HSBC Global Emerging Markets EM Banks JP

110310_28253 EM Banks (Credit) - Olga Fedotova_f:Layout 1 3/11/2011 3:51 AM Page 1
Olga Fedotova
Analyst
HSBC Bank plc
+44 20 7992 3707
olga.fedotova@hsbcib.com
Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible for
research on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst covering
Russian, Kazakh and Ukrainian credits.
Global Emerging Markets – Credit Strategy
March 2011
Keerthi Angammana, CFA
Analyst
HSBC Bank plc
+44 20 7991 5431
keerthisri.angammana@hsbcib.com
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.
EM Banks
EM Banks
Yi Hu
Analyst
The Hongkong and Shanghai Banking Corporation Limited, Hong Kong
+852 2996 6539
yi.hu@hsbc.com.hk
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.
Lights back on … but not for all

Devendran Mahendran, CFA
Analyst
+852 2822 4521
devendran@hsbc.com.hk
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 spent
three years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.
Ksenia Mishankina
Analyst
HSBC Bank plc
+44 20 7992 3703

ksenia.mishankina@hsbcib.com Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns
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 a
graduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.
Fundamentals are improving, supported by a traditional banking business model, fast economic
Pavel Simacek, CFA growth and favourable demographics
Analyst
HSBC Bank plc
+44 20 7992 3714
pavel.simacek@hsbcib.com We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.
Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerable
experience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analyst
Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks
designation and a member of the CFA Institute. to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are
attractively priced but wait for better entry point
By Olga Fedotova and Keerthi Angammana

March 2011
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
EM Banks abc
March 2011
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
The global financial crisis showed that EM banks were not immune to global events. However, in contrast to Olga Fedotova
Analyst
their developed market counterparts, most EM banks, particularly those in Asia and Latin America, have HSBC Bank plc
already shaken off the effect of the financial market dislocation. With a few exceptions, indications are that that +44 20 7992 3707
the worst is past for asset quality and liquidity problems. Strengthened regulation, reduced leverage and
Keerthi Angammana
increased focus on risk management have made EM banks more resilient to future risks in our view. Analyst
HSBC Bank plc
+44 207 991 5431
EM countries have almost three times the expected growth, over five times the population, but only half keerthisri.angammana@hsbcib.com
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
1
EM Banks abc
March 2011
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.
2
EM Banks abc
March 2011
Contents
Summary 1 EMEA banks 103
Trading Ideas 5 Kazakh banks 104
Alliance Bank 106
EM banks: strength lies in
ATF Bank 107
traditional business model 28
BTA Bank 108
Relative value framework 58 Development Bank of Kazakhstan 109
Bank profiles 65 Eurasian Development Bank 110
Halyk Bank 111
Asian banks 67
Kazkommertsbank 112
China banks 68
Qatar banks 114
China Development Bank 70
Commercial Bank of Qatar 116
Export Import Bank of China 71
Russian banks 118
Hong Kong Banks 72 Alfa Bank 120
BOC Hong Kong 74
Bank of Moscow 121
Bank of East Asia 75
Gazprombank 122
Citic Bank International 76
Russian Agricultural Bank 123
Dah Sing Banking Group 77
Sberbank 124
ICBC (Asia) 78
Vnesheconombank 125
Wing Hang Bank 79
VTB 126
Indian Banks 80
Saudi banks 128
Axis Bank 82
Bank of Baroda 83 UAE banks 130
Bank of India 84 Abu Dhabi Commercial Bank 132
ICICI Bank 85 Emirates NBD 133
State Bank of India 86 National Bank of Abu Dhabi 134
Korean Banks 88 Ukrainian banks 136

