The most defensive bank stocks on earth

(From Mizuho Securities Asia Ltd)
The most defensive bank stocks on earth
Top picks for panic conditions
Given the historic sell off across global markets in the past few days, investors have to be thinking either exit or ultra-defensive as far as banks stocks are concerned. Following is our view of the most defensive bank stocks on earth.
As a rule of thumb, we are looking for bank stocks that offer a solid 3.5% dividend yield, with no doubt about the bank’s ability to maintain the dividend, and large cap/high market share institutions with better than average profitability and capital strength.
Our list of favourites is understandably quite short. We think investors could consider the following names:
Fig 1  The five most defensive banks are all in Asia

			Dividend			Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
HSB	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2

Source: Bloomberg, Mizuho research
Skip the major global banks
The major global banks have not yet fully recovered from the Wall Street collapse of 4Q08 and the ensuing global recession in 2009 and are at the epicentre of current economic concerns. As a result, most of these banks are in need of balance sheet repair and are not in a position to pay big dividends, which is key for defensive investors.
We would be wary about looking at valuations out of context for these banks. PBV multiples are generally below 1.0x for the global banks, which we consider to be a distress signal.
The major European banks rank as least attractive at this point, despite bargain basement valuations. In banking geography can often be destiny. The Europeans naturally have the highest exposure to the troubled PIIGS markets of Portugal, Ireland, Italy, Greece, and Spain. We are witnessing a slow motion sovereign debt default in this region. It is way too early to call the bottom for European banks.
The top US banks have made some progress since the dark days of 4Q08, but the weak US economy continues to drag financial performance. The recent scare about the US government debt limit does not add to investor confidence for these names.
Fig 2  Global bank stocks are not in a defensive position at present

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Santander	SAN SM	NR	5.5%	10.6%	9.20%	5.3
BNP Paribas	BNP FP	NR	5.0%	10.9%	9.20%	5.0
HSBC	5 HK / HSBA LN	NR	4.5%	9.5%	10.53%	4.6
Barclays	BARC LN	NR	2.1%	7.3%	10.80%	1.8
Deutsche	DBK GR	NR	2.1%	5.4%	8.70%	1.7
JPMorganChase	JPM US	NR	1.5%	12.3%	9.80%	1.0
Bank of America	BAC US	NR	0.4%	5.8%	8.60%	0.2
Citigroup	C US	NR	0.05%	6.6%	10.75%	0.0
UBS	UBS US	NR	-	17.2%	15.30%	-
RBS	RBS LN	NR	-	-1.5%	10.70%	-
Lloyds	LLOY LN	NR	-	-1.4%	10.20%	-

Source: Bloomberg, Mizuho research
China banks: More defensive than you might think
Despite market worries this summer about iffy loans to local government financing vehicles, we consider the Big 4 Chinese banks defensive stock plays. The combination of high dividend yields, high ROEs, and high Core Tier 1 capital strikes us as very appealing. Valuations may not be cheap compared to bombed out global bank stocks, but the H-shares are currently trading at 2.0x PBV, which is the all-time low.
Fears about a possible credit shock this year are overdone in our view, although we see a credit cycle downturn as inevitable. Provision costs will be on the upswing this year. Even so, we expect the H-share banks to report 23% earnings growth in 2011.
Dividend payouts are solid for the Chinese banks since earnings are not under pressure.
Fig 3  Big is beautiful and tends to be defensive in China

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2
BOC	3988 HK	BUY	4.2%	18.2%	10.09%	7.7
ABC	1288 HK	BUY	3.5%	22.1%	9.75%	7.5
Less defensive
Bocom	3328 HK	HOLD	2.3%	20.2%	9.37%	4.4
Merchants	3968 HK	HOLD	2.4%	22.7%	8.04%	4.3
Citic	998 HK	HOLD	2.6%	19.3%	8.45%	4.2
Minsheng	1988 HK	SELL	2.1%	18.3%	8.08%	3.1

Source: Bloomberg, Mizuho research
Rest of Asia: Mighty Malaysia
The top dividend payers in the rest of Asia include major banks in Malaysia, Hong Kong, and Singapore. Maybank is the most defensive bank stock in the region with its 6.1% dividend yield and high leverage adjusted ROE. Hang Seng Bank comes in second place on the same basis. Five major banks in the region offer dividends yielding 3.5% or more.
High dividend payouts could be under threat over the medium term for some Asian banks, including Hang Seng Bank. Hang Seng’s CEO Margaret Leung commented recently that increased capital requirements could force the bank to review its dividend policy. We see Hang Seng Bank, Maybank, and Public Bank as traditional plays. This is an issue well worth monitoring.
Fig 4  Selected Asian banks

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
Hang Seng Bk	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
UOB	UOB SP	NR	3.5%	13.2%	14.90%	6.8
BOCHK	2388 HK	NR	3.7%	13.6%	11.29%	5.6
Less defensive
CIMB	CIMB MK	NR	3.1%	16.3%	10.94%	5.5
SCB	SCB TB	NR	2.2%	21.0%	10.80%	4.9
OCBC	OCBC SP	NR	3.0%	10.5%	15.40%	4.9
DBS	DBS SP	NR	2.8%	11.0%	13.50%	4.1
BBL	BBL TB	NR	2.7%	11.8%	12.26%	3.9
Kbank	KBANK TB	NR	1.6%	17.9%	6.69%	2.0

Source: Bloomberg, Mizuho research