Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Michael Wu. He is an analyst at Morningstar in Hong Kong. Hello.
Michael Wu: Hi, Holly.
Black: So, one of the areas you look at with your coverage is banking stocks and these are super popular with investors for a lot of reasons. I think one of the key ones is that they are reliable dividend payers. But what are reasons to consider investing in Asian banks?
Wu: Yeah. The key aspect for the Asia banks is the long-term growth prospects that the banks are exposed to. For the Hong Kong banks specifically, it is to the Greater China region and the Singapore banks is a similar exposure, but on top of that they do have emerging markets exposure as well which is benefiting from the favorable demographic which will underpin long-term economic growth. For the banking system in Hong Kong and Singapore, both benefit from a stable regulatory regime and a stable currency regime as well. And fundamentally, for the banks, they do have good underwriting standards, strong capital position and to your point, that would support their sustainable dividend payment.
Black: And how has the prospects for the sector changed under the Covid-19 crisis if at all?
Wu: For the Covid situation specifically, for the banks, it's similar to the global banks in that there will be a slowdown in economic growth which will result in a lower profitability as the quality should deteriorate and that will result in high credit cost. But we do think that is manageable. Government response has been swift. And with that we do expect that the improvement in Covid situation will lead to an early improvement in economic growth relative to developed markets.
Black: So, one of your top picks is OCBC. What is it that you like about that stock?
Wu: Yeah. For OCBC, overall the Singapore banking system is dominated by the three Singapore banks, OCBC is one of them. For them, they do benefit from a cost advantage from a 20% market share in Singapore dollar deposit. And with the Covid situation there is concern over asset quality. Again, we believe this is manageable for the bank. And in the longer term, we do like the strategy where there is an insurance arm in Great Eastern, which is the largest insurer in Singapore, as well as a strong private banking franchise in Bank of Singapore. So, it does provide the bank with diversified income. And we believe this was a key reason why the share price of the bank has outperformed its peers year-to-date. The bank is trading on a 20% discount to our fair value with a dividend yield of 5.5% which we think is attractive.
Black: And you mentioned it has an insurance arm and that's a real growth area in Asia because of demographics and growing wealth. So, another of your top picks in this sector as well and that's Ping An Insurance. What is it you like about this stock?
Wu: That's right. Our top pick in the non-bank financials area is Ping An Insurance. We do expect Ping An to benefit from the long-term growth themes in that there is a rising income wealth in China and that should drive demand for insurance products. There's also under-penetration of insurance products in China and obviously the aging population and greater awareness of critical illness do underpin demand for insurance products in the long term. Specifically, for Ping An, we do like the strong management execution where they have been able to acquire customers at a rapid pace. They also have a diversified distribution platform. Besides online they also have an agency network as well as Ping An Bank which they can explore and distribute the insurance product set. We do believe that the insurer is trading on a 20% discount on fair value, it is attractive.
Black: Michael, thank you so much for your time. For Morningstar, I'm Holly Black.