Export-Import Bank of Korea 90 Alfa Bank Ukraine 138
Korea Development Bank 91 Privatbank 139
Industrial Bank of Korea 92 Ukreximbank 140
Hana Bank 93 LatAm banks 141
Kookmin Bank 94
Brazilian banks 142
Korea Exchange Bank 95
Banco do Brasil 146
Shinhan Bank 96
BNDES 147
Woori Bank 97
Bradesco 148
Singaporean Banks 98 Itaú Unibanco 149
DBS Bank 99 Votorantim 150
OCBC 100
Appendix 151
United Overseas Bank 101
Bangkok Bank 102 Disclosure appendix 157
Disclaimer 164
3
EM Banks abc
March 2011
This page has been left intentionally blank
4
EM Banks abc
March 2011
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
Financials still offer value particularly given the links between them, which Olga Fedotova
Analyst
even after the rally were strengthened during the financial crisis. With HSBC Bank plc
financials trading around 2 ½ rating notches, or +44 20 7992 3707
Emerging-market spreads have rallied since the olga.fedotova@hsbcib.com
around 40% extra spread relative to comparably
financial crisis, and the financial sector has Keerthi Angammana
rated sovereigns, we think this offers adequate Analyst
outperformed (Figure 1). HSBC Bank plc
compensation for the down-side risk of around
+44 207 991 5431
Fig 1. EM Sector performance, Feb 09-March 2011 two rating notches, on the assumption conditions keerthisri.angammana@hsbcib.com
could revert to where they were in April 2009.

Govt Fin Energy Comm
Fig 2 Sector richness/cheapness (measured in rating
notches; negative numbers indicate richness), EMBI +
1200 CEMBI
OAS(bp )
700 Govt Fin Energy Comm

1.0
200 0.0
Aug-10
Aug -09
-1.0
Feb-09
Feb-10
Feb-11
May-10
Nov-10
May -09
Nov -09
Rich/Cheap
-2.0
-3.0
Source: Reuters, Bloomberg, HSBC calculations -4.0
-5.0
Jun-09
Sep-09
Jan-10
Aug -10
Dec -10
Feb -09
May -
The chart below plots the relative performance of

each emerging-market sector, expressed as their
Source: Bloomberg, Reuters, HSBC Calculations
richness or cheapness. It shows emerging-market
financials remain a leveraged play on sovereigns,
5
EM Banks abc
March 2011
The fundamentals of emerging-market banks are fundamental credit stories that are unlikely to be
improving across the board: the banks have derailed by rate hikes, emerging-market credit
benefited from strengthening economies, while spreads offer an interesting way to reduce
their bonds are supported by a combination of duration while maintaining carry. We recommend
QE2, limited fixed-income investment a cautious stance for the coming months and
opportunities in developed countries, and a switching out of long-dated and subordinated
structural shift in investor preferences towards paper into shorter-duration senior instruments.
emerging markets. The IIF forecasts net private
Fig 4. EM financial spreads and US 10yr, Feb ‘08-Mar ‘11
credit inflows of USD388bn in 2011 and
EM Financials US 10yr
USD394bn in 2012, up from USD127bn in 2009. 1600 4.00
1400 3.50
However, unrest in the Middle East and the 1200 3.00
US 10yr Yield
Spread (bp)
1000 2.50
continuing Eurozone debt distress complicate the
800 2.00
picture. The chart above shows the evolution of 600 1.50
400 1.00
the relative richness/cheapness of the
200 0.50
regions considered. 0 0.00
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Fig 3. Regional richness/cheapness (in rating notches;
negative numbers indicate richness)
Source: Reuters, Bloomberg, HSBC Calculations
Asia EE LatAm MidEast
2.0
1.5 We also see a number of trades that allow
1.0 investors to benefit from relative value
Rich/Cheap
0.5
opportunities across regions and position in the
0.0
-0.5 capital structure.
-1.0
-1.5 Most emerging-market banks in our universe are
Feb-09
Jun-09
Sep -09
Jan -10
Aug-10
Dec -10
May-
expensive relative to their historical performance

