 87.1 87.2 naDeposits 5,413 7,330 4,421 4,631 Capital structure Loans 19,743 13,378 7,014 5,079 Total CAR 17.6 na na naTotal assets 25,424 18,153 13,267 11,812 Tier-1 ratio 16.9 na na naTotal equity 3,750 -6,145 -11,388 -11,868 Funding Loan-to-deposit ratio 364.7 182.5 158.7 109.7 Loan/Assets 77.7 73.7 52.9 43.0Source: Company financials. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Development Bank of KazakhstanSpecial mission and status Key events and risks to monitor

Funding options are limited, as Development Bank of Kazakhstan (DBK) is not allowed to collect deposits

DBK focuses on a few large projects with substantial repayment periods Political pressures may influence business decisions

Credit profile outlook (Overweight from Neutral)

Due to its government ownership and development mission, DBK’s credit risk is closely aligned with that of Kazakhstan and will move in line with it. The current favourable macroeconomic story supports the recovery and government finances thus also strengthening the credit profile and importance of DKB. Consequently we change our recommendation from Neutral to Overweight. Risks to our view include adverse developments in the local economy and weak commodity prices.


Its development mission shapes DBK’s strategy and its credit profile. In 2010 the bank participated in 10 strategic government projects with a total value of USD4bn. According to preliminary data, DBK’s 2010 net income stood at KZT2.8bn (USD19.3m) while total assets advanced by 13.0% to close the year at USD6.5bn. In 2011 management expects the bottom line to reach KZT4bn (USD27.3m) mainly due to lower provisioning requirements. DBK reported consolidated IFRS assets of KZT928.7bn (USD6.3bn) as of 30 September 2010. Its balance sheet is highly liquid with resources waiting to be deployed. While profitability is not of key importance, the bank booked a net income of KZT3.9bn (USD27.2m) in 9M10, a significant improvement on the same period of 2009 when it recorded a loss of KZT11.9bn (USD79.9m).



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Stable Moody's Baa2 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011) Bank-deposit Baa3 Samruk-Kazyna National 100%Sub-debt NA Welfare Fund Financial strength NA S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA DBKAZ



Coupon

DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD500 5 ½%

DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD277 5 ½%

Bank in brief

Samruk-Kazyna National Welfare Fund is the sole owner of DBK and exercises ownership rights on behalf of the Kazakhstan government. DBK was set up in accordance with the law on the Development Bank of Kazakhstan in 2001 and enjoys special status including immunity from prudential and reserve requirements.

Development Bank of Kazakhstan: financial summary

Year to December (USDm) 2007 2008 2009 LTM Sept 2010

Year to December (%) 2007 2008 2009 LTM Sept 2010

Income statement Growth (y-o-y) Interest income 110 233 283 351 Loans 54.1 143.4 7.3 56.9Interest expense –42 –107 –126 –173 Assets 54.9 36.2 124.9 9.3Net interest income 68 127 157 178 Pre-provision profit 0.0 184.8 106.9 -3.1Other operating income –10 5 41 15 Net income –17.7 –27.0 na naOperating income 58 132 199 193 Profitability Operating expenses –21 –25 –19 –19 ROAA 1.3 0.7 –6.4 -3.2Pre-provision profits 37 107 180 175 Pre-provision profits/average assets 2.0 3.9 4.3 2.9Provisions for loan losses –6 –85 –497 –366 Net interest margins 5.5 6.5 5.1 3.7Non-operating profit 0 0 0 0 Cost-income ratio 36.4 18.9 9.4 9.6Pre-tax income 31 22 –317 –192 Asset quality Taxation –7 –4 50 31 Gross NPL ratio na 0.1 6.6 5.4Net income 24 18 –267 –160 Gross NPLs (USDm) na 1 126 147Key balance sheet items Loan loss res./NPLs na 7601 426 406Deposits 16 5 304 112 Capital structure Loans 640 1,553 1,357 2,140 Total CAR na na na naTotal assets 2,301 3,126 5,726 6,289 Tier-1 ratio na na na naTotal equity 837 797 1,813 1,862 Funding Summary of FX balance sheet Loan-to-deposit ratio 4045 29707 446 1917Loans 606 1,505 1,296 na Loan/assets 27.8 49.7 23.7 34.0Deposits 16 4 304 na FX loan-to-deposit ratio 3847 35475 426 naBorrowings 425 1,150 2,898 na Bonds 344 345 346 na


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Eurasian Development BankPromoting regional integration Key events and risks to monitor

The key driver of credit quality for Eurasian Development Bank (EDB) is its relationships with shareholding member states – these appear secure due to the bank’s development mission, high political profile and direct government ties.

EDB is a relative newcomer to the lending market with untested credit skills.

Credit profile outlook (Overweight)

EDB’s ownership – two-thirds by Russia and the rest by Kazakhstan and smaller states in the region – and the privileges it enjoys in these countries, represent the main props to its credit profile. EDB high political profile, its regional importance and support of member states with growing economies support our Overweight view. Risks to our view include major changes in political sentiment towards the bank.


EDB’s total assets amounted to USD2.5bn as of H1 2010, up only 1% on 2009. The bank is not a very active lender with loans to customers accounting for mere 27.4% of total assets as of H1 2010. A net profit for H1 2010 stood at USD7.3m, down from USD30.2m in H1 2009. Profitability came under pressure due to growing expenses related to newly raised debt.

EDB’s strategy calls for an increase in its investment portfolio to USD4.4bn by the end of 2013. A strong emphasis is placed on developing economic and trade relations among the member states, including an increase in mutual trade of USD1.6bn and investments of USD1.2bn by 2013. Its plans also for projects funded by the bank to result in a production of goods with a total annual value of USD3.6bn and to stimulate production in related supplier sectors of the economy.



+44 20 7992 3714+44 20 7992 3703

Kazakstan Credit profile


Credit rating profile FC government bond ratings (Russia) Fitch Fitch BBB- Positive Senior unsecured BBB Positive Moody's Baa2 Stable Sub-debt NA S&P BBB Stable Moody’s Senior unsecured A3 Stable Major shareholders (as of Jan 2011) Bank-deposit NA Russian Federation 67%Sub-debt NA Kazakhstan 33%Financial strength NA S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA EURDEV



Coupon

EURDEV7 3/8 09/14 (BBB/A3/BBB+) USD500 7 3/8%

Bank in brief

EDB is a regional development bank with a mandate to promote economic integration and development of its member states, Russia, Kazakhstan, Tajikistan, Armenia and Belarus, where the bank is exempt from taxes and the supervision of local regulatory bodies.

Eurasian Development Bank: financial summary



Income statement Growth (y-o-y) Interest income 59 108 108 0 Loans na 164.6 39.8 13.4 Interest expense –13 –29 –44 –0 Assets 69.6 52.9 24.3 1.0 Net interest income 46 79 64 47 Pre-provision profit 303.0 3.9 8.4 –45.1Other operating income 10 –12 11 12 Net income 297.4 3.3 –1.9 –57.5Operating income 56 67 74 59 Profitability Operating expenses –16 –26 –30 –35 ROAA 3.8 2.4 1.8 0.7Pre-provision profits 40 41 45 25 Pre-provision profits/average assets 3.8 2.5 2.0 1.0Provisions for loan losses –1 –1 –5 –8 Net interest margins 5.7 5.3 3.5 2.6Non-operating profit - - - - Cost-income ratio 28.3 38.5 39.8 58.5Pre-tax income 39 41 40 17 Asset quality Taxation - - - - Gross NPL ratio na na na naNet income 39 41 40 17 Gross NPLs (USDm) na na na naKey balance sheet items Loan loss res./NPLs na na na naDeposits 0 0 0 0 Capital structure Loans 165 436 609 690 Total CAR na na na naTotal assets 1,313 2,008 2,495 2,521 Tier-1 ratio na na na naTotal equity 854 1,531 1,634 1,655 Funding Summary of FX balance sheet Loan-to-deposit ratio 0.0 0.0 0.0 0.0Loans 165 436 528 612 Loan/assets 12.5 21.7 24.4 27.4Borrowings 407 474 48 57 FX loan-to-deposit ratio nm nm nm nmBonds 0 0 675 670


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Halyk Bank The worst seems to be over Key events and risks to monitor

Still weak asset quality is threatened by real estate exposure. Deposit concentration is concerning, with the bank’s 10 largest customer deposits

accounting for 47% of the total.

Credit profile outlook (Neutral, downgrade from Overweight)

Halyk Bank’s creditworthiness remains under pressure due to the still challenging operating environment and fragile economic recovery. This, coupled with the low, albeit stabilising, quality of the loan book prompts us to change our fundamental view to Neutral from Overweight. Risks to our view include: significant swings in asset quality and profitability. A substantial diversification in the funding structure would put upward pressure on our view.


Halyk Bank reported total assets of KZT2,063.9bn (USD14.0bn) as of 30 September 2010. The bank controlled 16.7% of the aggregate banking assets in Kazakhstan, making it the second larges bank in its domestic market. NPLs (at least 90 days in arrears) amounted to 17.5%, up from 16.7% at the end of 2009.

Halyk Bank keeps its balance sheet liquid, with around 34.5% of assets invested in cash and highly liquid instruments at the end of the first nine months of 2010. This cushion should be sufficient to meet unexpected swings in business or outflow of funds. Another safety buffer is represented by capital with the total capital ratio amounting to 22.5% and the Tier 1 standing at 18.4%.

Profitability has been recovering strongly. Net income stood at KZT26.00bn (USD179m) for 9M 2010, up more than 2.8 times from KZT9.27bn (USD62.3m) in 9M 2009. This improvement was mainly driven by falling provisions, potentially signalling asset deterioration has now bottomed out.



+44 20 7992 3714+44 20 7992 3703

Kazahstan Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B+ Stable Moody's Baa2 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Ba3 Stable Major shareholders (as of Jan 2011) Bank-deposit Ba2 Holding Group Almex 54.37%Sub-debt NA Samruk-Kazyna 20.91%Financial strength D- GDR holders 20.04%S&P Senior unsecured B+ Stable Bloomberg Sub-debt NA HSBKKZ



Coupon

HSBKKZ7 ¼ 05/17 (B+/Ba3/B+) USD638 7 1/4%HSBKKZ7 ¼ 01/21 (B+/Ba3/B+) USD500 7 1/4%HSBKKZ9 1/4 10/13 (B+/Ba3/B+) USD490 9 1/4%HSBKKZ7 3/4 05/13 (B+/Ba3/B+) USD270 7 3/4%

Bank in a capsule

Halyk Bank boasts a strong retail franchise and a dense territorial coverage, operating a branch network consisting of 629 outlets with 1,686 ATMs and 3,835 point-of-sale terminals. Its overseas presence, though, is modest with subsidiaries in Russia, Kyrgyzstan and Georgia. In addition to standard banking services, it is also active in pensions, insurance, leasing, brokerage and asset management.

Halyk Bank: financial summary



Income statement Growth (y-o-y) Interest income 1,082 1,601 1,313 1,215 Loans 74.5 14.2 -4.6 -3.4Interest expense -502 -837 -699 -620 Assets 60.9 3.5 22.5 2.0Net interest income 580 764 614 596 Pre-provision profit 62.6 16.6 23.1 -16.1Other operating income 337 347 418 378 Net income 49.2 -64.1 9.1 105.4Operating income 917 1,111 1,032 974 Profitability Operating expenses -326 -410 -329 -382 ROAA 3.1 0.9 0.9 1.6Pre-provision profits 591 702 703 592 Pre-provision profits/average assets 5.6 5.2 5.7 4.3Provisions for loan losses -173 -507 -573 -321 Net interest margins 6.7 6.0 5.3 4.7Non-operating profit 0 -60 0 0 Cost-income ratio 35.6 36.9 31.9 39.2Pre-tax income 418 134 129 271 Asset quality Taxation -87 -13 -22 -50 Gross NPL ratio na 6.40 16.7 17.5Net income 331 121 107 221 Gross NPLs (USDm) na 690 1,508 1,585Key balance sheet items Loan loss res./NPLs na 137.9 92.5 103.9Deposits 7,760 7,176 8,586 9,278 Capital structure Loans 8,630 9,831 7,637 7,410 Total CAR 12.9 13.4 20.6 22.5Total assets 13,233 13,662 13,634 13,976 Tier-1 ratio 10.6 9.9 16.9 18.4Total equity 1,336 1,581 1,893 2,094 Funding Summary of FX balance sheet Loan-to-deposit ratio 111.2 137.0 88.9 79.9Loans 3,476 4,510 3,969 3,611 Loan/assets 65.2 72.0 56.0 53.0Deposits 3,213 3,322 4,747 4,282 FX loan-to-deposit ratio 108.2 135.8 83.6 84.3Borrowings 1,423 1,690 236 184 Bonds 1,203 1,656 1,406 1,435


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Kazkommertsbank Big may not mean crisis proof Key events and risks to monitor

The bank is still burdened with many problematic exposures. Concentration on both sides of its balance sheet represents a challenge. Tight liquidity results in a negative liquidity gap in the shortest maturity bracket.

Credit profile outlook (Neutral, downgrade from Overweight)

KKB is one of the largest private banks in the CIS and the market leader by total assets in Kazakhstan. As of January 2011, KKB had accumulated on its books 20.19% of the country’s aggregate banking assets. However, credit volumes stayed flat in H1 2010, reflecting a still difficult economic situation and a scarcity of funding. Therefore we downgrade KKB to Neutral from Overweight. Risks to our view include significant changes in the operating environment or credit profile, which is strongly influenced by the asset quality.


KKB has been focusing on asset quality and liquidity management. The former remains a challenge, with some 22.3% of gross loans more than three months overdue as of 30 September 2010, up from 21.3% at the end of 2009. The bank is working hard to find solutions with its borrowers. The level of provisions reached 20.3% of gross loans, up from 19.0% during the same period.

Capitalisation remained almost flat during the first nine months of 2010 with the BIS total capital ratios and Tier 1 ratios easing modestly to 20.6% and 16.0%, respectively, from 20.1% and 15.9% at the end of 2009.

KKB booked a profit of KZT15.72bn (USD108.3m) in the first nine months of 2010, up from KZT14.60bn (USD98.0m) in 9M 2009. The bank is also gradually repaying government funds received during the crisis to restore itself to non-state ownership.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured B- Stable Moody's Baa2 StableSub-debt CC S&P BBB StableMoody’s Senior unsecured B2 Negative Major shareholders (as of Jan 2011) Bank-deposit Ba3 Central Asian Investment Co. 23.83%Sub-debt Caa1 Mr. N.S. Subkhanberdin 9.32%Financial strength E+ Alnar Capital Holding 28.76%S&P Samruk-Kazyna 21.26%Senior unsecured B Stable Bloomberg Sub-debt CCC+ KKB



Coupon

KKB7 ½ 04/16/13 (B-/B2/B) USD443 8 ½%KKB7 ½ 11/29/16 (B-/B2/B) USD356 7 ½%KKB8 11/03/15 (B-/B2/B) USD270 8%KKB8 04/07/14 (B-/B2/B) USD255 7 7/8%

Bank in brief

KKB is the largest bank in Kazakhstan. It is majority held by private investors; however, Samruk-Kazyna National Welfare Fund (SK) acquired a minority stake during the crisis in an effort to stabilise the financial sector. SK currently owns 21.26% though it is in the process of reviewing its holdings, many of which will be divested this year. It is quite possible that KKB will be included on the sell list as it does not represent a strategic investment.

Kazkommertsbank: financial summary



Income statement Growth (y-o-y) Interest income 2,583 3,165 2,524 2,054 Loans 41 –9 1 0 Interest expense –1,402 –1,507 –1,216 –1,076 Assets 23 –13 –1 4 Net interest income 1,181 1,658 1,308 978 Pre-provision profit 98 14 32 –40Other operating income 270 16 397 157 Net income 108 –65 –6 6 Operating income 1,451 1,675 1,705 1,135 Profitability Operating expenses –255 –283 –208 –234 ROAA 2.1 0.7 0.7 0.8Pre-provision profits 1,196 1,392 1,497 901 Pre-provision profits/average assets 5.4 6.0 8.5 5.0Provisions for loan losses –607 –1,268 –1,313 –686 Net interest margins 6.1 8.0 7.8 4.8Non-operating profit 12 –28 31 1 Cost-income ratio 17.6 16.9 12.2 20.6Pre-tax income 601 95 215 217 Asset quality Taxation –130 72 –86 –80 Gross NPL ratio 2.1 6.0 21.3 22.3Net income 471 168 129 137 Gross NPLs (USDm) 437 1,208 3,827 4,093Key balance sheet items Loan loss res./NPLs 266.6 198.1 89.0 90.9Deposits 7,426 8,103 8,602 9,965 Capital structure Loans 19,631 17,744 14,562 14,634 Total CAR 15.2 17.7 20.1 20.6Total assets 24,865 21,632 17,440 18,273 Tier-1 ratio 11.7 13.5 15.9 16.0Total equity 2,648 2,597 2,626 2,748 Funding Summary of FX balance sheet Loan-to-deposit ratio 264.4 219.0 169.3 146.9Loans 12,239 11,744 9,351 8,779 Loan/assets 79.0 82.0 83.5 80.1Deposits 2,926 4,431 4,340 4,600 FX loan-to-deposit ratio 418.3 265.1 215.5 190.9Borrowings 7,553 4,074 2,216 1,864 Bonds 6,136 5,611 3,125 2,669

Source: Company financial reports. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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State-led growth Qatar is pushing hard for infrastructure development,

especially since winning the 2022 World Cup bid.

Investment proposals are being chalked out and the

country has ample resources for a booster package.

The country’s finance minister has said that the state

is planning to allocate 40% of budgeted expenditure

to infrastructure development in 2011 against 30% in

2010. Our equity research team expects this

investment trend to continue and projects a 13%

compounded annual growth rate in lending between

2009 and 2012. This compares with the MENA

average of 10% during the same period and will

likely stimulate loan growth in Qatari banks.

The lending pattern in the country has undergone

a structural shift in the past few years. According

to the Qatari central bank, private sector credit

comprised only 65% of total domestic credit at the

end of 2010 compared with 73% at the end of

2008. The trend has been fairly unidirectional to

date and this will likely continue to be the case

given the strong pipeline of ongoing and

upcoming projects. Our equity research team

forecasts a public sector financing requirement of

USD64bn between 2011 and 2014 based on

ongoing projects. Such loans would usually yield

rates lower than prevailing commercial levels,

which would squeeze banks’ margins. However,

we expect volume growth to outpace margin

decline, allowing banks to post earnings growth.

Qatar does not have any large specialised

government lending institutions so commercial

banks have historically been the intermediary of

choice. The only specialised government-

promoted development bank, Qatar Development

Bank, has a lean balance sheet (end-2009 asset

size: QAR3.2bn or USD0.9bn) compared with

large domestic commercial banking peers like

Qatar National Bank (end-2010 asset size:

QAR223bn or USD61.2bn). Commercial banks

therefore have a clear advantage on balance sheet

strength and will likely lead the lending franchise

in the medium term.

Qatari banks’ capitalisation levels are similar to

those of peers in the region, with Tier 1 ratios at

around 11%. Loan-to-deposit ratios, however, are

on the high side in Qatar (>100%, with the

notable exception of Qatar National Bank),

suggesting generally aggressive lending. This risk

is partially offset by a sound depositor base.

Overall deposits increased at double-digit rates (in

percentage point terms) in the last three years.

Furthermore, the share of private deposits in total

deposits increased from 62% in 2008 to 74% at

end-2010 – in contrast to the UAE, where public

sector deposits form a larger chunk. This

Qatar banks

Strong loan growth outlook underpinned by state spending plans

Margins likely to shrink as public sector lending gains pace

Concentrated commercial banking sector will continue to lead

domestic lending activities


Aybek Islamov* Analyst (Equity Research0 HSBC Bank plc + 44 20 7992 3624 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations.

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reinforces the local economy and banking system,

and helps Qatari banks access the wholesale

market with ease and efficiency. The five-year

paper of the two leaders in the banking sector

yields less than 4%.

The region has a history of supporting local banks

through recapitalisation, de-risking of books and,

recently, the issuance of central bank bonds.

However, recent legislation to segregate Islamic

banking activities from those of commercial

banks is a paradigm shift. The long-term impact

of this change is still uncertain, but we expect a

large share of the local Islamic finance borrowers

to switch to conventional products offered by the

commercial banks as pure-play Islamic banks are

too lean to absorb all market demand, in our view.

