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Money and Investing
Riding the hottest financial stocks in Asia

• The list of Asia's top 100 bank stocks

Hottest Frank Lim is spoiled for choice. As fund manager of the $29-million United Global Capital Fund, he can invest in thousands of banks and financial institutions around the world. The Singaporean likes to keep his portfolio focused, however, so his fund owns only about 60 stocks. Lim spoke with Asiaweek's Cesar Bacani.

How do you see the environment for financial stocks?
There are increasing signs of a slowdown in [the developed] economies. Second-quarter growth in consumption in the U.S., for example, is about half of the rate in the first quarter. The risk of the Federal Reserve going on a tightening mode [on interest rates] again is, in our view, not entirely over. Higher oil prices could filter down to inflation. However, that does not actually have much impact on U.S. financial stocks because the Fed is clearly nearing the end of the hiking cycle.

Many people are taking a leaf from history. Financial stocks outperformed when the 1988 to 1989 and 1994 to 1995 rate-rise cycles stopped. What we have right now in 1999-2000 could very well be similar. But there was strong earnings growth in 1995. You will not see that in this cycle. Both revenue growth and loan growth were only at 7% in the second quarter, for example. Asset quality is also a worry [this time around]. Sometime in June, U.S. regional bank Wacovia, a leader in asset quality, had to increase its loan-loss provision. There is always the risk that if the economy really tips over and the Fed hikes too much, there will be defaults.

How do all these affect your allocations?
We are mildly overweight in the U.S. and aggressively overweight in Asian banks. In Asia, the two markets we look at seriously are Singapore and Hong Kong. There is a lot of value in other countries like South Korea, but there are still some negatives. In Malaysia, loan growth in the consumer sector is healthy, but that in the corporate sector continues to be weak. Taiwan is still overbanked and the industry faces structural problems like [inadequate] corporate governance, poor transparency and lack of consolidation momentum.

The Philippines and Thailand?
Asset quality in both places remains a major concern and loan growth is not very visible. There are still macro-economic risks — the macro factors, not just earnings, drive Asian countries. The banks are cheap, but we can afford not to own them.

How about Japan?
I still have lingering concerns about the credit situation there. However, we do own Sumitomo Trust & Banking and Sumitomo Bank. The group will become the second-largest financial operation in Japan after the merger with Sakura Bank. Sumitomo companies are focused on efficient management, follow a business model that emphasizes efficient use of assets, have a high [capital-adequacy] ratio of 9.5% and are ahead in cutting staff. We also own Bank of Tokyo-Mitsubishi [currently the largest bank], but it is not a core holding.

Which Hong Kong banks do you like?
I'm not exactly excited about HSBC. We see fair value ranging from HK$86 to HK$94. So there is a big premium in its current price [of HK$116]. One thing that HSBC offers Hong Kong investors, and I think that is why it has done well, is that 70% of its business is outside Hong Kong, which at the moment is not exactly very attractive in terms of business.

Margins have improved for Dah Sing Bank. It is the smallest bank [in the territory] but its valuation is very undemanding. Hang Seng Bank has a competitive advantage in funding cost. There is worry that after deposit rates [on savings accounts] are deregulated in 2001, Hang Seng Bank's margins would be affected. We have done our sums — the impact will be limited to about 20 basis points because only 40% of Hang Seng's deposits are demand deposits. People will continue to bank with it because it has a lot of branches. The bank has a huge customer base, which offers great cross-selling potentials. Hang Seng's exposure to the mainland is also a positive.

What about Singapore?
We own UOB [United Global Capital Fund's ultimate parent], OUB and DBS. The merger between DBS and POSBank is proceeding well, but you still see costs escalating with spending on information technology and personnel. Loan growth is best in OUB, followed by UOB. The disappointment is with OCBC and DBS.

What other bank stocks do you favor?
In Korea, we own Kookmin Bank, a top-quality institution with a diversified retail business, and one that has aggressively cleaned up its balance sheet. It owns 74% of Kookmin Credit Card, which has done very well. We don't have H&CB, but it is on our radar screen — its forecast p/e is something like four to five times forecast earnings. We don't have any investment in India at the moment, but we are looking.

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