and their ratings, and with rate hikes expected, the
Source: Reuters, Bloomberg, HSBC Calculations possibility of overshoot on the downside exists.
Supply will also put pressure on spreads, so that
Another source of risk for the global financial we look for banks with digestible net supply and
markets are expected rate hikes in developed strong deposit funding.
markets.
Cross-regional trade
The USD100bn of new supply expected from recommendation
emerging-market financial-sector issuers this year,
with Brazilian, Indian, Russia and Korean banks Switch into Russian banks from
leading the pack, is likely to be front-loaded to take Brazilian
advantage of still-low developed-market rates. Brazilian banks are some of the strongest
discussed in this report, with well-developed
With an ECB rate hike widely expected in April
regulation, excellent growth prospects and healthy
and US QE2 unlikely to be extended beyond the
profitability. However, they are also expensive,
2Q 2011, March does not appear to be the best
following out-performance by the sovereign, and
month to enter emerging market credits (see our
are likely to be the largest net issuers of external
Fixed Income Allocation, March 2011). But given
debt among emerging-market banks. We estimate
6
EM Banks abc
March 2011
Brazilian banks will be one of the largest net The relative value chart below shows that even
borrowers this year with potential external bond though VTB has rallied relative to BNDES,
supply around USD20bn. around three notches of cheapness are still left
after adjusting for regional differences.
We recommend switching from Brazil into
comparably rated Russian banks. Russia suffered Switch into Russian banks out of
during the financial crisis, but the sector has Indian banks
recovered well and the sovereign-linked credit, We prefer Russian banks because the financial sector
such as VTB and Bank of Moscow, offer a benefits from ample liquidity provided by high oil
superior return. The rapidly improving prices and government support. A fundamental
macroeconomic environment is likely to result in recovery is underway in the banking sector, with
an upgrade by the major rating agencies providing non-performing loans falling. Indian banks are also
further support to the mostly quasi-sovereign benefiting from strong growth, albeit from a low
banks in our Russian universe of banks. The oil- base, but increasing corporate demand for US dollars
exporting country is experiencing strong cash could lead to net supply risk.
inflows with banks mediating the process. The
abundance of liquidity in the banking system will Switch out of SBIIN 15 (Baa2/BBB-/NR, 228bp
fuel expansion in financial services and thus OAS) into BKMOSC Mar 15 (Baa2/NR/BBB- /*,
provide uplift to the domestic banks. All these 349bp) to pick up 120bp (Fig 7-1)
positive developments lead us to favour Russian Fig 7-1. SBIIN vs BKMOSC OAS, Oct 210-Mar 2011
banks over their peers in Brazil.
SBIIN 15 BKMOSC 15 Diff
We suggest switching out of Brazilian policy bank
600 0
BNDES (Baa2/BBB-/BBB-) 19, indicative OAS
400 -100
199bp, to Russian state-owned bank VTB
OAS (bp)
Diff (bp)
200
-200
(Baa1/BBB/BBB) 18, 338bp, to pick up 140bp, or 0
to BKMOSC (Baa2/NR/BBB-) to pick up 150bp. -200 -300
Both BNDES and VTB are likely to be frequent -400 -400

Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
issuers with VTB planning USD4.3bn this year, and

BNDES issuance is likely to be driven by ambitious
infrastructure projects in Brazil. Source: Bloomberg
Fig 7. VTB vs BNDES OAS, Oct 2010-Mar 2011 In non-investment grade, switch into
VTB 18 BNDES 19 Diff CIS government-linked senior from
Asian subordinated
500 300
250 We believe that switching to similarly rated CIS
400
200 senior bonds from Asian subordinated paper
OAS (bp)
Diff (bp)
300 150
would allow investors to improve their position in
100
200 the capital structure while picking up spread and
50
100 0 reducing duration. CIS names, particularly Russia
Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
and Kazakhstan, are likely to benefit from

sovereign-rating upgrades and are supported by
Source Reuters, Bloomberg, HSBC Calculations better margins, an equally attractive growth story
7
EM Banks abc
March 2011
and strong internal liquidity on the back of oil Fig 8. VTB vs BNDES Relative Value, Oct 2010-Mar 2011
export revenues. VTB 18 BNDES 19 Diff
We suggest moving out of CINDBK 20 LT2 5.0 5.00
Rich/Cheap (notches)
(Ba1/NR/BBB-, 320bp OAS), into senior state- 4.00
3.0
Difference
linked VTB 18 ( Baa1/BBB /*-/BBB, 338bp) 3.00
1.0
2.00
In Asia switch from subordinated debt -1.0 1.00
of Hong Kong banks into Indian or -3.0 0.00
Russian senior bonds
Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
Both Indian and Hong Kong banks are seeing
strong growth. The main driver for Hong Kong Source Reuters, Bloomberg, HSBC calculations
banks, however, is expansion into China, often at