The fact that more than half of such loans are

short-term will make the switch easier. Overall,

these recent changes add some elements of

regulatory risk but we think local commercial

banks still enjoy the sovereign’s backing and will

at least retain their share of business in the

medium term.

Given the recent turmoil in the region it is worth

noting that Qatar has a fairly strong democratic

representative government. The legislative

authority is vested in the Advisory Council (two-

thirds elected by public voting), while the

executive authority is vested in the Emir assisted

by the Council of Ministers as specified by the

constitution. There is an independent judiciary

system and court judgments are pronounced in the

name of the Emir.

Qatar– key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010

GDP growth (% y-o-y) 37.1 -11.2 14.3 Balance sheet ratios: Nominal GDP (USD bn) 110.7 98.3 123.7 Total assets (USDbn) 110 128 156 GDP per capita (USD) 76,435.0 60,251.0 73,773.6 Liquid assets/total assets 33% 36% 39% Total loan growth (%) 51% 11% 16% CPI, average (% y-o-y) 15.2 -4.9 -1.0 Loans/total assets (USDbn) 61% 58% 55% Policy rate, end-year (%) 5.6 5.6 5.6 Retail loans/gross loans 23% 20% 18% Trade balance (USDbn) 29.8 24.0 42.0 Impaired loans/gross loans 1.2% 1.7% 2.00% Current account balance (USDbn) 14.2 8.4 2.6 Reserve coverage of impaired loans 83% 85% 85% Current account balance (% GDP) 14.2 8.5 2.1 Gross loans/customer deposits 114% 109% 102% Total deposit growth (%) 27% 16% 24% Gross external debt (USDbn) 30.5 32.5 28.0 Capital/total assets 11% 12% 11% Private sector external debt (USDbn) na na na Profitability ratios: Central government balance (% GDP) 11.7 10.3 25.4 Cost/income ratio 25.2% 26.5% 24.6% Gross public external debt (% GDP) - - - ROA 2.9% 2.6% 2.6% International reserves (USDbn) - - - Net interest margin 2.5% 2.7% 2.9% Cost of Risk - - - Banking assets/GDP (%) - - - Market share (as % of sector assets): Total loans/GDP (%) - - - Largest 20 banks - - - Retail loans/GDP (%) - - - State-controlled banks - - - Total Deposits/GDP (%) - - - Foreign-owned banks - - -

Source:Qatar Central Bank, estimates HSBC Economics

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Commercial Bank of Qatar Key events and risks to monitor

NIM has increased by 30bps in 2010 compared to 2009. With an increasing share of government loans in the portfolio, this could come under pressure.

Fees income and commissions could also be squeezed when the share of public sector business increases.

Credit profile

Commercial Bank of Qatar (CBQ) could face earnings pressure as its share of business with public sector entities increases. Continued capital injection from the state is credit supportive but was probably not needed. Further injection headroom is narrow (it is the government’s intention to cap its holding at 20%), but rating agencies expect support will probably be forthcoming if it is needed.

CBQ maintained earnings through the last two years underpinned by robust NIM. However, the group witnessed weakness in capitalisation as the bank started provisioning after NPLs increased sharply. This is despite local government buying the bank’s QAR3bn (USD 820m) real estate portfolio in June 2009. The bank’s exposure remains aggressive with a loans-to-deposit ratio significantly higher than at its domestic peer Qatar National Bank.

The group has an aggressive dividend distribution policy; it announced a 97% dividend payout (QAR 7/share, USD1.92) for the year 2010.

We do not have a fundamental credit recommendation.

Analysts Olga Fedotova Aybek Islamov

+44 20 7992 3707 +44 20 7992 3624

[email protected]@hsbcib.com

Qatar Credit profile (continued)


Credit rating profile FC government bond ratings Fitch Fitch StableSenior unsecured A Stable Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured A1 Negative Major shareholders (December 2010) Bank-deposit A1 QIA 16.7%Sub-debt A2 Financial strength C- S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ Financial strength na


Description (Ratings: Fitch/Moody’s/S&P) Amount (USDm)

Coupon

COMQAT Float 11 (A/A1/A-) 500 L+40bpsCOMQAT 5 11/18/14 (A/A1/A-) 1000 5%COMQAT 7 1/2 11/19 (NR/A2/BBB+) 600 7.5%

Bank in brief

CBQ is the second-largest bank in Qatar with a market share of 12% in loans and 11% in deposits. The Qatar Investment Authority has injected capital three times since 2008 and now holds a 16.7% stake in the bank.

Commercial Bank of Qatar:Financial summary

Year to December (USDm) 2008 2009 2010 Year to December (%) 2008 2009 2010

Income statement Growth y-o-y Interest income 790 857 821 Loans 35.5 –4.5 5.8Interest expense –435 –400 –333 Assets 35.4 -6.8 9.1Net interest income 355 457 488 Pre-provision profit 44.0 0.0 –12.1Other operating income 259 187 215 Net income 22.4 –10.5 7.3Operating income 761 764 703 Profitability Operating expenses –206 –209 –216 ROA 3.2 2.6 2.7Pre-provision profits 555 555 487 Pre-provision profits/average assets - - -Provisions for loan losses –16 –127 –45 Net interest margins 2.8 3.1 3.4Non-operating profit - - - Cost-income ratio 27.1 27.3 30.7Taxation - - - Asset quality Net income 468 419 449 Gross NPL ratio 1.44 3.56 2.86 Gross NPLs (USDm) 135 319 271 Key balance sheet items Loan Loss Res./NPLs 58.3% 62.2 99.3Loans 9,396 8,975 9,490 Capital structure Deposits 8,847 7,221 9,143 Total CAR 13.6 18.9 18.5Interest bearing assets 14,910 13,965 15,526 Tier-1 ratio 13.1 17.2 16.6Total assets 16,901 15,755 17,185 Funding Loan-to-deposit ratio 106.2 124.3 103.8 Loan/assets 55.1 55.7 53.7

Source: CBQ financial reports, HSBC calculations (ratios). Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Russia’s banking system avoided major

bankruptcies during the crisis and is returning to

“business as usual” at an increasing speed. The

Russian government and the Central Bank of

Russia (the CBR) rushed to the rescue when

things turned really ugly in 2009. This timely state

intervention, along with large volumes of

government emergency money pumped into the

domestic banking sector and capital markets,

helped avert major financial failures.

Russia’s banking system remains highly

concentrated. In a country where over 1,000 banks

compete for market share, the top five creditors, all

directly or indirectly owned by the government,

control close to half of all banking assets. The

government has been saved the trouble of

nationalising the largest domestic financial

institutions in bailouts as it never privatised them.

The state-owned banks have started, with a

minimum of delay, to channel emergency funds into

the economy and also to other financial institutions.

These timely support measures have limited the

damage caused by the crisis to Russia’s economy

and its banking system and contributed to a

relatively early start to the recovery.

Nonetheless, the Russian government intends to

partially or fully privatise some 900 companies,

including banks, in the near future. The state

stakes in VTB, Sberbank and Rosselkhozbank are

to be reduced to 50% plus one share with further

divestments possible. A 10% equity stake in VTB

was sold to private investors in February 2010.

The Russian economy has started to grow again with

GDP projected to add 4.8% in 2011. This positive

macroeconomic story should support the growth

rates of the banking sector. After a very difficult

2009 the total banking assets expanded by 14.9% in

2010 to reach RUB33,804.6bn (USD1,108.8bn) as

of year-end, driven mostly by lending activities with

total loans advancing by 12.6%. If the

macroeconomic environment remains favourable,

which appears the most likely scenario, loan

portfolio growth should range between 15-20%

annually in the near to medium-term.

Russia’s banks managed to keep the quality of

their loan books at manageable levels throughout

the crisis. Overdue loans accounted for some

5.65% of gross loans as of 1 January 2011, down

from 6.24% a year before. Asset quality is on the

climb, with some banks starting to boost their

bottom lines with provision write-backs already

this year. However, the uncertain pattern of

provision releases may cause temporary volatility

in bottom lines.

The Russian banks maintain a high level of capital

surplus, substantially in excess of the CBR’s

minimum capital requirements. The total CBR

capitalisation ratio of the sector reached 18.0% at

the end of 2010 while the regulatory benchmark is

Pavel Simacek, CFA Analyst HSBC Bank plc +44 (0) 207992 3714 [email protected]

Ksenia Mishankina Analyst HSBC Bank plc +44 20 7992 3703 [email protected]

Russian banks

Expected loan growth rates to range from 15% to 20% in 2011

Profitability is improving and likely to continue to do so

The government may decide to sell more stakes in its banks

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10.0%. A higher level of equity may help the

banks weather possible business downturn and is

important in a potentially volatile and commodity

dependent operating environment of Russia.

Capitalisation concerns have encouraged the CBR

to also gradually hike its minimum capital

requirements. Effective from 1 January 2010 the

minimum amount of equity for a bank was

RUB90m (USD2.95m), but from the start of

2012, with this will rise to RUB180m

(USD5.4m). This higher capital hurdle may

represent a real challenge for small institutions,

and with discussions taking place to raise it

further to RUB300m (USD10.5m from 2015),

consolidation in the sector may accelerate.

The aggregate net income for the sector in 2010

was RUB573.38bn (USD18.8bn), up almost

threefold from the previous year’s RUB205.11bn

(USD6.82bn). All the main profitability indicators

also headed higher, with return on equity rising to

12.12% in 2010, up from 4.44% in 2009 and

return on assets advancing to 1.70% from 0.70%.

This recovery in profitability should continue in

2011 as core banking operations keep benefiting

from the reviving economy.

The role of the banking system in the economy has

been gradually increasing, with total banking assets

equivalent to 75.9% of Russia’s GDP by the end of

2010, a slight increase on the 75.27% seen a year

before. This high level of financial intermediation

makes the maintenance of financial system stability

one of the government’s top priorities.

Russia – key data on the banking sector


GDP growth (% y-o-y) -7.8 4.0 4.8 Balance sheet ratios Nominal GDP (USDbn) 1,290.3 1,459.3 1,670.6 Total assets (USDbn) 953.4 978.8 1,108.8 GDP per capita (USD) 10,494 10,912 11,445 Liquid assets/total assets 25.9% 28.0% 26.6% Total loan growth (%) 33.2 -2.1 6.6 CPI, average (% y-o-y) 11.7 6.9 9.7 Loans/total assets (USDbn) 70.9 67.5 66.9 Policy rate, end-year (%) 8.75 7.75 8.5 Retail loans/gross loans 24.0 22.0 22.0 Trade balance (USDbn) 112.1 151.6 134.1 Impaired loans/gross loans 3.45 6.2 5.7 Current account balance (USDbn) 49 75 49.7 Reserve coverage of impaired

loans 217% 181% 186%

Current account balance (% GDP) 4.0 5.1 2.8 Gross loans/customer deposits 1.32 1.16 1.01 Total deposit growth (%) 19.7 11.8 12.2Gross external debt (USDbn) 471.6 483.0 501.0 Capital/total assets (%) 11.1 12.8 13 Private sector external debt (USDbn) 430.5 442.3 457.3 Profitability ratios Central government balance (% GDP) -6.0 -4.0 -1.6 Cost/income ratio NA NA 42% Gross public external debt (% GDP) 41.0 40.6 43.6 ROA 1.46% 0.70% 1.70% International reserves (USDbn) 439.5 479.4 525.1 Net interest margin 6.2% 5.7% 5.3% Cost of risk NA NA 3.2 Banking assets/GDP (%) 75.9 76.0 na Market share (% of sector

assets)

Total loans/GDP (%) 53.8 49.8 na Largest 20 banks 67.4 68.3 70.0 Retail loans/GDP (%) 9.1 9.1 na State-controlled banks 55.5 53.5 55.6 Total deposits/GDP (%) 33.1 35.6 na Foreign-owned banks NA NA 17.6

Source: Rosstat, CBR, MOF, MOE, Fitch, estimates HSBC Economics. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Alfa BankRussia’s largest privately owned bank Key events and risks to monitor

Alfa bank faces high levels of problematic assets, although these are declining. Significant single client concentrations exist on both sides of its balance sheet. Possible exposure to related parties.

Credit profile outlook (Overweight, upgrade from Neutral)

Alfa Bank is working in a challenging operating environment, but seems well positioned to reap the benefits of the Russian’s continuing economic recovery. We upgrade from Neutral to Overweight on the back of the bank’s improving financial performance, as a result of which we expect it to remain one of Russia’s best-performing financial institutions. Risks to our view include a deterioration in asset quality and negative trend in profitability.


The bank’s asset mix remained relatively stable during H1 2010 but on the liability side it experienced a significant outflow of deposits, with customer accounts contracting by 5.1% to USD13.0bn. This adverse development in the funding structure was mostly attributable to a 25% drop in the account of one client. Alfa Bank’s top 10 deposits accounted for 27.5% of the total, a big concentration risk.

Loans overdue by more than one day dropped to 12.1% in H1 2010, down from 21.2% at the end of 2009. The bank reported a net income of USD296m in H1 2010, up from USD6m in H1 2009. The main drivers of profit were a higher net interest income (boosted by lower provisions) and gains arising from FX exposure. The total Basel capital adequacy ratio followed the same upward trend as profitability and increased to 22.1%, up from 20.2% at end 2009 with the Tier 1 ratio rising to 14.7% from 13.1%.



+44 20 7992 3714+44 20 7992 3703

Russia Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BB Stable Moody's Baa1 StableSub-debt BB- S&P BBB StableMoody’s Senior unsecured Ba1 Stable Major shareholders (as of Jan 2011) Bank-deposit Ba1 M. Fridman 36.47%Sub-debt Ba2 G. Khan 23.27%Financial strength D A. Kuzmichev 18.12%S&P P. Aven 13.76%Senior unsecured B+ Bloomberg Sub-debt B- ALFARU



Coupon

ALFARU7 7/8 09/17 (BB/Ba1/B+) USD1,000 7 7/8ALFARU8 03/18/15 (BB/Ba1/B+) USD600 8ALFARU 8.2 06/12 (BB/Ba1/B+) USD500 8.2ALFARU9 ¼ 06/13 (BB/Ba1/B+) USD400 9 1/4

Bank in brief

Founded in 1990, Alfa Bank is Russia’s sixth-largest financial institution, controlling some 2.6% of the country’s banking assets and is also its biggest privately owned bank.

Alfa Bank: financial summary



Income statement Growth (y-o-y) Interest income 1,706 2,824 2,519 2,273 Loans 61.7 17.2 -25.2 1.8Interest expense –790 –1,406 –1,403 –1,088 Assets 49.2 19.2 -20.0 4.3Net interest income 916 1,418 1,116 1,185 Pre-provision profit 58.5 146.3 -49.6 23.5Other operating income 373 891 385 544 Net income 33.2 -9.3 -66.5 376.6Operating income 1,289 2,309 1,501 1,729 Profitability Operating expenses –682 –813 –747 –798 ROAA 1.3 0.9 0.3 1.7Pre-provision profits 607 1,496 754 931 Pre-provision profits/average assets 3.2 6.0 3.1 4.2Provisions for loan losses –231 –1,009 –584 –363 Net interest margins 5.6 6.6 5.1 5.8Non-operating profit –47 –86 –46 –40 Cost-income ratio 52.9 35.2 49.8 46.2Pre-tax income 329 401 124 528 Asset quality Taxation –75 –171 –47 –161 Gross NPL ratio 0.4 1.1 18.9 naNet income 253 230 77 367 Gross NPLs (USDm) 62 202 2,824 naKey balance sheet items Loan loss res./NPLs 610.4 589.8 53.3 naDeposits 12,180 12,582 13,686 12,985 Capital structure Loans 15,330 17,970 13,449 13,695 Total CAR 11.8 9.2 20.2 22.1Total assets 22,695 27,052 21,646 22,579 Tier-1 ratio 9.5 8.2 13.1 14.7Total equity 1,855 2,162 2,698 2,883 Funding Summary of FX balance sheet Loan-to-deposit ratio 125.9 142.8 98.3 105.5Loans 8,750 9,871 7,426 7,222 Loan/assets 67.5 66.4 62.1 60.7Deposits 4,946 6,979 6,895 5,923 FX loan-to-deposit ratio 564.7 141.4 107.7 121.9Borrowings 4,809 3,696 1,440 1,857 Bonds 1,336 2,099 1,255 1,516


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Bank of MoscowOn its way to join forces with VTB Key events and risks to monitor

The bank is pending acquisition by VTB, Russia’s second largest bank. A large part of the Bank of Moscow (BOM) business franchise depends on good

relationship with Moscow’s government Significant risk concentration in the City of Moscow region

Credit profile outlook (initiate at Overweight)

BOM’s control is being transferred to VTB, and its current credit standing very much depends on this tie. An acquisition by government-owned VTB would strengthen BOM’s credit profile, lifting the bank from sub-Sovereign control to direct Sovereign ownership. This, coupled with an improving performance, drives our Overweight recommendation on the bank. Risks to our view include integration risks following VTB’s acquisition.


BOM is one of Russia’s five biggest banks with total assets amounting to RUB958.1bn (USD31.4bn) as at 30 September 2010. The balance sheet grew 16.1% during the first nine months of 2010, primarily fuelled by an expansion in lending activities with loans increasing by 14.3%. About 54.3% of BOM’s loan book is concentrated in the City of Moscow region.

Net profit in the first nine months of 2010 amounted to RUB8.84bn (USD290.8m), a significant increase from the RUB497.83m (USD16.5m) reported a year previously, largely due to falling interest expenses and provisioning charges. Net interest income after provisions climbed to RUB14.48bn (USD476.3m), up 5.8 times from RUB2.5bn (USD82.7m) in the same period.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB- Watch neg Moody's Baa1 StableSub-debt na S&P BBB StableMoody’s Senior unsecured Baa2 Negative Major shareholders (as of Mar 2011) Bank-deposit Baa2 VTB 46.48%Sub-debt Baa3 Stolichnaya Insurance Group 17.32%Financial strength D A.F. Borodin/L.F. Alaluev 20.4%S&P NR GCM Opportunities Fund 6.41%Senior unsecured Bloomberg Sub-debt BKMOSC



Coupon

BKMOSC 6.699 15 (BBB-/Baa2/NR) USD750 6.699%BKMOSC 7.335 13 (BBB-/Baa2/NR) USD500 7.335%BKMOSC Var 05/17 (BB+/Baa3/NR) USD400 6.807%BKMOSC Var 11/15 (BB+/Baa3/NR) USD300 5.967%

Bank in brief

BOM was established in 1995 and since then has had close ties with the municipality of Moscow until it was sold to VTB, which currently controls 46.48% of the bank. BOM services more than 100,000 corporations and over nine million private individuals in 60 regions of Russia and operates a network of close to 400 outlets.

Bank of Moscow: financial summary



Income statement Growth (y-o-y) Interest income 1,546 2,476 2,592 2,637 Loans 37.3 46.9 3.5 14.3Interest expense –800 –1,335 –1,606 -1,311 Assets 38.3 51.7 3.0 16.1Net interest income 746 1,141 985 1,326 Pre-provision profit 55.0 16.5 106.1 20.1Other operating income 229 82 473 447 Net income 73.9 -30.5 -89.7 1163.7Operating income 975 1,223 1,458 1,773 Profitability Operating expenses –435 –575 –413 -447 ROAA 2.2 1.0 0.1 1.0Pre-provision profits 540 647 1,046 1,326 Pre-provision profits/average assets 3.0 2.4 4.1 4.5Provisions for loan losses –96 –380 –1,002 -948 Net interest margins 4.8 4.7 4.1 4.7Non-operating profit 71 64 –5 18 Cost-income ratio 44.6 47.1 28.3 25.2Pre-tax income 516 332 39 396 Asset quality Taxation –123 –51 –17 -94 Gross NPL ratio 0.7 1.3 3.9 4.1Net income 393 280 23 301 Gross NPLs (USDm) 101 157 758 902Key balance sheet items Loan loss res./NPLs 181.5% 278.4 190.3 211.3Deposits 14,254 13,827 14,251 17,832 Capital structure Loans 14,293 17,569 17,796 20,007 Total CAR 14.8 13.9 18.9 20.4Total assets 21,466 27,252 27,473 31,377 Tier-1 ratio 10.4 9.5 8.0 15.2Total equity 1,975 2,301 2,883 3,836 Funding Summary of FX balance sheet Loan-to-deposit ratio 100.3% 127.1 124.9 112.2Loans 4,238 6,152 5,918 na Loan/assets 66.6 64.5 64.8 63.8Deposits 2,421 4,034 4,368 na FX loan-to-deposit ratio 175.0 152.5 135.5 naBorrowings 2,405 4,922 4,390 na Bonds 1,841 2,085 1,834 na


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GazprombankUniversal bank grown from gas roots Key events and risks to monitor

The bank’s relationship with Gazprom and the Russian government underpins its credit profile

However, this leaves it vulnerable to political pressure. Profitability rose in H1 2010 despite dwindling pre-provision net interest income.

