26 June 2018
Indian Banks: The final cleanup

Indian banks are going through the final phase of their balance-sheet cleanup. This completes a five-year process of purging legacy non-performing loans from the sector, and should see large public-sector banks return to profitability over the next 12 to 18 months

While we are positive on the sector’s fundamental momentum, we observe that spreads are relatively tight. We also expect significant issuance over the next two years as 57% of hard-currency Indian bank bonds will mature by 2020.

Indian Banks: A fundamental overview

In India, public sector banks have been harder hit than their private counterparts. Will that trend continue? We take a look 


Indian banks’ profitability has come under pressure over the past two years as the costs associated with cleaning up their balance sheets overwhelmed their earnings. These include not just direct costs, such as higher provisioning charges, but also the decline in income resulting from the rising load of non-performing loans. Consequently, net interest margins have been under pressure. Public Sector Banks (PSBs) have been harder hit than their private counterparts due to their higher exposure to troubled assets. We expect this to be the last year of negative profitability for them.

Indonesia: May trade deficit is the second worst in four years

The deficit of -$1.52bn is the second worst in four years and is expected to further deteriorate to -2.5% of GDP in the second quarter. We expect all of this to keep the rupiah on the defensive but another hike this Thursday should provide some relief

Indonesia’s strong import growth in the past two months has resulted in it's two largest trade deficits since April 2014.  

May imports remained strong posting an annual increase of 28.2% year on year, higher than market expectations but slower than April’s pace of 35.2%. Exports improved in May posting a 12.5% growth in May after April’s 9.6% increase from a year ago. 

We now expect the second quarter current account deficit to be around -$6.5bn or -2.46% of GDP, worse than the first quarter deficit of -$5.5bn or -2.15% of GDP

However, exports remain relatively weak when compared to the strong growth of 25% in May and 14% in April. Strong oil imports resulted in a large net oil deficit that mainly accounted for the worsening of the trade balance. Net oil balance was a larger deficit of -$1.2bn in May, worse than April’s deficit of -$1.1bn. Despite the export improvement, May trade deficit amounted to -$1.5bn from April deficit of -$1.6. The April-May trade balance worsened to a total deficit of -$3.2bn, from a year-ago surplus of $1.9bn.

This reversal does not bode well for the second quarter current account. 

We now expect the second quarter current account deficit to be around -$6.5bn or -2.46% of GDP, worse than the first quarter deficit of -$5.5bn or -2.15% of GDP. 

The weak trade and current account position would likely keep IDR on the defensive. Relief from recent IDR weakness would likely come from another policy rate hike at this Thursday's Bank Indonesia policy rate meeting.

Taiwan’s electronic sector holds up well but keep an eye on market volatility

The export-driven economy seemed to be doing fine in May as electronics supported industrial production growth. As trade tensions escalate, we forecast USD/TWD to reach 30.60 by the end of 2018 

Industrial production grew 7.05% year on year, of which integrated circuit production grew 17.56%YoY and electronic parts production grew at 9.38% YoY. Other computer parts grew by 19.74%, mainly brought by the production of cameras used in new handset models. 

But this is data from May - trade tensions have escalated since

It is true that data in May shows Taiwan's manufacturing industry, and therefore the economy was running well. But trade tension between Mainland China and the US have escalated since. 

We believe if a trade war materialises between Mainland China and the US, then world trade volume would shrink, and that would put Taiwan's export-driven manufacturing industry at risk. 

We forecast USD/TWD to reach 30.20 by the end of 1H18 and 30.60 by the end of 2018. 

Today's bearish sentiment, arising from the news that the US could ban Chinese companies' investments in the US for security reasons, has fueled depreciation of the yuan as well as the new Taiwan dollar. 

The market is very sensitive to news relating to a trade war, and market participants should watch out for increasing volatilities in asset markets. 

Singapore May inflation noses a little higher

All items consumer price inflation is still only 0.4%YoY (May), but the MAS core inflation rate has also edged up and now stands at 1.5%YoY. 

Rising inflation signals that the economy continues to make moderate progress

The 0.4% inflation rate for Singapore remains very low by historical standards, but the Monetary Authority of Singapore (MAS) tends to focus on its 'core' measure. This, unlike most core measures that exclude food and energy, excludes housing and private road transport. With public provision of housing and its associated rents a key channel of government policy, and the certificate of entitlement (COE - a compulsory license) for driving a car in Singapore another, the MAS' core measure comes up with an inflation rate of 1.5% - not a million miles away from the upper half of a 1-2% range that it outlined in its April Monetary Policy statement. 

What's driving inflation? History...

Housing delivered a big inflation swing on the month (-2.6% rising to +2.5%YoY), though this is basically just the unwinding of the quarterly public housing rebate and can be ignored. Imputed rentals on owner-occupied housing continue to rise, however, suggesting that the private accommodation market remains in slow recovery mode. 

The other excluded element of the MAS core measure, private road transport is partly a function of the COE. But since May, when on average it was a little higher than April, the COE has trended down. This may provide a bigger drag in June than it was for this latest release, keeping the headline rate from moving abruptly higher even if it has no bearing on the core rate. Transport inflation as a whole rose 0.7pp from April, though the monthly increase was unchanged at 0.2%. There is nothing really going on here apart from some volatile history. 

Moreover, although they are excluded from the core measure of inflation for being too heavily influenced by government policy to be meaningful. excluding the items above does suggest a strength in the underlying state of the economy that we are not convinced exists. For example, COE prices may be excluded from the MAS core price,  but they are still a legitimate indicator of baseline domestic demand, and they are currently consistently falling across all price brackets for cars.

Other subcomponents showing weakness include food, which dipped 0.1%pp to 1.3%YoY, and clothing and footwear (0.6%YoY down from 0.8%). Most other goods, including (unhelpfully) miscellaneous goods, saw inflation rise. In the case of the miscellaneous component, inflation rose to 1.1% from 0.5%, though this seems to be almost entirely down to alcohol and tobacco (+5.7%YoY) even if these prices did dip 0.3%MoM, and this should be less of a boost in June. 

October MAS meeting probably leaves policy unchanged

Putting this all together, the story of economic improvement in Singapore remains intact, though hardly looks invulnerable. As we near the October MAS monetary policy decision, as things stand, it is hard to see there being another tightening. And the most likely outcome, especially taking into account the increasingly uncertain external backdrop, is for policy to remain on hold. 

China RRR cut reduces risks from reform and trade war

A targeted cut in the reserve requirement ratio of 0.5 percentage point will add CNY700 billion of liquidity to facilitate debt-to-equity swaps and increase loans to SMEs. It's a policy that kills two birds with one stone, by relieving credit pressure from financial deleveraging reform and cushioning the potential impact of a trade war

Creative RRR cut to reduce two biggest risks in the economy

China has cut its reserve requirement reserve ratio (RRR) by 50 basis points, releasing CNY700billion cash. But this cash will be restricted to two purposes. State-owned and large banks will use CNY500billion for "debt-to-equity swaps" while other banks, including foreign lenders, will use the remaining CNY200billion to lend to SMEs. 

We think this dual purpose RRR cut will reduce the two biggest risks facing the economy by: 

  1. relieving corporate default pressure from financial deleveraging reform;
  2. providing a cushion for SMEs that could be affected by trade wars.
Reading time around 8 minutes

Good MornING Asia - 26 June 2018

With trade tensions spilling over into asset markets, it is time to consider if our risk scenarios are becoming the base case

In this bundle