Fig 9. BOOIN vs BCHINA, Oct 2010-Mar 2011
the expense of profitability and credit quality.
Indian banks enjoy underpenetrated domestic BOIIN 15 BCHINA 20 Diff
market with emerging credit demand, both from
80
retail and corporates, resulting in stronger 250 60
profitability and more healthy growth. 40
OAS (bp)
Diff (bp)
150
20
We suggest switching from BCHINA 20 50 0
(A1/BBB+/A-, 208bp OAS), into BOIIN 21 -20
-50 -40
(Baa3/BB/NR, 288bp OAS), to pick up spread,
Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
hedge against rapid expansion into China and

participate in Indian growth.
Source Reuters, Bloomberg, HSBC Calculations
Indian banks benefit from a stable funding base,

the potential for healthy growth as a result of an We also prefer senior debt of Russian banks over
under-leveraged population and adequate subordinated debt of Hong Kong banks. We are
capitalization. They will be frequent issuers this concerned about Hong Kong bank's high exposure
year, but we believe there will be adequate to China's market and real estate in the US.
appetite for this issuance, since the banks are still Therefore we recommend switching out of
BNKEA 20 (A3/BBB+/NR, 252bp OAS) to VTB
new to the market.
18 (Baa1/BBB /*-/BBB, 338bp OAS), Russia’s
We also like Indian ICICI 20 (Baa2/BBB-/NR, second largest bank) to upgrade seniority of the
287bp), but the bank has USD3bn to refinance in debt, get exposure to improving Russian oil
2012 and is likely to come to the market in 2011, so driven macro environment and pick up 87bp. Sell
we would recommend waiting for the new issue. 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
8
EM Banks abc
March 2011
would feel comfortable venturing out into private We expect a total of USD18bn supply to come
universe where our top peak is Alfa Bank. from the CIS region, with USD15bn of external
debt from Russian banks. Neither Ukrainian nor
Buy Kazakh banks as cheapest
Kazakh banks are likely to be heavy issuers.
quasi-sovereign credits in EM
Fig 10. OAS vs historical beta for financial sector, 1 March
ALLIBK and BTAS have emerged from their 2011
restructuring with significantly reduced liabilities
700
and with the Kazakh government as their owner. KAZ
600
Both credits are fundamentally weak on a stand- UKR
500
alone basis with high NPLs and low capitalization, Spread ( bp)
and weak profitability. Hence we initiate longer- 400

RUS y = 47.465x + 194.18
QAT R2 = 0.6687
term fundamental Underweight recommendations 300 ARE IND
BRA SAU
on these two banks in this report. 200
HKG THA
KOR
100 SGP CHN
However the banks have received a credit uplift
0
from government ownership, and now represent -2.0 0.0 2.0 4.0 6.0 8.0 10.0
one of the cheapest EM credits providing high Beta Relative to EMBI
carry and adequate risk/reward short term, in our Source: Reuters, Bloomberg, HSBC Calculations
view. It is important to highlight that ALLIBK
will start repayment of its sinkable bonds only in Figure 10A shows the richness (negative
2014, lightening its immediate repayment burden. numbers) and cheapness of selected countries
relative to the HSBC Forecast Adjusted Rating
As a trading call, therefore, we advocate buy
model (see Emerging sovereigns: A new tool for
ALLIBK 17 (Caa2/B-/B-, 991bp OAS) and BTAS
identifying opportunities in sovereign CDS,
18 (NR/NR/B-, 798bp).
January 2010).
The positive macroeconomic environment in
Fig 10A Relative richness/cheapness of selected countries
Kazakhstan provides additional support for this expressed in rating notches (negative numbers indicate
richness)
buy trading call.
Country Rich/Cheap Country Rich/Cheap
Brazil -3.0 Russia -1.7
In CIS, switch from Ukraine into China 1.8 Saudi Arabia 2.0
Kazakhstan Hong Kong -1.7 Singapore N/A
India 0.2 Thailand -0.9
Banks in Ukraine are generally expensive relative Kazakhstan 0.6 Ukraine -0.4
Korea 1.3 UAE 3.5
to its rating and its beta, and the country has yet to Qatar 4.7
see a full turnaround of the financial sector. Source: HSBC Calculations
Kazakh banks benefit from an improving macro-