Credit profile outlook (Initiate with Overweight)

Gazprombank is controlled by Gazprom, the world’s largest gas producer, which directly owns 41.73%, while its pension fund Gazfond owns a 50%+1 share. Hence Gazprombank’s creditworthiness is closely aligned with that of its parent, and also dependent on its close ties with the Russian government. The economic prospects of the gas industry and Russia look positive and support our Overweight view. Risks to our view include: weakening economy and loss of parent support.


Gazprombank’s balance sheet remained almost flat in H1 2010 at RUB1,747.5bn (USD56bn), with the bank reporting net income of RUB32.68bn (USD1.05bn), up from RUB24.45bn (USD785m) in H1 2009. Overdue loans stood at RUB28.33bn (USD908m) as of 30 June 2010, down 9.6% in absolute terms from RUB31.32bn (USD1.04bn) at the end of 2009. The gas industry accounted for only 12.6% of Gazprombank’s gross loan portfolio, with exposure to Gazprom Group at 7%. These low figures show the progress the bank has made in diversifying away from its parent and the gas industry. Capital adequacy ratios rose in H1 2010, with the total BIS capital ratio and Tier 1 ratio climbing to 16.6% and 10.8%, respectively from 14.8% and 9.7%.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch NR Fitch BBB PositiveSenior unsecured Moody's Baa1 StableSub-debt S&P BBB StableMoody’s Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011) Bank-deposit Baa3 Gazprom 41.73%Sub-debt NR Gazfond 50%+1Financial strength E+ S&P Senior unsecured BB Positive Bloomberg Sub-debt B+ GPBRU



Coupon

GPBRU 6 ¼ 12/14 (NR/Baa3/BB) USD1,000 6 1/4GPBRU 6 ¼ 09/15 (NR/Baa3/BB) USD948 6 1/2GPBRU7.933 06/13 (NR/Baa3/BB) USD443 7.933%GPBRU 7.97 06/11 (NR/Ba1/B+) USD300 7.97%

Bank in brief

Gazprombank was set up in 1990 by the gas industry giant Gazprom, initially to service its parent and other companies in the industry. However, the bank has expanded its customer base to sectors including oil and petrochemicals and metallurgy, servicing some 45,000 corporations and three million private individuals.

Gazprombank: financial summary



Income statement Growth (y-o-y) Interest income 2,539 3,054 4,464 3,799 Loans 40.8 57.0 18.9 6.9Interest expense –1,601 –1,903 –3,376 -2,860 Assets 21.8 95.3 -6.0 0.4Net interest income 937 1,151 1,088 939 Pre-provision profit –30.3 na na –42.4Other operating income 976 –3,907 2,530 1,830 Net income –15.7 na na 14.0Operating income 1,913 –2,756 3,618 2,769 Profitability Operating expenses –1,239 –1,017 –866 -1,106 ROAA 3.7 –4.9 3.3 3.8Pre-provision profits 674 –3,774 2,751 1,663 Pre-provision profits/average assets 1.9 –6.7 4.9 2.9Provisions for loan losses –71 –1,263 –1,224 -131 Net interest margins 5.0 4.0 3.7 2.7Non-operating profit 1,454 1,981 961 1,512 Cost-income ratio 64.8 –36.9 23.9 39.9Pre-tax income 2,057 –3,056 2,489 3,044 Asset quality Taxation –744 313 –638 -829 Gross NPL ratio 1.0 1.5 3.9 3.3Net income 1,313 –2,743 1,851 2,215 Gross NPLs (USDm) 166 334 1,043 908Key balance sheet items Loan loss res./NPLs 331.6 224.1 176.5 176.3Deposits 15,909 21,854 29,324 31,885 Capital structure Loans 16,309 21,429 24,947 25,666 Total CAR 19.9 9.2 14.8 16.6Total assets 38,557 62,993 57,970 55,994 Tier-1 ratio 22.1 7.8 9.7 10.8Total equity 8,193 4,349 6,526 7,221 Funding Summary of FX balance sheet Loan-to-deposit ratio 102.5 98.1 85.1 80.5Loans 5,062 7,277 11,772 11,512 Loan/assets 42.3 34.0 43.0 45.8Deposits 2,967 9,336 8,889 11,335 FX loan-to-deposit ratio 170.6 77.9 132.4 101.6Borrowings 3,463 5,376 4,939 3,085 Bonds 3,180 2,753 2,586 2,039

Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Russian Agricultural BankFortunes dependent on agribusiness Key events and risks to monitor

The bank’s 100% state ownership makes it susceptible to political pressures. It is operating in the highly volatile agricultural industry. Asset quality may come under pressure given significant sector concentration.

Credit profile outlook (initiate with Neutral)

The state-owned Russian Agricultural Bank (RAB) has a clearly defined role in the implementation of the government’s economic policy, and as such any privatisation looks very unlikely. We see its credit profile as being closely linked to that of the Russian government with a resulting close alignment of spreads. However, the bank is involved in the highly volatile agricultural business, hence we establish a Neutral recommendation. Risks to our view include: any distancing from the owner. The upside risk relates to the upgrade of Russia by rating agencies.


RAB’s total assets amounted to RUB861.4bn (USD27.6bn) as of 30 June 2010, up from RUB830.66bn (USD27.4bn) as at the end 2009. The bank’s mandate is to work actively with agricultural enterprises, with minimum of 70% exposure to this industry in its loan portfolio. This keeps the loan book largely concentrated in one sector of the economy, with any diversification highly unlikely. RAB’s fortunes will therefore be very much dependent on developments in Russian agribusiness.

The bank reported net income of RUB163m (USD5.2m) for H1 2010, a large drop from RUB336m (USD10.8m) reported in H1 2009. This bottom line contraction was primarily driven by provisions, which more than doubled y-o-y, signaling potential problems. The level of provisions increased to 6.2% of gross loans as of 30 June 2010, up from 4.9% on 31 December 2009.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch Senior unsecured BBB Stable Moody's Sub-debt NR S&P Moody’s Senior unsecured Baa1 Stable Major shareholders (as at Jan 2011) Bank-deposit Baa1 Government through 100%Sub-debt Baa2 The Federal Agency of Financial strength E+ Federal Property Management S&P NR Senior unsecured Bloomberg Sub-debt RSHB Financial strength



Coupon

RSHB 9 06/11/14 (BBB/Baa1/NR) USD1,000 9%RSHB 7 ¾ 05/18 (BBB/Baa1/NR) USD980 7 ¾%RSHB 7 1/8 01/14 (BBB/Baa1/NR) USD720 7 1/8%RSHB 7.175 05/13 (BBB/Baa1/NR) USD647 7.175%

Bank in brief

RAB is fully owned by the Russian government. It is the fourth largest bank in Russia in terms of total assets and accounts for some 3.3% of the aggregate banking balance sheet of the country. The bank was set up to work with agricultural businesses to which commercial banks are traditionally reluctant to lend.

Russian Agricultural Bank: financial summary



Income statement Growth (y-o-y) Interest income 1,275 2,254 2,934 3,295 Loans 87.1 55.1 29.2 11.6 Interest expense –609 –1,187 –1,829 -1,861 Assets 93.1 100.1 16.5 3.7 Net interest income 666 1,068 1,105 1,435 Pre-provision profit 135.3 43.5 15.6 43.1 Other operating income 99 103 –6 -12 Net income 410.3 –52.8 –87.8 –68.9Operating income 765 1,171 1,099 1,423 Profitability Operating expenses –414 –654 –630 -719 ROAA 1.6 0.4 0.0 0.0 Pre-provision profits 351 517 469 704 Pre-provision profits/average assets 3.3 2.4 1.9 2.5 Provisions for loan losses –122 –383 –433 -687 Net interest margins 10.7 5.6 5.2 5.7 Non-operating profit 0 0 –9 -0 Cost-income ratio 84.6 79.1 74.4 98.0 Pre-tax income 228 134 26 17 Asset quality Taxation –58 –52 –19 -15 Gross NPL ratio 1.0 2.3 4.3 naNet income 170 83 8 3 Gross NPLs (USDm) 123 369 870 naKey balance sheet items Loan loss res./NPLs 235% 153 114 na Deposits 3,901 5,254 7,597 10,119 Capital structure Loans 11,853 15,383 19,279 20,906 Total CAR 13.6 16.0 20.7 20.3Total assets 14,490 24,253 27,402 27,600 Tier-1 ratio 8.9 10.7 14.6 14.7Total equity 1,375 2,304 3,811 3,726 Funding Summary of FX balance sheet Loan-to-deposit ratio 303.9% 292.8 253.8 206.6Loans na na na na Loan/assets 81.8 63.4 70.4 75.7Deposits na na na na FX loan-to-deposit ratio na na na naBorrowings na na na na Bonds na na na na


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Sberbank Unmatched market heavyweight Key events and risks to monitor

Sberbank’s relationship with the government is the key to its creditworthiness. Its NPLs remain relatively high but at >140% are well provisioned. International expansion and investment banking ambitions may be a challenge.

Credit profile outlook (Overweight)

Sberbank can be considered a close proxy for Russian Sovereign risk. The state is a controlling shareholder with a 57.6% stake, while the bank’s systemic importance is enhanced by its unmatched retail franchise with 48% of retail deposits on its books. Therefore we maintain our Overweight recommendation. Risks to our view include: a significant deterioration in market shares and depleting capitalisation.


Sberbank is well poised to benefit from the gradual recovery in its operating environment. As macroeconomic conditions in Russia improve, profitability is bound to strengthen. In 9M10, the bottom line amounted to RUB109.6bn (USD3.7bn), up 10.6 times on the RUB10.3bn (USD0.3bn) reported in 9M 2009. This significant improvement can be largely attributed to a decline in provisions to RUB150.0bn (USD4.9bn) from RUB301.3bn (USD10bn). Asset quality stabilised with NPLs at 8.6% of gross loans as of 30 September 2010, slightly up from 8.5% at the 2009YE.

Sberbank remains well capitalised with its total capital ratio under Basel at 16.9% as of 30 September 2010. The Tier 1 ratio rose to 11.6% from 11.5% during the same period. The minimum regulatory capital requirements are 11% and 8% for total capital and Tier 1 capital, respectively. The growing investment banking ambitions could translate into an acquisition of an established market player; the target recently most discussed in the press has been Troika Dialog.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NR S&P BBB StableMoody’s Senior unsecured A3 Stable Major shareholders (as of April 2011) Bank-deposit Baa1 Central Bank of Russia 57.58%Sub-debt Baa1 Foreign Legal Entities 32.12%Financial strength D+ S&P NR Senior unsecured Bloomberg Sub-debt SBERRU



Coupon

SBERRU 5.499 15 (BBB/A3/NR) USD1,500 5.499%SBERRU 5.4 03/17 (BBB/A3/NR) USD1,250 5.4%SBERRU5.93 11/11 (BBB/A3/NR) USD750 5.93%SBERRU 6.468 13 (BBB/A3/NR) USD500 6.468%SBERRU6.48 05/13 (BBB/A3/NR) USD500 6.48%

Bank in brief

Sberbank dominates the Russian banking sector, accounting for 27% of total banking assets in the country. The bank boasts a strong franchise supported by a massive branch network spanning nine time zones and consisting of some 19,000 outlets and in total servicing some 300m individual accounts. According to current legislation the government ownership may not fall below 50%.

Sberbank: financial summary

Year to December (USDm) 2007 2008 2009 LTM Sep 2010

Year to December (%) 2007 2008 2009 LTM Sep 2010

Income statement Growth (y-o-y) Interest income 17,230 24,919 25,674 26,422 Loans 54.5 29.5 -4.2 5.8Interest expense -7,070 -9,719 -9,837 -10,199 Assets 42.2 36.7 5.5 13.0Net interest income 10,160 15,200 15,837 16,223 Pre-provision profit 28.1 48.7 88.6 -6.0Other operating income 4,035 3,477 5,292 6,301 Net income 28.6 -8.2 -75.0 407.2Operating income 14,194 18,677 21,129 22,524 Profitability Operating expenses -7,869 -9,269 -7,223 -8,719 ROAA 2.5 1.7 0.4 1.6Pre-provision profits 6,326 9,408 13,906 13,805 Pre-provision profits/average assets 3.7 4.0 6.4 5.5Provisions for loan losses -709 -3,934 -12,328 -8,057 Net interest margins 6.4 7.0 7.7 6.5Non-operating profit 0 -252 -638 -597 Cost-income ratio 55.4 49.6 34.2 38.7Pre-tax income 5,465 5,222 941 5,150 Asset quality Taxation -1,337 -1,293 -172 -1,034 Gross NPL ratio 1.50 1.80 8.50 8.60Net income 4,280 3,929 769 4,116 Gross NPLs (USDm) 2,454 3,221 15,454 16,606Key balance sheet items Loan loss res./NPLs 193.1% 216.5 125.0 141.1Deposits 157,623 163,088 181,084 201,864 Capital structure Loans 159,409 172,701 161,945 168,539 Total CAR 14.50 18.90 18.10 16.90Total assets 200,353 229,111 236,560 262,935 Tier-1 ratio 13.90 12.20 11.50 11.60Total equity 25,902 25,513 25,934 29,972 Funding Summary of FX balance sheet Loan-to-deposit ratio 101.1% 105.9 89.4 83.5Loans 23,908 27,325 28,062 37,097 Loan/assets 79.6 75.4 68.5 64.1Deposits 23,272 36,558 38,236 40,647 FX loan-to-deposit ratio 102.7 74.7 73.4 91.3Borrowings 5,733 7,664 4,789 10,126 Bonds 188 38 239 241


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VnesheconombankGovernment agent with a goal Key events and risks to monitor

Relationship with the government is the key credit driver as the government uses VEB as a tool in implementing its economic policies

Participation in long-term potentially risky development projects is a concern.

Credit profile outlook (initiating with Overweight)

VEB is wholly owned by the government, so its creditworthiness is likely to mirror the developments in that of the Sovereign. Owing to extraordinary government support and its crucial role to the Russian economy we establish our Overweight recommendation. Risks to our view include: falling economic importance of the bank and a weakening relationship with the government.


VEB has been expanding its operations rapidly under the direction of the Russian government, which has been stepping up efforts to restore the economic and financial stability of the country shattered by the recent global financial turmoil. The bank is participating in large, long-term, and potentially risky development projects, resulting in a significant level of concentration in its loan book.

The profitability is not a priority as VEB’s core purpose is non-commercial, to support the development of Russian infrastructure, high technology industries and medium-sized enterprises. Other aims include an increase in the efficiency of exploitation of natural resources, support of exports and services. Its bottom line amounted to RUB14.25bn (USD455.8m) in H1 2010, down from RUB18.20bn (USD584.7m) in H1 2009. Profitability received a boost from provisions falling to RUB13.34bn (USD426.8m) from RUB42.96bn (USD1.38bn) in the same period.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured NA Major shareholders (as at Jan 2011) Bank-deposit Baa1 Stable Government 100%Sub-debt NA Financial strength E+ S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA VEBBNK



Coupon

VEBBNK 6.902 20 (BBB/NR/BBB) USD1,600 6.902%VEBBNK 6.8 11/25 (BBB/NR/BBB) USD1,000 6.8%VEBBNK5.45 11/27 (BBB/Baa1/BBB) USD600 5.45%

Bank in brief

VEB does not have a banking licence and its operations are governed by a special federal law. VEB acts as a government agent in charge of the monitoring and management of the external debt of the state. When needed the bank is empowered to reconcile, settle and also restructure the debt obligations of the Russian Federation.

Vnesheconombank: financial summary



Income statement Growth (y-o-y) Interest income 920 1,745 4,373 4,827 Loans 32.0 218.2 16.2 3.4Interest expense –633 –846 –2,736 -2,835 Assets 69.5 196.6 17.9 1.9Net interest income 287 898 1,636 1,993 Pre-provision profit –46.3 na na –6.9Other operating income 309 –1,616 3,118 2,755 Net income 15.7 na na –10.3Operating income 596 –718 4,754 4,747 Profitability Operating expenses –372 –408 –709 -794 ROAA 2.1 –7.4 2.1 1.8Pre-provision profits 224 –1,126 4,045 3,954 Pre-provision profits/average assets 1.3 –2.5 7.2 6.1Provisions for loan losses 6 –2,108 –3,660 -2,809 Net interest margins 2.2 2.6 3.2 3.2Non-operating profit 27 5 835 64 Cost-income ratio 62.4 –56.8 14.9 16.7Pre-tax income 256 –3,228 1,220 1,209 Asset quality Taxation 114 –38 –13 -73 Gross NPL ratio 0.1 1.6 7.9 8.2Net income 370 –3,267 1,207 1,136 Gross NPLs (USDm) 231 11,800 76,211 82,098Key balance sheet items Loan loss res./NPLs 1438.1 100.4 159.0 158.8Deposits 1,598 3,787 6,733 7,257 Capital structure Loans 9,269 24,679 28,085 27,942 Total CAR 44.3 14.7 19.1 naTotal assets 22,545 55,938 64,565 63,309 Tier-1 ratio na na na naTotal equity 9,026 7,322 15,157 14,142 Funding Loan-to-deposit ratio 580.1 651.7 417.1 385.0 Loan/assets 41.1 44.1 56.8 44.1 FX loan-to-deposit ratio na na na na Source: Company financials, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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VTB High acquisition appetite Key events and risks to monitor

VTB’s majority government ownership makes it susceptible to political pressure. The bank’s aggressive acquisitions policy creates integration risks.


VTB’s credit profile is closely linked to that of the Russian government, owner of 75.5% of its equity. State support has been forthcoming in the past, and remains strong in our opinion. Risks to our view include possible new debt issues in 2011. The proceeds would be used for funding the aggressive expansion/acquisition plans, which include the acquisition of Transcredit bank and a likely purchase of Bank of Moscow. Also any problems with integrating the acquisitions could exert negative pressure on the bank and our view. The upside risks include a significant improvement in credit metrics on the back of expansion in market shares.


While the Russian government has recently sold a 10% stake of its holding in the bank, it remains majority owner, and so the sale is unlikely to have a material impact on the credit profile of VTB.

An improving operating environment has contributed to a strong jump in profitability. VTB reported a net profit of RUB38.8bn (USD1.3bn) for the first nine months of 2010, a major turnaround when compared with a loss of RUB45.5bn (USD1.5bn) reported for the corresponding period of 2009.

VTB has been heavily reliant on its core banking operations with a net loan portfolio accounting for 67.4% of total assets as of 30 September 2010. However, the profitability of the loan book came under pressure when interest rates fell in the credit market, prompting VTB to review its funding strategy and adjust it accordingly. As a result NIM improved to 5.2% in the first nine months of 2010.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch BBB PositiveSenior unsecured BBB Stable Moody's Baa1 StableSub-debt NA S&P BBB StableMoody’s Senior unsecured Baa1 Stable Major shareholders (as at March 2011) Bank-deposit Baa1 Russian Federation 75.50%Sub-debt Baa2 GDRs 17.26%Financial strength D- Ordinary shares 7.24%S&P Senior unsecured BBB Watch

Negative Bloomberg

Sub-debt NA VTB Key dollar-denominated bonds

Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m) Coupon

VTB6 7/8 05/29/18 (BBB/Baa1/BBB) USD1,706 6 7/8%VTB 6.465 03/15 (BBB/Baa1/BBB) USD1,250 6.465%VTB 6.609 10/12 (BBB/Baa1/BBB) USD1,054 6.609%VTB 6.551 10/20 (BBB/Baa1/BBB) USD1,000 6.551%VTB6 6.315 02/18 (BBB/Baa1/BBB) USD750 6.315%

Bank in brief

VTB is Russia’s second-largest bank and is primarily focused on corporate business although it is growing its high margin retail and investment banking arms. It accounted for 12% of Russia’s banking assets as of 30 September 2010 and has the third-largest branch network (after Sberbank and Russian Agricultural Bank) with 653 outlets in Russia alone and 282 in Europe and the CIS. The bank’s Supervisory Council chairman is Mr. A Kudrin, Russia’s Minister of Finance.

VTB: financial summary



Income statement Growth (y-o-y) Interest income 5,387 9,856 11,773 11,419 Loans 100.1 48.5 -9.6 9.5Interest expense -2,831 -5,290 -6,978 -5,621 Assets 76.7 35.8 -2.3 3.9Net interest income 2,556 4,566 4,795 5,797 Pre-provision profit 29.7 43.5 11.4 24.5Other operating income 1685 1,403 441 1,028 Net income 29.2 -87.8 na naOperating income 4,241 5,969 5,236 6,825 Profitability Operating expenses -2,011 -2,769 -2,442 -3,153 ROAA 2.1 0.2 -1.5 0.7Pre-provision profits 2,230 3,199 2,794 3,672 Pre-provision profits/average assets 3.1 2.9 2.4 3.0Provisions for loan losses -524 -2,609 -5,044 -2,521 Net interest margins 4.4 4.8 4.6 5.3Non-operating profit 113 137 98 130 Cost-income ratio 47.4 46.4 46.6 46.2Pre-tax income 1,819 728 -2,152 1,281 Asset quality Taxation -305 -543 274 -459 Gross NPL ratio 1.2 1.9 9.8 9.5Net income 1,514 185 -1,878 822 Gross NPLs (USDm) 698 1,629 6,556 8,374Key balance sheet items Loan loss res./NPLs 210.9% 197.7 119.3 105.0Deposits 37,098 37,476 52,232 60,236 Capital structure Loans 58,549 86,917 76,907 82,797 Total CAR 16.3 17.3 20.7 18.8Total assets 92,609 125,750 120,220 122,918 Tier-1 ratio 15.0 10.5 14.8 13.9Total equity 16,207 13,336 16,810 17,861 Funding Summary of FX balance sheet Loan-to-deposit ratio 157.8% 231.9 147.2 137.5Loans na na na na Loan/sssets 63.2 69.1 64.0 67.4Deposits na na na na FX loan-to-deposit ratio na na na naBorrowings na na na na Bonds 12,220 12,996 10,006 11,386


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Stability paves way for growth The first half of 2010 was tough for Saudi banks,

which faced declining loan portfolios and

shrinking net interest margins. The trend changed

for the better in the second half and revenues

stabilised. Private sector was still slow on

recovery and the banks remained cautious, but

there was loan growth of 3% compared to a 1%

contraction in 2009. Two years of a near-stagnant

market and rising oil prices suggest, to us, strong

loan growth in 2011.

The Saudi government’s five-year capital

investment plan (SAR1.4trn, USD364bn) is now

in its third year. The banks’ relatively weak

capital position has limited their participation in

this scheme. Further, despite having most of the

structural catalysts in place Saudi economy has

failed to take off in the past two years perhaps due

to a low level of government intervention. We,

however, expect a gain in the growth momentum

and investments to be increasingly channelled

through banks which should improve loan growth.

The Saudi GDP real growth rate declined to

nearly zero in 2009 amid the credit crisis but

HSBC’s economist expects it to recover to 3.8%

in 2011. However, growth will be driven mainly

by increased government spending while private

consumption is not likely to change significantly.

Inflation is still a concern, with CPI inflation

averaging more than 5% over the past three years,

but according to HSBC’s economist that should

not limit the government’s expansionary fiscal

and monetary policy. Further, the latest PMI

numbers indicate that Saudi firms are able to pass

through increased costs, and so they should be

able to maintain their profitability.

Saudi banks are well regulated. For commercial

banks the loan-to-deposit ratio is capped at 85%.

The actual ratio fell to 78% in 2009 from 88% in

2008 due to the decline in loan portfolios, but

improved modestly to 80% in 2010. However the

regulation limits the potential for credit growth.

During 2010, bank credit to the private sector

increased 4.5% to SAR735bn (USD196bn) while

credit to public sector enterprise increased by 8%

but was still low at SAR32.3bn (USD8.6bn). Risk

aversion was apparent from the 45% surge in

banks’ investments in low risk T-Bills to

SAR120.1bn (USD 32bn). Banks, therefore, have

Saudi banks

HSBC FI Research is positive on the prospects for Saudi banks,

and expects that the net interest margin has bottomed out

We believe strong loan growth is likely after two years of subdued

performance

Banks accelerated provisioning in H2 2010 and are in a better

position to look forward


Aybek Islamov* Analyst (Equity Research0 HSBC Bank plc + 44 20 7992 3624 [email protected]


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the potential to redirect investments to higher

yielding assets as risk appetite increases.

HSBC’s estimates point to 11% growth in private

consumption in 2011 which supports our case that

credit growth is likely to be driven by private

lending. Further, after high loan disbursements by

government agencies in the recent past, the loans-to-

equity ratio went up to 120% in 2009 from 91% in

2007. These agencies do not collect deposits, and so

their lending capacity will depend on equity

infusions and as a result we believe will be limited.

The constraints on the agencies lending capacity will

also support loan growth at banks.

Public sector deposits are still a small proportion

of the overall deposit level in Saudi banks. At the

end of November 2010 they made up only 6.9%

of total deposits, significantly below the

percentage in other GCC countries. Higher oil

prices have improved the country’s financial

flexibility and hence we expect public sector

deposit support if need be.

Saudi banks accelerated provisioning in Q3 2010

and our equity team expects the provisioning

cycle to reach its peak in H1 2011. Further, bank

management teams indicate the loan loss reserves

to gross loans ratio for our covered banks increase

to 3.7% in 2011 from 2.5% in 2008. This is quite

comfortable in our view considering Saudi banks’

limited exposure to private real estate and

construction sectors.

Saudi Arabia – key data on the banking sector


GDP growth (% y-o-y) 4.4 0.1 3.8 Balance sheet ratios: Nominal GDP (USDbn) 487.6 376.3 449.9 Total Assets (USDbn) 357 375 384 GDP per capita (USD) 18337.6 13791.4 16089.6 Liquid assets/total assets 66% 63% 63% Total Loan growth (%) 25% -1% 3% CPI, average (% y-o-y) 9.9 5.1 5.4 Loans/Total assets (USDbn) 57% 54% 55% Policy rate, end-year (%) 2.5 2.0 2.0 Retail loans/gross loans 29% 29% 31% Trade balance (USDbn) 146.2 41.3 84.8 Impaired loans/gross loans 1.2% 2.6% N.A Current account balance (USDbn) 132.3 22.8 69.8 Reserve coverage of Impaired

loans 194% 92% N.A

Current account balance (% GDP) 27.1 6.1 15.5 Gross Loans/Customer deposits 88% 78% 80% Total Deposit growth (%) 18% 11% 4% Gross external debt (USDbn) 96.7 90.3 89.6 Capital/total assets 12% 14% 15% Private sector external debt (USDbn) NA NA NA Profitability ratios: Central government balance (% GDP) 31.8 -6.1 6.4 Cost/income ratio 33.7% 31.4% 32% Gross public external debt (% GDP) 20.0 15.0 17.0 ROA 2.6% 2.5% 2.20% International reserves (USDbn) 442.5 410.0 441.2 Net interest margin 4.1% 3.8% 3.43% Cost of Risk 0.4% 0.8% 1.45% Banking assets/GDP (%) Market share (as % of sector

assets):

Total loans/GDP (%) Largest 20 banks Retail loans/GDP (%) State-controlled banks Total Deposits/GDP (%) Foreign-owned banks

Source: SAMA, estimates HSBC Economics

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Rationalisation required Local banks in the UAE have invested heavily in

real-estate-related activities, with direct lending to

construction sector accounting for 13% of their

books. Total exposure to real estate sector has

remained stable after growing until 2009 while

growth in loan books came from small business

loans. Such substantial exposure to the

construction sector is concerning given recent

restructurings and bailouts. The restructuring of

Dubai’s master developer Nakheel, for example,

involved extension on USD12bn of bank loans.

Abu Dhabi’s master developer Aldar, also only

recently avoided a liquidity squeeze though a

state-backed financial revamping. Even now, the

Dubai government is in active discussion with

regional and international lenders to restructure

debt at other state-owned/related entities including

Dubai Holdings and Dubai Group. While the

scope of these ongoing negotiations has not yet

been disclosed, they are likely to be smaller scale

than for Nakheel. Nonetheless, given the financial

sector’s exposure, they remain a concern.

Real estate exposures will likely continue to grow,

considering the large supply pipeline, particularly

in commercial real estate (CRE). HSBC’s equity

team expects commercial real estate supply in the

UAE to increase by more than 50% in the medium

term. Most of these projects will probably have

committed loan facilities with disbursals linked to

the stage of completion. Banks’ exposure to CRE

projects is therefore likely to increase.

Delinquency levels have steadily increased in the

country since the end of 2008 and most of the

banks reported NPL ratios between 3% and 5% at

the end of Q3 2010. Loan growth beyond the

1.7% rate achieved in 9M 2010 will be tough,

therefore, factoring in the increased provisioning

requirement. Abu Dhabi’s supportive stance

towards its controlled banks is a strong credit

positive, however. The emirate injected

USD4.4bn of Tier 1 capital into five of its banks

early 2009. Dubai’s government, meanwhile, has

been fairly quiet on that front.

UAE banks

High exposure to the commercial real-estate and construction

sectors

Exposure to the latter is likely to grow further given the strong

supply pipeline

Banks with more focus on retail loans, and less concentrated

exposure, offer a stronger investment proposition


Aybek Islamov* Analyst (Equity Research) HSBC Bank plc + 44 20 7992 3624 [email protected]


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Increasing government involvement in domestic

activities in the wake of the Dubai World crisis is

reflected in the balance sheets of the region’s banks.

Lending to government and public sector entities has

increased by 37% since end of 2008 to USD53bn

while lending to private sector has declined by 8% to

USD158bn. Exposure to the private sector continued

to decline in 2010, indicating ongoing caution on the

part of the banks.

UAE – key data on the banking sector


GDP growth (% y-o-y) 7.0 -2.9 1.7 Balance sheet ratios Nominal GDP (USDbn) 254.3 230.1 251.9 Total assets (USDbn) 397 417 446 GDP per capita (USD) 44,074.0 40,705.7 43,594.6 Liquid assets/total assets 25% 26% 28% Total loan growth (%) 48% 4% 1% CPI, average (% y-o-y) 12.0 1.3 0.7 Loans/total assets 64% 63% 60% Policy rate, end-year (%) 1.8 1.0 1.0 Retail loans/gross loans 25% 25% 25% Trade balance (USDbn) 62.9 42.1 57.5 Impaired loans/gross loans 1.1% 2.9% N.A Current account balance (USDbn) 22.3 7.8 25.2 Reserve coverage of impaired

loans 121% 94% N.A

Current account balance (% GDP) 8.8 3.4 10.0 Gross loans/customer deposits 101% 98% 93% Total deposit growth 27% 8% 7% Gross external debt (USDbn) 151.0 153.3 169.5 Capital/total assets 12% 11% 11% Private sector external debt (USDbn) NA NA NA Profitability ratios Central government balance (% GDP) 21.0 -12.4 1.8 Cost/income ratio 28.7% 27.5% 27% Gross public external debt (% GDP) 58.6 70.5 69.8 ROA 2.1% 1.3% 1.80% International reserves (USDbn) 31.6 38.7 34.8 Net interest margin 2.6% 2.8% 2.85% Cost of risk 0.5% 1.1% 1.30% Banking assets/GDP (%) - - - Market share (% of sector

assets)

Total loans/GDP (%) - - - Largest 20 banks - - - Retail loans/GDP (%) - - - State-controlled banks - - - Total deposits/GDP (%) - - - Foreign-owned banks - - -

Source: UAE Central Bank, estimates HSBC Economics

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Abu Dhabi Commercial Bank Key events and risks to monitor

NPLs for this bank had climbed to 11% of outstanding loans at the end of end 2010, one of the poorest among large MENA banks. However, S&P believes that ADCB’s creditworthiness should remain sufficiently resilient to the difficult economic environment.

Capitalisation, however, is still decent with Tier 1 ratio at 12% at end 2010.

Credit profile

Abu Dhabi Commercial Bank (ADCB) plans to consolidate its balance sheet and focus on improving its credit strength this year. The group’s operating performance will likely remain subdued meanwhile. Its credit profile, however, is bolstered by the implied backing of the Emirate of Abu Dhabi.

ADCB has a strong franchise in the local market but its asset exposure is quite concentrated within the UAE. Its NPL level jumped sharply in 2010 to AED18.2bn (USD3.9bn) from AED6.2bn (USD1.7bn) a year ago, highlighting the risk of focus on this region. The increase was exacerbated by renegotiations and extensions on loans to Dubai sovereign-related entity Dubai World. ADCB took a further AED2bn (USD550m) of impairment in 2010. ADCB has been proactive in disclosing risky exposures and cautious thereafter.

Profitability before impairments was sound through Q3 2010, but large impairments resulted in losses at the group level. Increasing provisions keep pressure on capitalisation. However, Moody’s expects ADBC’s profitability to stabilise in 2011. ADCB reported Tier 1 ratio of 11.5% at the end of Q3 2010 compared to 12.34% at the end of 2009.

S&P believes that an upgrade appears remote in the foreseeable future remote in the foreseeable future because it would hinge on a major improvement in the bank's operating environment.


Analysts

Olga Fedotova Aybek Islamov

+44 20 7992 3707 +44 20 7992 3624


United Arab Emirates Credit profile (continued)


Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured na na Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured A1 Negative Major shareholders (December 2010) Bank-deposit A1 ADIC 65%Sub-debt A2 Financial strength D+ S&P Senior unsecured A- Stable Bloomberg Sub-debt BBB+ ADCB UH Financial strength



Coupon

ADCB Float 05/16 (NR/A2/BBB+) 361 L+60bpsADCB 4 3/4 10/14 (NR/A1/A-) 1,000 4.75%

Bank in brief

ADCB is the third-largest bank in the UAE, with a market share of 12% in loans and 9% in deposits. The Government of Abu Dhabi holds a 65% stake through ADIB. The bank’s strategy is to expand its footprint in markets similar to UAE by leveraging its core assets.

ADCB: financial summary


Income statement Growth (y-o-y) Interest income 1,620 1,880 1,949 Loans 44.6 8.8 6.8Interest expense 944 987 955 Assets 39.7 7.9 11.2Net interest income 676 893 1,002 Pre-provision profit 2.6 13.2 13.5Other operating income 268 269 260 Net income –37.8 –154.9 157.3Operating income 1,196 1,303 1,453 Profitability Operating expenses –416 –419 –448 ROA 1.0 –0.4 0.2Pre-provision profits 781 884 1,004 Pre-provision profits/average assets 2.3 2.1 2.2Provisions for loan losses –207 –809 –779 Net interest margins 2.1 2.4 2.4Non-operating profit –202 –214 –117 Cost-income ratio 34.7 32.2 30.8Taxation –2 –1 -3 Asset quality Net income 337 –185 106 Gross NPL ratio 1.13 5.17 11.06 Gross NPLs (USDm) 343 1,701 3,890 Key balance sheet items Loan Loss Res./NPLs (%) 123.5 60.9 44.1Loans 30,265 32,927 35,168 Capital structure Deposits 22,987 23,515 28,895 Total CAR 11.4 17.4 16.7Interest bearing assets 36,497 39,117 42,140 Tier-1 ratio 11.4 12.4 12.0Total assets 40,444 43,654 48,535 Funding Loan-to-deposit ratio (%) 131.7 140.0 121.7 Loan/assets 73.5 72.8 72.5

Source: ADCB financial reports, HSBC calculations (ratios). . Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Emirates NBD Key events and risks to monitor

Has seen a sharp rise in NPL ratio The loans-to-deposit ratio improved to 101% at the end of Q3 2010 from 118% at

end 2009 but still lags that of regional peers significantly.

Credit profile

Emirates NBD (ENBD) continues to face margin pressures due to relatively higher cost of funding. Fitch highlights the bank’s high level of exposure to Dubai property market and government-related entities. The rating agency believes that lending growth and improvements in profitability will be difficult to achieve in 2010 and 2011.

ENBD is one of the primary bankers of the government of Dubai and therefore experienced rapid loan growth (CAGR of 38%) between 2001 and 2008. Over that period, however, it lacked focus on developing a matching funding profile. Despite a 10% reduction in loans in the first nine months of 2010 and a 6% increase in deposits during the same period, the loans-to-deposit ratio stood at 101%, which limits loan growth capabilities. According to the bank’s management ENBD will focus on the balance sheet rationalisation in 2011. Capitalisation at end Q3 2010 was adequate but weaker than regional peers with a Tier 1 ratio of 12.8%.

Fitch’s view is that given ENBD’s size, its significant domestic franchise, majority ownership by the government of Dubai and the long history of support in the UAE, Fitch considers there to be an extremely high probability of support for the bank if ever required.



+44 20 7992 3707 +44 20 7992 3624


United Arab Emirates Credit profile


Credit rating profile FC government bond ratings Fitch Fitch Senior unsecured A+ Stable Moody's Sub-debt A S&P Moody’s Senior unsecured A3 Stable Major shareholders (December 2010) Bank-deposit na Investment Corporation of

Dubai 55.65%

Sub-debt Baa1 Financial strength D+ S&P Senior unsecured NR Bloomberg Sub-debt ENBD UH Financial strength



Coupon

EBIUH Float 01/12 (NR/A3/NR) 500 L+27bpEBIUH Float 04/12 (NR/A3/NR) 141 L+450bpEBIUH Float 10/16 (NR/A3/NR) 363 L+70bpEBIUH Float 12/16 (NR/A3/NR) 444 L+60bp

Bank in brief

ENBD, the largest bank in the UAE by asset size, with a market share of about 19% of loans and deposits, was formed in 2007 by the merger of Emirates Bank International (EBI) and National Bank of Dubai (NBD). It is 55.6% owned by the Dubai government through its investment arm Investment Corporation of Dubai (ICD).

Emirates NBD: financial summary


Income statement Growth (y-o-y) Interest income 3,040 3,262 3,075 Loans 23.7 2.7 –8.2Interest expense –1,566 –1,418 –1,341 Assets 11.3 –0.3 1.6Net interest income 1,474 1,844 1,734 Pre-provision profit 67.9 42.1 –7.9Other operating income 828 1,112 914 Net income 32.8 –9.1 –30.1Operating income 2,302 2,956 2,648 Profitability Operating expenses –1,365 –1,958 -1,799 ROA 1.3 1.2 0.8Pre-provision profits 1,387 1,971 1,816 Pre-provision profits/average assets 1.8 2.6 2.3 Provisions for loan losses –450 –990 -967 Net interest margins 2.1 2.8 2.5Non-operating profit 66 –70 -205 Cost-income ratio 38.5 32.9 31.4Taxation - -2.6 -5.7 Asset quality Net income 1,003 911 637 Gross NPL ratio 1.6 2.6 10.0 Gross NPLs (USDm) 897 1,588 5,602 Key balance sheet items Loan Loss Res./NPLs 101% 102 40 Loans 56,928 58,477 53,704 Capital structure Deposits 44,227 49,362 54,488 Total CAR 20.8 18.7 20.1 Interest bearing assets 69,047 71,366 71,852 Tier-1 ratio 13.3 11.9 12.8Total assets 76,952 76,724 77,987 Funding Loan-to-deposit ratio (%) 128.7 118.4 98.6 Loan/Assets 74.0 76.2 68.9 -

Source: ENBD financial reports, HSBC estimates. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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National Bank of Abu Dhabi Key events and risks to monitor

NPLs have been on the rise through 2010. Deposits base needs to improve given increasing growth-related lending

mandate from the state.

Credit profile

National Bank of Abu Dhabi (NBAD) continues to enjoy strong support from Abu Dhabi. The group will likely focus on lending growth this year after a modest 3.9% loan growth in 2010.

NBAD managed its funding profile on a tight leash in 2010 as loan growth was largely funded by increasing depositor base. Access to quality wholesale funding was very limited in the region as a whole and hence loan growth was constrained. This situation moderated in Q2 and reversed in Q3 with noticeable improvement in deposits. The loans-to-deposit ratio at the end of 2010 was almost 3pp better y-o-y but still quite aggressive at 114%. The funding risk, however, is overshadowed by Abu Dhabi’s strategic stake in the bank and rating agencies’ expectations of strong and timely state backing in the time of need.

Moody’s expects NBAD’s asset quality to weaken further by the end 2010 but anticipates more stability during 2011 and gradual improvement. The rating agency estimates NBAD’s problem loans will pick up by YE2010 around 2.0-2.5% while normalize in 2011 and possibly trend below 2.0% by 2011.

Despite increased dependence on wholesale finding over the last two years, NBAD managed to keep NIM steady at around 250bps. Benchmark issues at decent cost in 2010 also suggest continued support for the bank in capital markets.



+44 20 7992 3707 +44 20 7992 3624


United Arab Emirates Credit profile (continued)


Credit rating profile FC government bond ratings Fitch Fitch AA StableSenior unsecured AA- Stable Moody's Aa2 StableSub-debt na S&P AA StableMoody’s Senior unsecured Aa3 Stable Major shareholders (December 2010) Bank-deposit Aa3 ADIC 70.5%Sub-debt na Financial strength C S&P Senior unsecured A+ Stable Bloomberg Sub-debt na NBAD UH Financial strength na



Coupon

NBADUH 4 1/4 03/15 (AA-/Aa3/A+) 750 4.25%NBADUH 4 1/2 09/14 (AA-/Aa3/A+) 850 4.5%

Bank in brief

NBAD is the second-largest bank in the UAE, with a market share of 18% in loans and 11.4% in deposits. Abu Dhabi’s sovereign investment arm Abu Dhabi Investment Authority holds a 70% stake in the bank. Government deposits constitute 54% of its deposits, and government and public sector loans amount to 39% of the total loan book.

National Bank of Abu Dhabi: financial summary


Income statement Growth y-o-y Interest income 2,012 1,874 1,947 Loans 39.6 17.7 3.9Interest expense 1,029 628 580 Assets 18.1 19.6 7.4Net interest income 983 1,246 1,367 Pre-provision profit 45.8 18.2 10.9Other operating income 308 309 348 Net income 20.5 –3.9 18.7Operating income 1,444 1,744 1,898 Profitability Operating expenses –407 –517 –569 ROA 2.0 1.6 1.7Pre-provision profits 1,038 1,226 1,329 Pre-provision profits/average assets 2.5 2.5 2.4Provisions for loan losses –195 –384 –383 Net interest margins 2.5 2.6 2.7Non-operating profit - - - Cost-income ratio 28.2 29.7 30.5Taxation –20 –20 –24 Asset quality Net income 823 790 856 Gross NPL ratio 0.93 1.24 2.31 Gross NPLs (USDm) 292 460 890 Key balance sheet items Loan Loss Res./NPLs 144.6 157.6 112.8Loans 31,397 36,941 38,940 Capital structure Deposits 28,196 31,498 32,816 Total CAR 13.7 21.8 23.1Interest bearing assets 42,954 51,778 55,768 Tier-1 ratio 11.8 16.0 17.5Total assets 44,865 53,636 58,172 Funding Loan-to-deposit ratio 111.3 117.3 114.4 Loan/assets 67.9 68.9 66.6

Source: NABD financial reports, HSBC calculations (ratios). Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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We expect growth rates in the Ukrainian banking

system to remain subdued in the coming two years.

If the economic story becomes more favourable,

lending growth is likely to turn slightly positive in

2011 and surpass the GDP growth rate a year later.

The main risk to this scenario lies in a fragile

economic environment, as any disruption would

limit the banks’ recovery prospects.

The Ukrainian banking system is struggling to

overcome the devastating impact of the global

financial crisis. A steep decline in economic

activity coupled with the devaluation of the local

currency exacerbated the stress in the corporate

sector and radically worsened the repayment

ability of a large pool of borrowers. This made it

difficult for Ukrainian banks to defend their

franchise and contain mounting losses from

lending operations.

After slumping in 2009, aggregate banking assets

expanded 7.0% in 2010, closing the year at

UAH942.1bn (USD117bn). However, with loan

arrears standing at 11.2% as at 1 January 2011, up

from 9.4% a year earlier, the recovery seems to be

a long way off. According to our estimates

impaired loans combined with restructured

exposures could total up to 40% of gross loans.

Despite the worsening trend in 2010 we expect

the level of problem assets to stabilise in H1 2011

and slowly start improving. The task of restoring

the quality of assets in the absence of any clearly

defined mechanisms for their disposal may prove

difficult and prolonged.

Asset quality worsened in 2010 despite slow loan

growth and sluggish demand for credit. This

seems to have been caused by a depressed

economic environment and lagging improvements

in loan underwriting standards. The aggregate

loan portfolio increased by mere 1% during 2010,

reaching UAH755.03bn (USD96.1bn) as at 1

January 2011. This growth was driven by

corporate lending, which rose 7%, whereas retail

loans contracted by 16.2%. The expansion rate in

lending operations is unlikely to pick up in the

near future in our view: the already highly

leveraged balance sheets of Ukrainian

corporations cannot support additional debt while

retail has insufficient purchasing power.

The first line of defence against worsening asset

quality has been the formation of provision

buffers. According to data from the Central Bank

of Ukraine, provisions stood at 15% of gross loans

while the level of provision coverage was 133%

as at 1 January 2011. The existing provisions

appear sufficient to absorb expected losses.

Banks’ regulatory capital stood at UAH160.9bn

(USD20.5bn) as at 1 January 2011. Regulatory

Pavel Simacek, CFA Analyst HSBC Bank Plc +44 20 7992 3714 [email protected]

Ksenia Mishankina Analyst HSBC Bank plc +44 20 7992 3703 [email protected]

Ukrainian banks

High level of non-performing assets persists

Banking system continues to generate losses

Funding structure fragile and prospects of near-term growth

remain very limited

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capital funded 17.08% of total assets, up from

15.43% a year earlier. However, this capitalisation

improvement was to a large degree attributable to

emergency equity injections from existing mostly

foreign shareholders and the government. Capital

formation related to retained earnings has yet to

be restored.

The Ukrainian banks generated an aggregate loss

of UAH13.03bn (USD1.7bn) in 2010. Although

this was not an encouraging result it was still an

improvement over the loss of UAH38.5bn

(USD4.8bn) reported in 2009.

The high level of impaired loans is the main drag

on the bottom-line performance of Ukrainian

banks. Until this issue is resolved we do not

envisage much potential for increasing the

profitability of the banking system.

Total deposits stood at UAH414.77bn

(USD52.8bn) as at 1 January 2011, up 27.5%

from UAH325.21bn (USD40.9bn) a year earlier.

Retail deposits accounted for some 65.2% of the

total – and such resources should, in theory,

enhance the stability of the funding base.

However, lessons learned from the recent crisis

suggest that Ukrainian retail depositors tend to be

a nervous crowd who are prepared to pull their

funds out of the banking sector at the first sign of

trouble. Bank deposits shrank by some 20% as

depositors withdrew their money during the peak

of the crisis in late 2008 and early 2009. This

sudden outflow of funds prompted the National

Bank of Ukraine to introduce a temporary

moratorium on early withdrawals of deposits.

The diversification of their funding base is one of

the important tasks facing Ukrainian banks, and

they are increasingly turning to local and

international capital markets. However, the

universe of Ukrainian banks issuing Eurobonds is

likely to expand at a slow pace as very few can

meet the criteria necessary for tapping

international bond markets. Furthermore

Ukrainian demand for loans denominated in

foreign currency is very weak and this further

constrains the international borrowing appetite of

domestic banks.

Ukraine – key data on the banking sector

Macro framework 2009 2010 2011e Key Banking Industry indicators 2008 2009 2010 LTM

GDP growth (% y-o-y) -14.8 4.2 4.0 Balance sheet ratios: Nominal GDP (USDbn) 113.7 137.5 155.0 Total assets (USDbn) 115 109 117 GDP per capita (USD) 3,947 4,771 5,499 Liquid assets/total assets (%) 9 11 9* Total loan growth (%) 63.2 -5.7 1.0 CPI, average (% y-o-y) 15.9 10.8 10.2 Loans/total assets (%) 85.5 84.9 80.1 Policy rate, end-year (%) 15.5 9.25 9.5 Retail loans/gross loans 33.9 29.8 24.7 Trade balance (USDbn) -5.0 -8.8 -18.1 Impaired loans/gross loans 2.3 9.4 11.2 Current account balance (USDbn) -2.1 -3.6 -11.9 Reserve coverage of Impaired

loans 247.0 141.9 133.1

Current account balance (% GDP) -1.8 -2.6 -7.8 Gross loans/customer deposits 2.21 2.3 1.82 Total deposit growth (%) 29.6 -8.9 27.5Gross external debt (USDbn) 105.9 112.9 119.9 Capital/total assets 13.3 15.4 17.1 Private sector external debt (USDbn) 72.2 64.8 66.6 Profitability ratios: Central government balance (% GDP) -6.6 -5.8 -3.6 Cost/income ratio na na 54.2% ** Gross public external debt (% GDP) 23.9 25 31.7 ROA 1.0% -4.4% -1.5% International reserves (USDbn) 25.6 32.3 34.8 Net interest margin 5.30 6.21 5.79 Cost of risk na na 6.4%** Banking assets/GDP (%) 95.8 85.0 na Market share (as % of sector

assets):

Total loans/GDP (%) 81.6 69.1 na Largest 20 banks na na 55% Retail loans/GDP (%) na na na State-controlled banks na na 17.3 (1) Total deposits/GDP (%) 35.8 38.0 na Foreign-owned banks na na 43.2 (1)

2010 LTM as of year end, * as of 9M 2010, ** as of 6M 2010 Source: National Bank of Ukraine, Fitch, estimates HSBC Economics

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Alfa Bank Ukraine Alfa Group Consortium’s Ukraine arm Key events and risks to monitor

Profitability is poor due to substantial loan loss provisions, though these are declining. Recent data point to a continuing deterioration of asset quality. The bank’s high dependence on wholesale funding creates a refinancing risk.

Credit profile outlook (Initiate with Neutral)

We establish a Neutral recommendation on Alfa Bank Ukraine (ABU). Its operating environment continues to be weak and asset quality remains under pressure, but ABU’s shareholder, AGC, has provided continuous support to the bank during the crisis including the latest capital injection of USD116.4m in February ‘11. Risks to our view include a radical improvement in asset quality or explicit support/guarantees from the owner.


ABU’s sizeable loan loss provisions of USD161m in H1 2010, combined with narrowing net interested margins (5.5%, LTM2010), led to the bank’s negative bottom line result for the reporting period.

Additionally, NPLs reached 22% at the end of 2009 driven by high exposure to economic sectors that suffered heavily during the crisis. Loans to the real estate and financial services companies represented 9% and 30% respectively of the total portfolio at the end of 2009.

The bank successfully repaid the first USD105m tranche of its 2012 Eurobond in October 2010 and should have no problems meeting 2011 repayments. A cash cushion of USD440m as of H1 2010 comfortably covers USD315m in sinkable fund payments of the 2012 Eurobond and a USD25m local bond, both due in 2011.



+44 20 7992 3714+44 20 7992 3703

Ukraine Credit profile


Credit rating profile FC government bond ratings Fitch NR Fitch B StableSenior unsecured Moody's B2 StableSub-debt S&P B+ StableMoody’s NR Senior unsecured Major shareholders (as at Jan 2011) Bank-deposit AHB Ukraine Ltt, Cyprus 80.1%Sub-debt OJSC ‘Alfa-Bank’, Russia 19.9%Financial strength Ultimately owned by 3 private S&P individuals named in “Bank in

brief” below Senior unsecured CCC+ Positive Bloomberg Sub-debt na ALFAUA



Coupon

ALFAUA 13 07/12 (NR/NR/CCC+) (sinkable) USD630 13%

Bank in brief

ABU is Ukraine’s No.10 bank with total assets of USD3bn as of H1 2010. It is owned by privately held Alfa Group Consortium (AGC), one of the largest banking groups in Russia controlled by leading businessmen Mikhail Fridman, German Khan and Alexei Kuzmichev. ABU is focussed on corporate banking with corporate loans amounting to more than half of total assets as of 1 October 2010.

Alfa Bank Ukraine: financial summary

Year to December (USDm) 2007 2008 2009 LTM 2010 Year to December (%) 2007 2008 2009 LTM 2010

Income statement Growth (y-o-y) Interest income 241 637 617 517 Loans 137.5 38.6 -23.2 -6.1Interest expense -126 -300 -363 -346 Assets 110.0 44.9 -18.9 -3.0Net interest income 116 337 254 171 Pre-provision profit 111.0 539.0 -31.2 -49.3Other operating income 27 152 80 51 Net income 647.9 200.2 na naOperating income 142 489 334 222 Profitability Operating expenses -92 -169 -114 -111 ROAA 0.6 1.1 -6.6 -8.1Pre-provision profits 50 320 220 112 Pre-provision profits/average assets 2.6 10.1 6.5 3.7Provisions for loan losses -33 -278 -527 -433 Net interest margins 6.9 11.5 7.7 5.5Non-operating profit 0 0 0 0 Cost-income ratio 64.8 34.6 34.1 49.8Pre-tax income 17 42 -306 -322 Asset quality Taxation -5 -7 81 78 Gross NPL ratio 0.5 3.4 22.3 naNet income 12 36 -226 -244 Gross NPLs (USDm) 12 116 681 naKey balance sheet items Loan loss res./NPLs 33.9% 48.1 105.3 naDeposits 843 1,429 976 1,125 Capital structure Loans 2,261 3,133 2,406 2,259 Total CAR 16.1 16.5 12.1 10.3Total assets 2,598 3,765 3,053 2,962 Tier-1 ratio NA NA NA NATotal equity 313 447 215 198 Funding Loan-to-deposit ratio 268.3 219.2 246.6 200.7 Loan/assets 87.0 83.2 78.8 76.3 FX loan-to-deposit ratio na na na na LTM 2010 numbers as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financials.

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Privatbank Benefiting from its leading position Key events and risks to monitor

Privatbank provides a relatively limited level of public disclosure. Moreover, it is operating in the fragile economic environment of Ukraine. However, recent data show an improving trend in the bank’s bottom line.

Credit profile outlook (Initiate with Neutral)

Privatbank’s credit profile benefits from a strong domestic franchise and solid financial performance. A strong market share of the retail sector boosts its systemic importance. However, weak operating environment constrains further upside in Privatbank’s performance. As a result we establish our Neutral recommendation. Risks to our view include material changes in macroeconomic conditions.


Privatbank’s total assets amounted to UAH104bn (USD13.2bn) at the end of H1 2010, up 16.4% on 2009. An expansion in lending operations was the main growth driver, with loans and advances to customers increasing by 11.0% to UAH73.93bn (USD9.3bn) in H1 2010. Net loans to total assets receded to 70.8% from 74.2%, while profit amounted to UAH643m (USD82.5m), up from UAH621m (USD82.0m) in the same period in 2009. The falling provision charge represents a positive sign suggesting that the asset quality problems may be abating.

The funding mix is heavily skewed towards deposits. Customer accounts supported 68.6% of the balance sheet at the end of H1 2010, down from 73.5% a year before. Even though the proportion of customer deposits declined, in absolute terms they increased by 25.4% in H1 2010. The bank experienced an outflow of deposits during the crisis but this negative trend seems to have now reversed.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch B StableSenior unsecured B Stable Moody's B2 StableSub-debt NA S&P B+ StableMoody’s Senior unsecured B1 Stable Major shareholders (as at Jan 2011) Bank-deposit B3 G. Bogolyubov 49.027%Sub-debt B1 I Kolomoyskiy 49.154%Financial strength D- S&P NR Senior unsecured Bloomberg Sub-debt PRBANK Financial strength



Coupon

PRBANK8 02/06/12 (B/B1/NR) USD500 8%PRBANK9 09/15 (B/B1/NR) USD200 9 3/8%PRBANK 02/16 (NR/B1/NR) USD150 5.799%

Bank in brief

Privatbank is owned by businessmen individuals Gennady Bogolyubov and Igor Kolomoyskiy with 49.027% and 49.154% stakes, respectively. It is the largest bank in Ukraine with a 10.5% share of total assets, 17.0% of retail deposits and more than 3,200 braches and outlets and around 7,000 ATMs.

Privatbank: financial summary



Income statement Growth (y-o-y) Interest income 1,398 2,206 1,804 1,996 Loans 60 58 –2 11 Interest expense –600 –986 –904 –1,101 Assets 65 56 2 16 Net interest income 797 1,221 899 895 Pre-provision profit 56 231 7 –2Other operating income 269 1,073 647 631 Net income 82 77 –33 2 Operating income 1,067 2,294 1,547 1,526 Profitability Operating expenses –643 –953 –610 –603 ROAA 2 3 1 1 Pre-provision profits 424 1,341 937 922 Pre-provision profits/average assets 5 10 9 8 Provisions for loan losses –123 –858 –683 –675 Net interest margins 10 10 9 8 Non-operating profit - - - - Cost-income ratio 60 42 39 40 Pre-tax income 301 482 253 247 Asset quality Taxation –78 –105 –89 –79 Gross NPL ratio 3 5 12 11 Net income 223 378 165 168 Gross NPLs (USDm) 308 449 1,144 991Key balance sheet items Loan loss res./NPLs 181% 225 137 160 Deposits 7,134 7,077 7,100 9,061 Capital structure Loans 8,535 8,456 8,276 9,348 Total CAR 14 14 18 na Total assets 11,150 10,872 11,146 13,205 Tier-1 ratio 10 11 15 na Total equity 1,071 1,221 1,497 1,609 Funding Loan-to-deposit ratio 120% 119 117 103 Loan/assets 77 78 74 71 FX loan-to-deposit ratio na na na na 2010 LTM as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financial reports.

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Ukreximbank A good proxy for Sovereign risk Key events and risks to monitor

Ukreximbank’s quasi-Sovereign status supports its credit standing. NPLs are still growing , although more slowly than at the height of the crisis. Substantial funding reliance on NBU and interbank sources.

Credit profile outlook (initiate with Neutral)

We establish a Neutral recommendation since Ukreximbank enjoys support from its owner, the Ukrainian government, which injected USD800m in fresh equity in H1 2010, but government finances remain fragile. Additionally, the bank’s liquidity appears adequate and sufficient to cover liabilities maturing in 2011. Risks to our view include any changes in the relationship with the state, swings in asset quality and profitability.


Earnings picked up in H1 2010, but the bank’s asset quality is likely to remain under pressure in the near term. The core business remains fairly stable with profitability receiving a boost from falling mark-to-market losses and provision releases in H1 2010.

Continuous government injections helped the bank bring its Tier 1 capital ratio to 28.5% at the end of H1 2010, well above Basel requirements. However Ukreximbank’s asset quality significantly deteriorated in this time, with NPLs advancing to 8.6% in H1 2010 from 6.1% at the end of 2009, while restructured loans climbed substantially to 37% of gross loans (end of H1 2010) on the back of the weak economic environment in Ukraine.



+44 20 7992 3714+44 20 7992 3703



Credit rating profile FC government bond ratings Fitch Fitch B StableSenior unsecured B Stable Moody's B2 StableSub-debt CCC S&P B+ StableMoody’s Senior unsecured B1 Stable Major shareholders (as of Jan 2011) Bank-deposit B3 Government 100%Sub-debt B1 Financial strength D- S&P NR Senior unsecured Bloomberg Sub-debt EXIMUK Financial strength



Coupon

EXIMUK8 3/8 04/15 (B/B1/NR) USD750 8 3/8%EXIMUK7.65 09/11 (B/B1/NR) USD500 7.65%EXIMUK 6.8 10/12 (B/B1/NR) USD250 6.8%

Bank in brief

Ukreximbank is the second-largest bank in the Ukraine with assets totalling USD8.2bn as of the end of H1 2010. The state-owned bank is strategically important since it supports Ukrainian exports and services foreign credit lines provided under Sovereign guarantees. As of year-end 2009, it had 29 branches and 93 operating outlets in the Ukraine and offices in London and New York.

Ukreximbank: financial summary



Income statement Growth (y-o-y) Interest income 507 770 816 828 Loans 61.8 68.1 17.5 -3.4Interest expense -297 -460 -393 -428 Assets 54.8 66.6 18.0 15.9Net interest income 209 310 423 400 Pre-provision profit 57.2 73.6 96.4 -2.6Other operating income 91 151 71 87 Net income 65.1 -77.9 -80.8 53.8Operating income 300 460 494 487 Profitability Operating expenses -120 -160 -110 -112 ROAA 2.4 0.3 0.0 0.1Pre-provision profits 181 300 384 375 Pre-provision profits/average assets 3.9 4.1 6.0 5.0Provisions for loan losses -31 -266 -379 -367 Net interest margins 8.6 5.0 7.4 6.1Non-operating profit 0 0 0 0 Cost-income ratio 39.8 34.8 22.3 23.0Pre-tax income 150 34 6 8 Asset quality Taxation -40 -11 -3 -3 Gross NPL ratio 1.4 0.8 6.1 8.6Net income 110 23 3 4 Gross NPLs (USDm) 306 310 2,930 4,117Key balance sheet items Loan loss res./NPLs 239% 709 171 153Deposits 2,099 2,062 2,480 2,785 Capital structure Loans 4,316 4,548 5,344 5,255 Total CAR 13.0 11.0 25.5 35.1Total assets 5,661 5,912 6,979 8,227 Tier-1 ratio 8.5 7.9 18.3 28.5Total equity 493 489 1,282 2,131 Funding Loan-to-deposit ratio 205.6% 220.5 215.5 188.7 Loan/assets 76.3 76.9 76.6 63.9 FX loan-to-deposit ratio

LTM 2010 as of H1 2010. Note: We use average annual USD rates for the P&L, year-end for the balance sheet. Source: Company financials

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LatAm banks

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2011: a year with caveats Review and outlook

The Brazilian economy remains buoyant,

particularly on the demand side, due to significant

growth in income, higher employment and the

ready availability of credit.

The ratio of debt to disposable income continues to

grow, and with the emerging middle class, this trend

has potential to continue. According to data from

Bradesco, class C – the middle income category in

Brazil – accounted for 53.4% of the population in

July 2010, as against 38.7% in January 2004.

This growth in the middle income group is a result

of lower income consumer groups becoming

wealthier, such as classes D and E, which together

accounted for 36.2% of the Brazilian population

in July 2010, down from 53.8% in January 2004.

The growth in demand for credit can be attributed

to the health of the Brazilian economy, which

posted both a rise in consumer confidence and a

significant fall in unemployment in 2010, the

latter dropping to 5.3% in December 2010 versus

6.8% a year before.

Moreover, the growth in household debt has not

significantly changed the proportion of monthly

income that goes towards amortisations and interest

payments, thanks to the simultaneous rise in

incomes, the extension of payment terms and the

decline in interest rates. Consequently, despite the

fast growth in credit, default rates have remained

relatively steady. At the end of January 2011, default

rates reached 3.6% for corporates and 5.7% for

individuals, the lowest rates in eight years.

All that said, Brazil’s strong economic

fundaments, solid domestic demand and healthy

financial system should continue to bolster credit

growth in 2011. We expect loan growth for the

banking system of 15% in 2011, driven by SMEs

and consumer credit expansion, in line with the

view of the Central Bank, Banco Central do Brasil

(BCB). This is likely to be accompanied by some

pressures on spreads from changing loan mix and

competition. In terms of asset quality, in the near

term the fast loan growth should gradually

increase the NPL ratio, but lower provisions and

healthy coverage should help to limit any major

compression of bank earnings.

Political and regulatory environment

The major near-term concern is accelerating

inflation in Brazil. BCB has recently taken

measures to halt the rise of inflation including

raising reserve requirements and capital ratios and

increasing borrowing costs.

Brazilian banks

Loan growth should continue into 2011 although at a slower pace

Further government macro-prudential measures could impact loan

growth in 2011

Healthy NPL coverage should limit any major margin erosion

Olga Fedotova Credit Analyst HSBC Bank plc +44 20 7992 3707 [email protected]

Victor Galliano Analyst (Equities) HSBC Securities (USA), Inc. +1 212 525 5253 [email protected]

Mariel Santiago Analyst (Equities) HSBC Securities (USA), Inc. +1 212 525 5418 [email protected]

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In December 2010, the Central Bank announced

an increase in reserve requirements on term

deposits to 20% from 15% and on cash deposits to

12% from 8%. The bank also raised capital

requirements on long-term loans to individual

consumers to 150% from 100%. Its objective is to

tighten liquidity conditions and slow the pace of

consumer credit growth. The BCB says these two

measures should drain BRL61bn (USD36bn) of

liquidity from the sector, equivalent to around 5%

of the total stock of the Brazilian banking system,

and add 20% to reserve requirements.

There is nonetheless one positive development in

the form of the total removal of the 15% reserve

requirement on Letras Financieras, the domestic

bonds that can be issued by banks with a

minimum tenor of two years. Furthermore, the

BCB announced the phasing out of the DPGE, a

form of government-guaranteed funding for mid-

caps, beginning January 2012 and due to be

wound up by January 2016.

These measures should weigh on overall credit

growth in 2011, led by more conservative credit

expansion in the financial sector. In addition, the

increase in interest rates could also be a challenge

in maintaining retail credit demand and lower

consumer delinquencies. HSBC economists

forecast that the BCB will raise benchmark rates

by further 75bps in 2011 from the current Selic

rate of 11.75% to 12.50%, combined with further

potential macro-prudential measures.

Further measures to curb the real’s appreciation

are widely believed to be under consideration,

such as taxing foreign investments in domestic

securities more heavily via an increase in the IOF

tax, in an effort to cool demand for the currency.

Government support

BNDES, the state development bank, continues to

play an active role in Brazilian banking with a

21% share of total system credit at the end of

January 2011.

Looking into 2011 and beyond, BNDES will

probably make infrastructure lending its core

priority, reducing its emphasis on corporate credit,

where it currently provides cheap credit for large-

and medium-sized companies. As BNDES shifts

its focus to infrastructure credit, this should

reduce the ‘crowding out’ in the corporate market

on the commercial banks, especially in working

capital and acquisition of capital goods credit.

Industry main trends Brazil’s credit growth has been recovering strongly

0%

10%

20%

30%

40%

50%

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

YoY C hange indiv iduals YoY C hange c orporatesTotal lending

Source: BCB

Brazil’s private credit growth has been recovering

strongly since February 2010, accelerating to 20%

y-o-y at the end of 2010 after dipping to 10% at

2009-end. According to data published by the

BCB on 24 February 2011, total system credit

registered healthy growth of 20.3% y-o-y in

January 2011 and credit as a percentage of GPD

reached to 46.5%. On a m-o-m basis, total lending

declined by 0.9% driven by a decrease in

consumer loans due to the effects of macro-

prudential measures.

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Foreign and private domestic banks drove loan

growth during 2010. In December 2010, credit for

private domestic banks (eg Bradesco, Itaú Unibanco)

grew 22% y-o-y, up from 8.5% at 2009-end and for

private foreign banks (eg Santander Brasil) grew

15% y-o-y vs. 0.2% at 2009-end. In contrast, public

sector banks like Banco do Brasil grew their

portfolios by 17% y-o-y in December 2010, down

from 29% in 2009. In January 2011, private

domestic banks accelerated slightly by 22.3% y-o-y,

foreign banks recorded a slowdown in credit growth

of 14.3% y-o-y and public sector banks, continued to

expand by 17.8%.

BNDES credit growth has continued to slow,

falling to 24.6% in January 2011 from 26.4% in

December 2010. The bank’s loan growth has been

decelerating in previous months and its share of

credit ex-infrastructure is likely to continue to

decline as the government tightens its funding

sources and BNDES focuses more on

infrastructure credit.

A positive offset to the implementation of macro-

prudential measures in January 2011 was the

210bps increase in spreads to 25.6% from 23.5%

in December. The increase in spreads was driven

mostly by lending rates in the consumer segment

rising 320bps m-o-m. Corporate lending rates also

increased January leading to an expansion of

110bps in corporate spreads.

Credit to individuals and corporates vs NPLs

-

200

400

600

800

1,000

1,200

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

0%

2%

4%

6%

8%

10%

Individuals Corporates Total Ind+CorpNPL Corp + Ind NPL Corporates (RHS)NPL Individuals

Thou

sand

s

-

200

400

600

800

1,000

1,200

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

0%

2%

4%

6%

8%

10%

IndividualsIndividuals CorporatesCorporates Total Ind+CorpTotal Ind+CorpNPL Corp + IndNPL Corp + Ind NPL Corporates (RHS)NPL Corporates (RHS)NPL IndividualsNPL Individuals

Thou

sand

s

Source: BCB

Looking at asset quality, the NPL ratio for the

overall system (those more than 90 days overdue)

rose to 3.2% in January 2011 from 4.3% a year ago.

In January, NPL for individuals remained steady m-

o-m at 5.7%. Similarly, the NPL ratio for corporate

credit was unchanged from December at 3.6%. In

terms of arrears, individual saw a sharp increase to

5.9% from 5.3% in December and corporates

remained steady at 1.9% from December. Given the

rapid increase in consumer loans, we think this ratio

could lead to a higher NPL ratio later in the year,

even though we believe the solid economic

fundamentals in Brazil should mitigate the increase

in delinquencies. In January the unemployment rate

was 6.1%, down from 7.2% a year ago.

The NPL ratio for foreign banks increased 20bps

m-o-m to 4.3% from 4.1% in January. Similarly

the NPL ratio for public-domestic banks increased

Public and private sector banks credit, y-o-y

-10%

0%

10%

20%

30%

40%

50%

Private domestic banks Public banks -BNDESForeign banks Total loans

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11-10%

0%

10%

20%

30%

40%

50%

Private domestic banksPrivate domestic banks Public banks -BNDESPublic banks -BNDESForeign banksForeign banks Total loansTotal loans


0%

10%

20%

30%

40%

50%

Private domestic banks Public banks -BNDESForeign banks Total loans


0%

10%

20%

30%

40%

50%

Private domestic banksPrivate domestic banks Public banks -BNDESPublic banks -BNDESForeign banksForeign banks Total loansTotal loans

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Source: BCB

Public and private sector banks default rates

-1.02.03.04.05.06.07.08.0

Jan -

02M

ay-0

2Se

p-02

Jan -

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11

Public Default Private Domestic DefaultForeign Default

-1.02.03.04.05.06.07.08.0

Jan -

02M

ay-0

2Se

p-02

Jan -

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11

Public DefaultPublic Default Private Domestic DefaultPrivate Domestic DefaultForeign DefaultForeign Default

-1.02.03.04.05.06.07.08.0

Jan -

02M

ay-0

2Se

p-02

Jan -

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11

Public Default Private Domestic DefaultForeign Default

-1.02.03.04.05.06.07.08.0

Jan -

02M

ay-0

2Se

p-02

Jan -

03M

ay-0

3Se

p-03

Jan-

04M

ay-0

4Se

p-04

Jan-

05M

ay-0

5Se

p-05

Jan-

06M

ay-0

6Se

p-06

Jan-

07M

ay-0

7Se

p-07

Jan-

08M

ay-0

8Se

p-08

Jan-

09M

ay-0

9Se

p-09

Jan-

10M

ay-1

0Se

p-10

Jan-

11

Public DefaultPublic Default Private Domestic DefaultPrivate Domestic DefaultForeign DefaultForeign Default

Source: BCB

145


abc

to 2.1% from 2.0% in December. We believe this

is a result of a change in mix with greater

concentration in SME and consumer lending. For

private domestic banks, the NPL ratio remained

steady m-o-m in January at 4%. This ratio is

slightly below the pre-crisis average for the

domestic sector.

Challenges and opportunities

Challenges

Higher reserve and capital requirements could

weight on margins and slow down credit

growth.

Increasing interest rates could add pressure to

credit expansion and asset quality.

Increasing competition should increase pressure

on margins, although this could be partly offset

by the medium-term repricing of assets.

The faster loan growth in SME and consumer

could result in more delinquencies and thus

higher provisioning needs.

Opportunities

Healthy NPL coverage and relatively lower

provisions should help limit any major

contraction of margins.

Strong economic fundamentals and low

unemployment should continue to support

credit growth and maintain consumer

delinquencies at historically low levels.

Brazil – key data on the banking sector

Macro framework 2009 2010 2011e Key banking industry indicators 2008 2009 2010

GDP growth (% y-o-y) -0.6 7.8 5.1 Balance sheet ratios Nominal GDP (USDbn) 1,625 2,077 2,440 Total assets (USDbn) 1,234 1,760 2,115GDP per capita (USD) 8.487 10.745 12,521 Liquid assets/total assets n/a n/a n/a Total loan growth (%) 27.1 15.3 27.1CPI, average (% y-o-y) 4.9 4.9 6.0 Loans/total assets (USDbn) (%) 32.4 35.1 35.9Policy rate, end-year (%) 8.75 10.75 12.50 Retail loans/gross loans (%) 42.3 43.7 42.4Trade balance (USDbn) 25.3 15.2 -6.2 Impaired loans/gross loans (%) 7.8 8.9 7.3Current account balance (USDbn) -24.3 -50.6 -81.1 Reserve coverage of impaired

loans (%) 68.5 77.3 76.8

Current account balance (% GDP) -1.5 -2.4 -3.3 Gross loans/customer deposits (%) 77.8 86.0 102.7 Total deposit growth (%) 38.8 4.2 6.4Gross external debt (USDbn) 198 260 310 Capital/total assets (%) 15.7 18.4 18.4Private sector external debt (USDbn) 121 170 220 Profitability ratios (%) Central government balance (% GDP) -3.5 -1.5 -1.4 Cost/income ratio 64.6 62.5 61.4Gross public external debt (% GDP) 3.5 3 2.6 ROA 1.9 1.6 1.1International reserves (USDbn) 239 290 313 Net interest margin 5.7 6.6 4.3 Cost of risk 7.7 10.7 8.0Banking assets/GDP (%) 108.3 101.8 n/a Market share (% of sector

assets) Total loans/GDP (%) 44.4 46.6 n/a Largest 20 banks 93.8 95.7 93.9Retail loans/GDP (%) 15.3 14.0 n/a State-controlled banks 29.7 28.7 32.6Total deposits/GDP (%) 44.2 38.0 n/a Foreign-owned banks 47.6 21.8 24.0

Source: BCB, estimates HSBC Economics

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Banco do Brasil Key events and risks to monitor

Higher compulsory deposits requirements could weigh on loan growth. With the lowest BIS ratio of the big-cap peers, the bank has a high reliance on

time and demand deposits for funding. Overseas expansion is part of Banco do Brasil’s (BB’s) strategy for 2011.

Credit profile

BB is one of the strongest banks in the EM universe, benefitting from hefty liquidity on the back of a vast deposit base, healthy margins and a healthy capital base. The bank has low dependence on external funding and we believe has a high likelihood of government support.

BB reported net income of BRL3, 704m in Q4 2010, beating consensus estimates by 35.5% mainly due to higher-than-expected non-interest income that included the reassessment of PREVI pension assets and liabilities. Excluding one-offs, net income was up 21% y-o-y.

Net loans grew at 6% q-o-q and 20.8% y-o-y, led by an increase in consumer credit, which grew by 5.3% q-o-q and 23.2% y-o-y, while loans to businesses grew by 6.6% q-o-q and 19.5% y-o-y.

NIM came under pressure contracting 15bps q-o-q to 6.5%. Part of this can be explained by the consolidation of Banco Votorantim, which operates in the lower-risk, lower-spread segment. Net interest income stood at BRL9,523m.

Provision for loan losses fell 27.5% q-on-q.

We do not have a fundamental credit recommendation on the issuer.

Analysts Olga Fedotova Victor Galliano Mariel Santiago

[email protected] [email protected] [email protected]

+44 20 7992 3707+1 212 525 5253+1 212 525 5418

Brazil Credit profile (continued)


Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB+ Positive Moody's Baa3 PositiveSub-debt NA S&P BBB+ StableMoody’s Senior unsecured Baa2 Positive Major shareholders (December 2010) Bank-deposit Baa3 Federal government 53.2%Sub-debt Baa2 Positive Previ 10.4%Financial strength C+ Free float 30.4%S&P Senior unsecured BBB- Stable Bloomberg Sub-debt NA BANBRA

Key international bonds

Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon

BANBRA 8 ½ 09/14 (subordinated) USD300 8.5%

BANBRA 4 ½ 01/15 USD950 4.5%BANBRA 4 ½ 01/16 (callable) EUR750 4.5%BANBRA 6 01/20 USD500 6%BANBRA 5 3/8 01/21 USD660 5 3/8%

Bank in brief

BB is the largest public financial institution in Brazil, majority owned by the federal government. The bank serves nearly 25 million clients through 5,058 branches in Brazil and 47 abroad. As of September 2010, BB had a market share of 26% of total loans and 28% of deposits in Brazil. The bank had total assets of BRL811bn (USD490) at the end of Q4 2010 and has a high exposure to the agribusiness segment which accounted for 21% of its loan portfolio in Q4 2010.

Banco do Brasil: financial summary

Year to December (USDm) 2009 2010 2011e 2012e Year to December (%) 2009 2010 2011e 2012e

Income statement Growth (y-o-y)

Interest income 32,663 44,987 52,924 51,925 Loans 33.76 19.69 20.40 16.98Interest expense 16,168 23,421 26,616 25,887 Deposits 23.11 14.63 7.61 7.63Net interest income 16,495 21,566 26,308 26,038 Pre-provision profit 49.36 49.67 50.53 52.71Other operating income 5,702 8,132 9,430 9,684 Net Income 22.91 19.97 18.04 18.23Operating income 22,197 29,698 35,738 35,722 Profitability Operating expenses 10,740 14,338 17,197 16,451 ROAA 1.58 1.37 1.22 1.26Pre-provision profits 10,958 14,749 18,058 18,829 Pre-provision profits/average assets 3.41 3.41 3.80 4.33Provisions for loan losses 5,827 6,332 8,838 9,345 Net interest margins 6.92 6.24 6.09 6.58Provision for taxes 1,994 3,335 3,175 3,354 Cost-income ratio 48.4 48.3 48.1 46.1Net income 5,085 5,929 6,446 6,511 Asset quality Balance sheet summary Gross NPL ratio 3.7 2.7 2.8 3.0Customer deposits 186,842 213,668 234,059 232,775 Gross NPLs (USDm) 5,449 7,241 9,254 9,918Loans 161,772 209,626 254,163 271,837 Loan loss res./NPLs 157.64 164.20 152.09 144.44Total assets 406,162 504,077 546,274 537,578 Capital structure Total CAR 13.70 15.30 15.05 14.78 Equity/Assets 5.10 6.15 6.41 6.66 Funding Loan-to-deposit ratio 86.6 98.1 108.6 116.8 Loan/assets 39.83 41.59 46.53 50.57

Source: Banco do Brasil, HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.

mailto:[email protected]


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BNDES Key events and risks to monitor

Capital base includes a significant component of hybrid debt/capital issues High disbursements should continue in 2011 after record year in 2010 due to

increased demand in the infrastructure (energy and transportation) segment The concentration of lending to the 10 largest borrowers remains high and is

growing, having risen to 36.2% at H1 from 34% at the end of 2008

Credit profile

BNDES disbursements reached BRL168.4bn (USD102bn) in 2010, a 23% increase on 2009. Industry accounted for 47% of total disbursements, followed by infrastructure, with a 31% share, and trade and services at 16%. In addition, the bank ended 2010 with a record volume in credit operations mainly lending to micro-, small- and medium-sized companies, as well as individuals, revealing greater access and a wider reach. BNDES recorded net profit of BRL3.6bn (USD2.05bn) in H1 2010, equivalent to an increase of 408.6% on a y-o-y basis. The main contributing factor to this strong performance was a BRL2bn (USD1.14bn) increase in credit recoveries. In H1 2010 the bank’s credit portfolio reached around BRL317bn (USD181bn), equal to 20.5% of total credit in Brazil in June 2010. The default ratio, which is historically low, remained stable at 0.20% at the end of H1 2010. The international financial crisis did not affect the quality of the bank’s portfolio, in which 97.9% of the total granted credits were graded at risk levels AA-C. The BIS ratio was 17.1% in H1 2010, well above the 11% requirement. BNDES is likely to continue to provide credit to foster infrastructure investment and economic development, and to continue to rely on the Brazilian Treasury and, increasingly, the capital markets, for its funding.




+44 20 7992 3707+1 212 525 5253+1 212 525 5418



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (December 2010) Bank-deposit Baa3 Federal Government 100%Sub-debt Financial strength na S&P Senior unsecured BBB- Stable Bloomberg Sub-debt NA BNDES

Key international bonds


BNDES 9 5/8 12/11 (NR/A3/NR) USD300 9 5/8%BNDES 4 1/8 09/17 (NR/Baa2/BBB-) EUR750 4 1/8%BNDES 6.369 06/18 (NR/Baa2/BBB-) USD1,000 6.369%BNDES 6 1/2 06/19 (BBB-/Baa2/BBB-) USD1,000 6 1/2%BNDES 5 1/2 07/20 (WD/Baa2/BBB-) USD1,000 5 1/2%

Bank in brief

BNDES is the federal-government-owned development bank of Brazil and the main vehicle for financing long-term investments in the Brazilian economy. Since its foundation in 1952, the bank has supported infrastructure, commerce, agriculture and other sectors, offering special terms to small and medium sized enterprises. It is the third largest bank in terms of assets (USD253bn) and the fifth in terms of equity (USD17bn). The bank plays a fundamental role in executing the Brazilian government’s development policies.

BNDES: financial summary

Year to December 2006 2007 2008 2009 Year to December (%) 2006 2007 2008 2009

Income statement (USDm) Growth (y-o-y) Interest income 6,204 5,226 16,044 5,236 Loans n/a 12.12 31.16 31.34Interest expense 3,978 2,759 13,938 2,320 Deposits n/a 8.63 37.32 37.93Net interest income 2,227 2,467 2,106 2,917 Pre-provision profit n/a 20.23 –23.17 31.30Other operating income 1,457 2,271 2,668 1,814 Net Income n/a 15.52 –27.36 26.77Operating income 3,886 5,280 3,966 4,495 Profitability Operating expenses 593 734 1,053 622 ROAA n/a 3.86 2.27 2.09Pre-provision profits 3,403 4,570 3,723 4,498 Pre-provision profits/average assets n/a 4.69 2.92 2.78Provisions for loan losses –484 –710 –242 3 Net interest margins n/a 3.86 2.27 2.09Provision for taxes 972 1,368 1,072 1,121 Cost-income ratio 15.26 13.90 26.57 13.84Net income 2,910 3,755 2,893 3,375 Asset quality Balance sheet summary Gross NPL ratio 4.38 3.50 1.81 2.33Deposits 12,262 14,950 11,170 13,168 Gross NPLs (USDm) 3,098 3,323 1,723 3,857Loans 68,751 92,518 93,320 162,609 Loan loss Res./NPLs 65.58 71.81 114.31 69.13Total assets 85,064 110,909 117,126 214,332 Capital structure Total CAR 26.70 17.80 17.60 17.12 Equity/assets 12.30 9.11 7.15 6.47 Funding Loan-to-deposit ratio 560.66 618.84 835.43 1234.90 Loan/assets 80.82 83.42 79.68 75.87

Source: BNDES, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.



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Bradesco Key events and risks to monitor

Heavy investment in IT and branch expansion. In the midst of a tightening cycle, Brazil could be vulnerable to a credit slowdown NPLs increased in late 2010 and remain a concern

Credit profile

As one of the two largest private banks in Brazil and Latin America, Bradesco’s credit profile benefits from a high level of state support and good access to local deposits due to its vast branch network and strong brand recognition.

Bradesco booked net income of BRL10bn (USD5.5bn) in 2010, an increase of 25% y-o-y. The insurance business played an important role, growing 18% y-o-y and accounting for 30% of earnings. Net interest income excluding trading gains was BRL31.5bn (USD19.6bn), 11% higher y-o-y and mainly driven by the growth in loan volumes in SMEs and consumer. Interest income from insurance was strong in 2010 mainly as a result of volume growth and slightly higher spreads on assets. Net loans had a strong year growing 26% y-o-y. The main drivers were SME and consumer credit. Provisions for loan losses were down significantly in 2010, by 24% y-o-y, resulting from higher recoveries and decline in delinquencies. The bank is investing heavily in infrastructure and technology resulting in an increase in operating expenditures of 22% y-o-y. The delinquency ratio (+60 days overdue loans) has been improving across the board since the end of 2009, reaching 3.6% in Q4 2010. Although the NPL ratio is improving, there was also a slight uptick in NPL formation in Q4 2010.




+44 20 7992 3707+1 212 525 5253+1 212 525 5418

Brazil Credit profile


Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Positive Moody's Baa3 PositiveSub-debt BBB- S&P BBB- StableMoody’s Senior unsecured Baa2 (P) Stable Major shareholders (December 2010) Bank-deposit Baa3 Fundacao Bradesco 48.4%Sub-debt Baa2 Espirito Santo of Portugal 7.9%Financial strength B- UFJ Bank of Japan 2.9%S&P Free float 21.7%Senior unsecured BBB Stable Bloomberg Sub-debt N/R BRADES Financial strength N/R

Key US dollar denominated bonds


BRADES 5.9 01/21 (BBB-/Baa2/NR) USD1,100 5.9%BRADES6 ¾ 09/19 (BBB-/Baa2/NR) USD750 6 3/4%BRADES 5.9 01/21 (BBB-/NR/NR) USD500 5.9%

Bank in brief

Bradesco, founded in 1943 is one of the largest private banks in Brazil with more than 71,000 points of sale. The group’s insurance and private pension activities are an important part of the business contributing c30% of earnings in 2010. As of December 2009, Bradesco had a market share of 24% of insurance premiums and 36% of private pension investment portfolios. The bank is the third-largest investment fund manager in Brazil with a market share of 17%. It has a 13% share of total credit in Brazil and a 20% share of credit cards market in terms of invoiced revenue.

Bradesco: financial summary

Year to December (USDm) 2009a 2010a 2011e 2012e Year to December (%) 2009a 2010a 2011e 2012e


Interest income 25,281 32,998 40,252 40,283 Loans 4.59 21.48 18.11 14.75Interest expense 12,251 15,696 18,308 19,077 Deposits 11.40 23.01 7.63 6.24Net interest income 13,029 17,302 21,944 21,206 Pre-provision profit 82.42 4.58 17.78 9.77Other operating income 5,734 6,456 7,673 7,606 Net Income 5.14 20.05 16.99 6.78Operating income 19,993 25,321 31,498 30,722 Profitability Operating expenses 9,410 12,666 15,233 14,494 ROAA 1.67 1.70 1.74 1.74Pre-provision profits 10,045 11,915 15,432 15,489 Pre-provision profits/average assets 4.17 3.71 3.81 3.91Provisions for loan losses 6,486 5,168 6,401 6,866 Net interest margins 7.59 7.81 7.86 7.80Provision for taxes 2,066 2,900 3,908 3,648 Cost-income ratio 46.9 49.5 47.8 46.4Net income 4,014 5,467 7,033 6,866 Asset quality Balance sheet summary Gross NPL ratio 7.05 5.45 5.50 5.90Customer deposits 97,633 117,585 128,176 124,381 Gross NPLs (USDm) 7,050 7,039 8,418 9,463Loans 90,260 118,710 141,204 148,146 Loan loss res./NPLs 137.21 148.43 140.62 129.37Total assets 290,182 386,456 418,894 406,899 Capital structure Total CAR 17.90 15.55 13.17 13.09 Equity/assets 8.25 7.63 8.01 8.47 Funding Loan-to-deposit ratio 92.4 101.0 110.2 119.1 Loan/assets 31.10 30.72 33.71 36.41

Source: Bradesco financial reports, HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.



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Itaú Unibanco Key events and risks to monitor

The bank’s overseas presence generates international liquidity, but its broad deposit base could well put pressure on funding costs.

Asset quality could improve further, but needs to remain a focus of attention due to strong expansion in SMEs and consumer credit.

Slower loan growth and margin compression in 2011 could weigh on earnings.

Credit profile

Constrained by the sovereign ceiling, the bank is one of the highest rated credits in the country. It stands to benefit from the improvement of the overall operating environment through its exposure to commercial lending and consumer credit.

At the end of 2010, Itaú Unibanco reported net income of BRL13.3bn (USD8.3bn), showing 25.3% y-o-y growth and strong ROE of 23.0%. The expansion in net interest income was mainly due to strong consumer and SME credit. Itaú Unibanco’s total loan book was BRL335bn (USD208bn) at the end of Q4 2010, a y-o-y rise of 20%. The majority of loan growth during 2010 came from the retail sector, particularly in mortgages (53% y-o-y) and credit cards (19% y-o-y). Annualised NIM excluding insurance was 12.3% at Q4 2010, nearly 50bps higher than Q4 2009.This increase was a result of increased volumes more than a change in interest rates. Delinquency ratios showed a significant drop to 5.1% at end of Q4 2010 from 6.6% in Q4 2009. The bank’s capital ratio was 15.4% in Q4 2010, 120bps lower than Q4 2009.




+44 20 7992 3707+1 212 525 5253+1 212 525 5418



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders ( December 2010) Bank-deposit Baa3 Itaú, SA 20.0%Sub-debt Itaú Unibanco Particaoes 26.0%Financial strength B- Free float 54.0%S&P Senior unsecured BBB Stable Bloomberg Sub-debt NA ITAU



Coupon

ITAU 5 ¾ 01/21 (BBB-/Baa2/NR) USD1,000 5 3/4%ITAU6.2 04/15/20 (BBB-/Baa2/NR USD1,000 6.2%ITAU8.7 07/49-11 (NR/Baa2/NR), perpetual USD500 8.7%

Bank in brief

Itaú Unibanco is Brazil’s largest private banking institution. It came into existence through the merger of Banco Itaú and Unibanco in 2008 and operates overseas in Chile, Argentina and Uruguay, as well as the US, Europe, Japan and China. As of September 2010, the bank had an extensive network of 3,929 branches and 30,000 ATMs in Brazil. In Brazil, it controls 11% of the retail banking market, and at the end of Q3 2010 had an 18% share of total loans and 16% of deposits.

Itaú Unibanco: financial summary

Year to December 2009a 2010e 2011e 2012e Year to December (%) 2009a 2010e 2011e 2012e

Income statement (USDm) Growth (y-o-y)

Interest income 31,709 39,966 47,891 50,901 Loans 0.37 22.17 14.75 14.20Interest expense 13,322 17,272 20,234 23,594 Deposits -3.87 15.45 9.61 9.62Net interest income 18,387 22,693 27,657 27,307 Pre-provision profit -4.48 0.14 22.04 14.31Other operating income 5,618 8,141 10,406 10,571 Net Income -0.75 25.27 20.54 12.32Operating income 27,053 33,487 41,118 40,761 Profitability Operating expenses 6,106 7,489 8,890 8,306 ROAA 1.69 2.01 2.15 2.21Pre-provision profits 13,860 15,743 21,128 22,082 Pre-provision profits/average assets 13.90 13.92 16.98 19.42Provisions for loan losses 7,097 6,812 8,564 8,985 Net interest margins 8.60 9.76 9.32 9.25Provision for taxes 2,045 2,740 4,077 4,386 Cost-income ratio 46.70 50.50 46.40 43.70Net income 5,257 7,470 9,901 10,167 Asset quality Balance sheet summary (USDm) Gross NPL ratio 6.62 5.05 5.10 5.20Customer deposits 108,183 123,621 139,102 142,101 Gross NPLs (USD m) 9,342 9,229 10,735 11,434Loans 127,199 168,247 194,428 203,002 Loan Loss Res./NPLs 149.04 156.28 148.90 147.02Total assets 348,680 435,839 481,091 482,178 Capital structure Total CAR 16.68 15.52 14.43 14.92 Equity/assets 8.33 8.49 9.07 9.63 Funding Loan-to-deposit ratio 117.60 136.10 139.80 142.90 Loan/assets 36.48 38.60 40.41 42.10

Source: Itaú Unibanco (actual figures). HSBC equity research estimates and calculations. Note: For historical numbers we use average annual USD rates for the P&L, year-end for the balance sheet. For estimates we apply a rate of 1.6 for 2011 and 1.75 for 2012, in line with HSBC FX estimates.



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Votorantim Key events and risks to monitor

A high concentration in auto loans could affect asset quality and earnings, while the bank’s capital ratios have steadily lagged those of larger peers.

The higher interest rates scenario could help margin expansion, although a slowdown in auto loan growth should partly offset any recovery in margins.

The Banco do Brasil partnership should generate opportunities for revenue synergy.

Credit profile

The bank benefits from access to cheaper and longer-term funding from Banco do Brasil and a sizable market share in retail lending.

First-half net profit in 2010 was 18% higher y-o-y, mainly as a result of increased loan origination in consumer banking (+35% y-o-y) and strong fee income during the period. This growth was supported by higher operating expenses that raised the cost-to-income ratio to 41% from historical levels of 35%. The improvement in credit quality in Brazil resulting from strong economic fundamentals is reducing credit cost pressures at Votorantim. The NPL ratio trended down in H1 2010, reaching 3.9%, while the capital ratio remained comfortable at 13.7%, supportive of further portfolio growth. Having been historically weaker than its peers, this ratio been fortified by issuance of Tier 2 capital contributions made by Banco do Brasil and the bank expects to have closed 2010 with a BIS of 14% after expansion during the year.


Analysts Olga Fedotova Victor Galliano


+44 20 7992 3707+1 212 525 5253



Credit rating profile FC government bond ratings Fitch Fitch BBB- PositiveSenior unsecured BBB- Positive Moody's Baa3 PositiveSub-debt NA S&P BBB- StableMoody’s Senior unsecured Baa2 Stable Major shareholders (December 2010) Bank-deposit Baa3 Banco do Brasil 50.0%Sub-debt Baa2 VF and Emirio Moraes 50.0%Financial strength C- S&P Senior unsecured BB+ Stable Bloomberg Sub-debt NA BANVOR



BANVOR7 3/8 01/20 (NR/Baa2/BB+) USD1,150 7 3/8%BANVOR5 1/4 06/16 (NR/Baa2/BB+) USD750 5 1/4%BANVOR4 1/4 02/13 (NR/Baa2/BB+) USD500 4 1/4%

Bank in brief

Votorantim was founded in 1987 and is focused on consumer finance, mainly vehicle credit. On December 2009, the bank approved a tie-up with Banco do Brasil which holds 49% of Votorantim’s capital. With the partnership, the bank has solidified its overall support especially in auto financing. As of September 2010, the bank had a 3.9% market share of loans and a 1.9% share of total deposits with a total asset base of BRL102bn (USD60bn).

Votorantim: financial summary

Year to December (USDm) 2007 2008 2009 Sept 2010 Year to December (%) 2007 2008 2009 Sept 2010a


Interest income 4,521 5,348 5,500 2,062 Loans 59.85 8.1 49.2 25.8Interest expense 2,837 3,718 2,615 1,205 Deposits –22 –21.3 106.9 7.9Net interest income 1,684 1,630 2,886 857 Pre-provision profit 8.81 –30.7 119.3 –56.9Other operating income 391 295 470 57 Net Income 14.57 –41.4 19.4 –66.4Operating income 700 372 674 914 Profitability Operating expenses 818 785 1,245 277 ROAA 1.80 1.30 1.02 1.2Pre-provision profits 973 674 1,478 637 ROAE 21.1 14.6 11.9 12.7Provisions for loan losses 273 301 804 231 Net interest margins n/a 5.5 6.8 6.6Provision for taxes 221 –38 163 98 Cost-income ratio 31.0 34.3 34.1 35.6Net income 659 386 461 155 Asset quality

Balance sheet summary Gross NPL ratio 2.93 2.88 4.51 2.70

Customer deposits 8,022 6,314 13,064 14,091 Gross NPLs (USDm) 440 475 1,098 843Loans 15,113 16,344 24,388 30,670 Loan loss res./NPLs 111 113 101 106Total assets 37,494 30,952 48,725 65,192 Capital structure Total CAR 15.20 13.50 13.0 13.5 Equity/assets 9.09 8.85 8.43 7.4 Funding Loan-to-deposit ratio 184.4 253.6 180.7 217.7 Loan/assets 39.46 51.74 48.45 47.05

Source: Votorantim, HSBC calculations. Note: We use average annual USD rates for the P&L, year-end for the balance sheet.

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Appendix

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Selected Eurobond and private placement deals, 2011 maturities APPENDIX

Issuer Coupon Maturity Date First Put/Call date Currency Outstanding (M)

Asia

China CHINA DEV BANK 1.05481 12/12/2011 USD 600 HANG SENG BANK 0.59063 06/07/2016 06/07/2011 USD 450 FUBON BANK HK 6.125 26/04/2016 26/04/2011 USD 200 DAH SING BANK 1.05344 03/06/2016 03/06/2011 USD 150 CHONG HING BANK 1.22188 16/12/2016 16/12/2011 USD 125 Hong Kong Hong Kong Mortgage Corp 3-mth Libor +45bp 14/03/2011 USD 90 Hong Kong Mortgage Corp 4.25 06/06/2011 USD 70 China Development Bank (HK) 0.66 28/02/2011 USD 60 India ICICI BANK LTD/S 5.875 20/10/2011 USD 500 STATE BK INDIA 0.79219 15/12/2011 USD 500 Korea WOORI BANK 6.125 03/05/2016 03/05/2011 USD 1,000 EXP-IMP BK KOREA 0.5 04/10/2011 USD 500 INDUST BK KOREA 0.56 27/04/2011 USD 500 KOOKMIN BANK 0.54188 28/11/2011 USD 500 WOORI BANK 0.65219 14/09/2011 USD 500 HANA BANK 5.88 14/09/2016 14/09/2011 USD 400 KOREA DEV BANK 0.5 12/09/2011 USD 300 SHINHAN BANK 5.75 28/02/2016 28/02/2011 USD 300 Singapore OVERSEA-CHINESE 7.750 06/09/2011 USD 1,250 DBS BANK LTD/SP 7.125 15/05/2011 USD 850 DBS CAP FUND COR 7.657 15/11/2019 15/03/2011 USD 725 Thailand Export-Import Bank of Thailand 6-mth Libor +10bp 04/04/2011 USD 120 Russia and CIS: Kazakhstan Kazkommertsbank 5.125 23/03/2011 EUR 238 Kazkommertsbank 12 30/05/2011 USD 230 Russia VTB Bank 8.25 30/06/2011 EUR 1,000 VTB Bank 7.5 10/08/2011 CHF 750 VTB Bank 7.50 12/09/2011 USD 450 TransCreditBank 9 25/06/2011 USD 350 Russian Standard Bank 8.625 05/05/2011 USD 350 Ak Bars Bank 9.25 20/06/2011 USD 300 Gazprombank 7.97 15/06/2011 USD 300 Bank of Moscow 6.253 04/03/2011 CHF 250 Ukraine Ukreximbank 7.65 07/09/2011 USD 500 UkrSibbank AKIB 7.75 21/12/2011 USD 500 UkrSibbank AKIB 9.25 04/08/2011 USD 250 LatAm and ME: Brazil Banco BMG SA 7.25 23/05/2011 USD 200 HSBC Bank Brasil - Banco Multiplo 1.05 18/08/2011 USD 200 Qatar Commercial Bank of Qatar QSC 3-mth Libor +40bp 12/10/2011 USD 500 Saudi Arabia Riyad Bank Ltd 3-mth Libor +30bp 26/04/2011 USD 500 Samba Financial Group 3-mth Libor +30bp 31/05/2011 USD 500 Saudi British Bank 3-mth Euribor +30bp 13/04/2011 EUR 325 UAE Abu Dhabi Commercial Bank 5.625 16/11/2011 GBP 500 Emirates Bank International 3-mth Euribor +30bp 15/06/2011 EUR 500 Abu Dhabi Commercial Bank 2.75 19/04/2011 CHF 300 Mashreqbank 3-mth Libor +38bp 06/04/2011 USD 300 SIB Sukuk Co 3-mth Libor +65bp 12/10/2011 USD 225

Source: Bloomberg, Dealogic

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Selected Eurobond and private placement deals, 2012 maturities

Issuer Coupon Maturity Date First Put/Call date Currency Outstanding (M)

Asia

China CHINA DEV BANK 0.75875 30/05/2012 USD 700 EXP-IMP BK CHINA 1.03719 12/01/2012 USD 700 HANG SENG BANK 0.54063 05/07/2017 06/07/2012 USD 300 CITIC BANK INTL 2.05219 12/12/2017 12/12/2012 USD 250 CKWH-UT2 9.125 Perpetual 31/05/2012 USD 250 DAH SING BANK 5.451 18/08/2017 18/08/2012 USD 150 HK HANG SENG BANK 0.54063 05/07/2017 06/07/2012 USD 300 DAH SING BANK 5.451 18/08/2017 18/08/2012 USD 150 India ICICI Bank 6.625, callable (make

whole) 03/10/2012 USD 1,795

ICICI Bank 5.75 12/01/2012 USD 730 State Bank of India 3-mth Libor +38bp 15/02/2012 USD 300 Export-Import Bank of India 3-mth Libor +50bp 07/06/2012 JPY 24,000 ICICI Bank 1.86 13/02/2012 JPY 3,000 Korea EXP-IMP BK KOREA 5.5 17/10/2012 USD 1500 HANA BANK 6.5 09/04/2012 USD 1000 KOREA DEV BANK 5.5 13/11/2012 USD 600 EXP-IMP BK KOREA 1.35219 13/03/2012 USD 500 SHINHAN BANK 6 29/06/2012 USD 500 KOREA DEV BANK 0.56438 22/11/2012 USD 500 HANA BANK 5.375 12/04/2017 12/04/2012 USD 500 KOOKMIN BANK 0.51813 31/01/2012 USD 400 KOREA DEV BANK 0.8125 04/10/2012 USD 300 KOOKMIN BANK 5.875 11/06/2012 USD 300 KOREA EXCH BANK 0.61906 20/07/2012 USD 300 Singapore DBS BANK /SP 6 20/09/2012 AUD 50 Russia and CIS Kazakhstan ATF Bank 9.25 12/04/2012 USD 200 Kazkommertsbank 7.625 13/02/2012 GBP 174 Kazkommertsbank 12.85 18/12/2012 USD 125 Russia VTB Bank 6.609 31/10/2012 USD 1,054 Alfa Bank 8.2 25/06/2012 USD 500 VTB Bank 4.2 11/08/2012 SGD 400 Ak Bars Bank 10.25 03/12/2012 USD 280 Tatfondbank 12 02/02/2012 USD 225 Ukraine Alfa Bank Ukraine 13 30/07/2012 USD 631 PrivatBank 8 06/02/2012 USD 500 Ukreximbank 6.8 04/10/2012 USD 250 LatAm and ME

Brazil Banco Panamericano 7 26/10/2012 USD 200 Banco Cruzeiro do Sul 8 17/09/2012 USD 175 BES Investimento do Brasil 6 18/05/2012 USD 150 Parana Banco 7.375 21/12/2012 USD 100 Banco Mercantil do Brasil 7.75, sinkable 08/05/2012 USD 67 Banco Bradesco 4.05 17/04/2012 JPY 17,500 UAE Dubai Sukuk Centre 3-mth Libor +37.5bp 13/06/2012 USD 1,250 First Gulf Bank PJSC 4 26/11/2012 USD 470 National Bank of Abu Dhabi 5.875 27/02/2012 GBP 350 National Bank of Abu Dhabi 3-mth Euribor +5bp 23/07/2012 07/04/2011 EUR 117 Emirates Bank International 3-mth Libor +450bp 30/04/2012 USD 104

Source: Bloomberg, Dealogic

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Key forecasts

__________________ GDP_________________ _______________ Inflation ________________ 2009 2010f 2011f 2012f 2009 2010f 2011f 2012f

World (nominal GDP weights) -2.4 3.8 3.3 3.5 1.0 2.4 2.7 2.3 World (PPP weights) -0.6 5.0 4.3 4.3 1.9 3.3 3.3 2.8 Developed -3.7 2.6 2.3 2.5 0.0 1.4 1.7 1.2 Emerging 1.9 7.4 6.4 6.2 4.8 5.7 6.0 5.5

North America -2.6 2.9 3.3 3.4 -0.3 1.7 1.8 1.2 US -2.6 2.9 3.4 3.4 -0.3 1.6 1.8 1.2 Canada -2.5 3.0 2.6 2.9 0.3 1.8 1.9 2.0

Latin America -3.4 6.6 4.8 4.4 6.3 7.2 8.2 7.7 Mexico -6.1 5.1 4.1 4.1 5.3 4.1 4.1 3.5 Brazil -0.6 7.8 5.1 4.5 4.9 4.9 5.4 4.6 Argentina -2.9 9.0 5.8 5.0 15.9 23.2 25.5 22.5 Chile -1.5 5.3 6.0 5.0 0.3 1.4 2.5 2.9

Western Europe -4.1 1.8 1.5 1.7 0.6 1.8 2.3 1.7 Eurozone -4.0 1.7 1.5 1.6 0.3 1.6 2.2 1.7

Germany -4.7 3.5 2.1 2.0 0.2 1.1 1.5 1.6 France -2.5 1.6 1.5 1.8 0.1 1.7 1.7 1.8 Italy -5.1 1.0 0.8 1.0 0.8 1.6 1.5 1.7 Spain -3.7 -0.2 0.7 1.2 -0.2 1.7 1.5 1.6

Other Western Europe -4.4 2.0 1.8 1.8 1.5 2.5 2.7 1.8 UK -5.0 1.7 1.7 1.8 2.2 3.3 3.6 1.9 Norway -1.3 -0.1 1.1 2.0 2.2 2.3 1.6 2.3 Sweden -5.3 5.1 3.4 2.5 -0.3 1.1 1.9 2.3 Switzerland -1.9 2.7 2.1 2.0 -0.5 0.7 0.9 1.5

EMEA -3.4 3.9 4.1 3.9 7.7 5.9 6.7 6.5 Czech Republic -4.1 2.1 2.0 2.3 1.0 1.4 2.2 2.4 Hungary -6.5 1.0 2.5 3.1 4.2 4.9 3.2 3.4 Poland 1.7 3.8 3.9 3.4 3.5 2.6 2.9 2.8 Russia -7.9 3.2 4.8 3.5 11.7 6.9 9.5 8.5 Turkey -4.7 7.7 4.2 4.3 6.3 8.7 7.1 6.4 Ukraine -15.1 5.5 4.0 5.1 16.0 9.5 8.7 8.0 Romania -6.9 -2.0 1.5 3.5 5.6 6.1 5.5 4.6 Egypt* 4.7 5.1 6.0 6.1 15.5 11.7 11.9 11.1 Israel 0.8 4.0 3.4 3.6 3.9 2.7 3.3 3.1 Saudi Arabia 0.1 3.6 4.4 4.8 5.1 5.4 6.5 7.0 UAE -2.9 1.7 3.3 4.1 1.3 0.7 2.1 3.3 South Africa -1.8 2.6 3.5 3.1 7.2 4.3 3.9 5.5

Asia-Pacific 0.3 6.7 4.8 5.2 0.8 2.2 2.3 2.1 Japan -6.3 4.3 1.1 2.0 -1.3 -1.1 -0.7 -0.5 Australia 1.3 2.7 3.6 4.1 1.9 2.9 3.1 3.1 New Zealand -1.7 1.6 2.8 3.5 2.1 2.3 4.0 2.3

Asia ex Japan 5.7 8.9 7.6 7.5 2.6 5.0 4.8 4.0 China 9.1 10.0 8.9 8.6 -0.7 3.3 3.9 2.9

Asia ex Japan and China 2.4 7.8 6.2 6.3 5.1 6.2 5.4 4.8 Hong Kong -2.8 7.0 5.2 4.6 0.5 2.3 4.4 4.2 India 6.8 9.2 8.0 8.2 10.9 11.8 7.1 6.1 Indonesia 4.5 6.0 6.4 6.3 4.8 5.1 6.3 5.2 Malaysia -1.7 7.1 5.1 4.9 0.6 1.8 3.0 2.2 Philippines 1.1 6.8 5.0 5.8 3.3 4.0 4.5 4.8 Singapore -1.3 14.8 5.2 5.8 0.6 2.8 3.2 2.9 South Korea 0.2 6.1 4.9 4.8 2.8 3.0 3.8 3.3 Taiwan -1.9 9.6 4.7 4.5 -0.9 1.0 2.3 2.0 Thailand -2.3 7.9 5.3 4.3 -0.8 3.3 3.8 3.1 Vietnam 5.3 6.7 7.5 7.8 7.1 9.0 9.9 9.4

Notes: Calendar year; except for * which is based upon Egyptian fiscal year (July-June); Global and regional aggregates are calculated using chain nominal GDP (USD) weights Source: HSBC Economics

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Notes

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Notes

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Disclosure appendix Analyst Certification Each analyst whose name appears as author of an individual chapter or individual chapters of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the chapter(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein.

Basis for financial analysis This report is designed for, and should only be utilised by, institutional investors. Furthermore, HSBC believes an investor's decision to make an investment should depend on individual circumstances such as the investor's existing holdings and other considerations.

HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its credit research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a six-month time horizon; and 2) from time to time to identify trade ideas on a time horizon of up to three months, relating to specific instruments, which are predominantly derived from relative value considerations or driven by events and which may differ from our long-term credit opinion on an issuer. HSBC has assigned a fundamental recommendation structure only for its long-term investment opportunities, as described below.

HSBC believes an investor's decision to buy or sell a bond should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of terms as well as different systems to describe their recommendations. Investors should carefully read the definitions of the recommendations used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the recommendation. In any case, recommendations should not be used or relied on in isolation as investment advice.

Definitions for fundamental credit recommendations Overweight: The credits of the issuer are expected to outperform those of other issuers in the sector over the next six months

Neutral: The credits of the issuer are expected to perform in line with those of other issuers in the sector over the next six months

Underweight: The credits of the issuer are expected to underperform those of other issuers in the sector over the next six months

Prior to 1 July 2007, HSBC applied a recommendation structure in Europe that ranked euro- and sterling-denominated bonds and CDS relative to the relevant iBoxx/iTraxx indices over a 3-month horizon.

Rating changes for long-term investment opportunities Recommendation History of OCBC

From To Date

Not Rated Neutral 2009-12-17Source: HSBC

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Recommendation History of AXIS BANK LTD

From To Date


Recommendation History of BANK OF BARODA

From To Date


Recommendation History of STATE BANK OF INDIA

From To Date

Overweight Neutral 2007-02-05Not Rated Overweight 2006-12-18

Source: HSBC

Recommendation History of BOC HONG KONG HOLDINGS

From To Date


Recommendation History of DAH SING BANKING GROUP

From To Date

Underweight Neutral 2010-03-25Not Rated Underweight 2009-08-13

Source: HSBC

Recommendation History of ALLIANCE BANK (KAZAKHSTAN)

From To Date

Underweight Neutral 2008-10-30Not Rated Underweight 2008-03-18

Source: HSBC

Recommendation History of ALFA BANK

From To Date


Source: HSBC

Recommendation History of EXPORT-IMPORT BANK OF CHINA

From To Date


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Recommendation History of WOORI FHC

From To Date

Underweight Neutral 2009-10-30Neutral Underweight 2008-10-22Overweight Neutral 2007-04-03Not Rated Overweight 2006-12-18

Source: HSBC

Recommendation History of BANK OF EAST ASIA

From To Date

Not Rated Underweight 2009-12-17Source: HSBC

Recommendation History of UOB

From To Date


Source: HSBC

Recommendation History of ICICI BANK

From To Date

Overweight Neutral 2008-06-02Neutral Overweight 2008-03-31Underweight Neutral 2008-03-04Overweight Underweight 2007-03-05Not Rated Overweight 2006-12-18

Source: HSBC

Recommendation History of CITIC BANK INTERNATIONAL LIMIT

From To Date


Recommendation History of SBERBANK RF

From To Date

Not Rated Overweight 2009-01-27Not Rated Not Rated 2008-09-05

Source: HSBC

Recommendation History of BANGKOK BANK

From To Date


Source: HSBC

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Recommendation History of KOREA EXCHANGE BANK

From To Date


Source: HSBC

Recommendation History of DEVELOPMENT BANK OF KAZAKHSTAN

From To Date


Recommendation History of BANK OF INDIA

From To Date


Source: HSBC

Recommendation History of ATF BANK

From To Date


Recommendation History of KAZKOMMERTSBANK

From To Date

Neutral Overweight 2009-10-16Underweight Neutral 2008-06-20Not Rated Underweight 2008-03-18

Source: HSBC

Recommendation History of EURASIAN DEVELOPMENT BANK

From To Date

Not Rated Overweight 2010-01-19Source: HSBC

Recommendation History of KOREA DEVELOPMENT BANK

From To Date

Underweight Neutral 2009-03-09Neutral Underweight 2008-12-17Not Rated Neutral 2008-05-28

Source: HSBC

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Recommendation History of SHINHAN

From To Date


Source: HSBC

Recommendation History of HANA FGL

From To Date

Underweight Neutral 2009-12-17Neutral Underweight 2008-10-22Not Rated Neutral 2008-06-06

Source: HSBC

Recommendation History of BANK VTB OAO

From To Date


Recommendation History of HALYK BANK

From To Date

Neutral Overweight 2009-03-25Underweight Neutral 2008-10-30Neutral Underweight 2008-05-06Not Rated Neutral 2008-03-18

Source: HSBC

Recommendation History of EXPORT-IMPORT BANK OF KOR

From To Date


Recommendation History of CHINA DEVELOPMENT BANK

From To Date


Recommendation History of INDUSTRIAL BANK OF KOREA

From To Date


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Distribution of fundamental credit opinions As of 10 March 2011, the distribution of all credit opinions published is as follows:

___All Covered Companies___ Companies where HSBC has provided Investment Banking in the past 12 months

Count Percentage Count Percentage

Overweight 123 21 43 35Neutral 339 58 113 33Underweight 124 21 47 38

Source: HSBC

HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

ABU DHABI COMM BANK ADCB.AD 2.28 11-Mar-2011 6, 7, 11ALFA BANK - - - 1, 2, 5, 6, 7, 11ALLIANCE BANK (KAZAKHSTAN) - - - 11ATF BANK - - - 11AXIS BANK LTD AXBK.BO 1285.05 11-Mar-2011 1, 2, 4, 5, 7, 11BANCO BRADESCO BBDC4.SA 30.22 11-Mar-2011 1, 2, 4, 5, 7, 11BANCO DO BRASIL BBAS3.SA 28.01 11-Mar-2011 1, 2, 5, 6, 7, 11BANGKOK BANK BBL.BK 158.50 11-Mar-2011 6, 7, 11BANK OF BARODA BOB.NS 909.35 11-Mar-2011 1, 5, 6, 7, 11BANK OF EAST ASIA 0023.HK 33.95 11-Mar-2011 1, 2, 5, 6, 7, 11BANK OF INDIA BOI.NS 466.30 11-Mar-2011 1, 4, 5, 6, 7, 11BANK OF MOSCOW - - - 6, 7BANK VTB OAO VTBRq.L 6.58 11-Mar-2011 1, 2, 5, 7, 11BOC HONG KONG HOLDINGS 2388.HK 24.85 11-Mar-2011 4, 11CHINA DEVELOPMENT BANK - - - 1, 2, 5, 6, 7, 11CITIC BANK INTERNATIONAL LIMIT - - - 1, 5, 6, 7DBS GROUP DBSM.SI 14.36 11-Mar-2011 1, 5, 6, 11DEVELOPMENT BANK OF KAZAK - - - 6, 7, 11EURASIAN DEVELOPMENT BANK - - - 1, 5, 11EXPORT-IMPORT BANK OF CHI - - - 1, 2, 5, 7, 11EXPORT-IMPORT BANK OF KOR - - - 1, 2, 5, 6, 7, 11GAZPROM BANK - - - 6, 7HALYK BANK HSBKq.L 10.49 11-Mar-2011 2, 7, 11HANA FGL 086790.KS 46150.00 11-Mar-2011 2, 7, 11ICBC - - - 1, 5, 7, 11ICICI BANK ICBK.NS 1014.55 11-Mar-2011 1, 2, 4, 5, 6, 7, 11INDUSTRIAL BANK OF KOREA - - - 1, 2, 5, 7, 11ITAUSA - - - 4KAZKOMMERTSBANK KKGByq.L 7.70 11-Mar-2011 2, 6, 7, 11KOREA DEVELOPMENT BANK - - - 1, 5, 7, 11KOREA EXCHANGE BANK 004940.KS 9100.00 11-Mar-2011 1, 2, 5, 6, 7, 11OCBC OCBC.SI 9.27 11-Mar-2011 1, 5, 6RUSSIAN AGRICULTURAL BANK - - - 5, 7SBERBANK RF SBER03.MM 3.48 11-Mar-2011 2, 7, 11SHINHAN - - - 6, 7, 11STATE BANK OF INDIA SBI.NS 2589.75 11-Mar-2011 1, 2, 4, 5, 6, 7, 11UOB UOBH.SI 18.74 11-Mar-2011 5, 6, 7, 11WOORI FHC 053000.KS 14600.00 11-Mar-2011 1, 2, 5, 6, 7, 11

Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 28 February 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services.

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6 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services.

7 As of 31 January 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services.

8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 13 March 2011. 2 All market data included in this report are dated as at close 08 March 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

4 As of 28 February 2011, HSBC beneficially owned 5% or more of a class of common equity securities of the following company(ies): AXIS BANK LTD

5 As of 28 February 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more of the total capital of the subject companies securities in the market for the following Company(ies): AXIS BANK LTD, STATE BANK OF INDIA, BOC HONG KONG HOLDINGS, BANCO BRADESCO, ICICI BANK, ITAUSA

6 As of 25 February 2011, HSBC owned a significant interest in the debt securities of the following company(ies) : ALLIANCE BANK (KAZAKHSTAN, EXPORT-IMPORT BANK OF CHI, WOORI FHC, BANK OF EAST ASIA, DBS GROUP, BTA BANK, ICBC, EURASIAN DEVELOPMENT BANK, KOREA DEVELOPMENT BANK, HANA FGL, BANK VTB OAO, EXPORT-IMPORT BANK OF KOREA, CHINA DEVELOPMENT BANK, INDUSTRIAL BANK OF KOREA.

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Disclaimer * Legal entities as at 31 January 2010 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited., The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.

Issuer of report HSBC Bank plc 8 Canada Square

London, E14 5HQ, United Kingdom

Telephone: +44 20 7991 8888 Fax: +44 20 7992 4880

Website: www.research.hsbc.com

In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FSA) and those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the researchreport, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. © Copyright. HSBC Bank plc 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA (P) 142/06/2010 and MICA (P) 193/04/2010

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EM

Ban

ks

By Olga Fedotova and Keerthi Angammana

Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns

Fundamentals are improving, supported by a traditional banking business model, fast economic

growth and favourable demographics

We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.

Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks

to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are

attractively priced but wait for better entry point

Disclosures and Disclaimer This report must be read with the disclosures and analyst

certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Glo

bal E

merg

ing

Mark

ets

– C

red

it Stra

teg

y

Olga FedotovaAnalystHSBC Bank plc+44 20 7992 [email protected]

Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible forresearch on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst coveringRussian, Kazakh and Ukrainian credits.

March

2011

EM BanksLights back on … but not for all

Global Emerging Markets – Credit Strategy

March 2011Keerthi Angammana, CFA

Analyst

HSBC Bank plc

+44 20 7991 5431

[email protected]

Keerthi Angammana is Head of Fixed Income Quantitative Research, based in London. Keerthi has worked at HSBC for three years, initially as a strategist

in Central and Eastern Europe rates and credit markets. Keerthi is a CFA charterholder.

Yi HuAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2996 [email protected]

Yi joined the Asia credit research team in February 2009, focusing on financial institutions. Yi came to HSBC in September 2007 after completing a Masters degree at the London School of Economics. At HSBC, she has worked in both equity research in Asia and with the credit research team in Europe.

Devendran Mahendran, CFAAnalystThe Hongkong and Shanghai Banking Corporation Limited, Hong Kong+852 2822 [email protected]

Devendran joined HSBC in 2000 and has worked as a credit analyst since 1994. He started his career in 1991 at the Malaysian central bank where he spentthree years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.

Ksenia MishankinaAnalystHSBC Bank plc+44 20 7992 [email protected]

Ksenia joined HSBC EMEA credit team in June 2009. Prior to that, she has had one year of experience at a leading investment bank having joined on agraduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.

Pavel Simacek, CFAAnalystHSBC Bank plc+44 20 7992 [email protected]

Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerableexperience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analystdesignation and a member of the CFA Institute.

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