economic and operating environment as a result of Switch to EURDEV (A3/NR/BBB)
strengthening oil prices, which is likely to lead to from Russia 15 (Baa1/BBB/BBB)
a sovereign upgrade. We expect limited supply EURDEV is majority-owned by the Russian and
from the region, and for investors interested in Kazakh governments, which translates into strong
participating in single B credits, we suggest support in case of need. The bank enjoys high
switching from Ukrainian state-owned EXIMUK capitalisation (65% of total assets), which means it is
15 (B1/NA/B, 565bp OAS) to Kazakh state- well-positioned for further growth. Even though
owned BTAS 18 (B-/NA/NA, 798bp OAS), or EURDEV could raise up to USD1bn this year, that
ALLIBK 17 (Caa2/B-/B-, 991bp OAS). could be absorbed by investors and should increase
9
EM Banks abc
March 2011
liquidity for the bonds. Switching from RUSSIA 15 GCC banks cheap, but wait for better
(Baa1/BBB/BBB, 159bp) to EURDEV 14 entry point
(A3/BBB/NR, 297bp) offers a spread pick-up of Directly affected by the ongoing unrest in the region,
138bp, cheapness to ratings, and substantially the the Middle Eastern banks are relatively the cheapest
same credit risk. Figure 11 shows the spread in the A-rated emerging-market universe. However,
difference between EURDEV 14 and Russia 15. after adjusting for the regional cheapness of the
Fig 11. EURDEV 14 vs Russia 15, Oct 2010-Mar 2011 Middle East relative to Asia because of its
political instability, we find them not quite as
EURDEV 14 RUSSIA 15 Diff
cheap as spreads alone would indicate. So even if
250 we like switching out of, for example, Korean
400 200 banks from a relative-value standpoint, we would
OAS (bp)
Diff (bp)
300 150 look for a better entry point.

100
200 The issuance risk is lower for Abu Dhabi banks
50
100 0 (USD6bn in 2011) compared with Korean policy
Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
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
Figure 12 shows the relative value between the two
names expressed in rating notches. Even though the economy) which has in the past demonstrated a
strong commitment to the banking sector.
spread has tightened recently, EURDEV 14s still
offer about two notches of cheapness. However, banks there suffer from constrained net-
interest margins and limited growth prospects
Fig 12 Model richness/cheapness of EURDEV vs Russia 15 because of its relatively small population. But
(richness is represented by negative numbers)
they are well-capitalised and enjoy improving
EURDEV 14 RUSSIA 15 Diff
liquidity from rising oil prices, while government
5.0 4.00
support makes their credit closely linked to that of
the government.
4.0 3.00
Difference
3.0 2.00
2.0 1.00
1.0 0.00
Oct-10
Dec-10
Sep-10
Jan-11
Feb-11
Mar-11
Nov-10
Source: Reuters, Bloomberg, HSBC Calculations
10
EM Banks abc
March 2011
Relative value charts, 7 March 2011

OAS vs rating, A-rated or better, 0-5yrs, 7 March 2011
Maturity 0 to 5 years
Asia LatAm MiddleEast
350
300 WOORIB 15 LT2

ADCB 14
COMQAT 14
250
BRADES 13 sub
SABBAB 15
NBADUH 15 WOORIB 15
NBADUH 14 HANABK 15
OAS ( bp)
200 EIBKOR 15 WOORIB 16

INDKOR 15 KEB 16
SHNH AN 15 BAN BRA 14 sub
KDB 15 EIBKOR 13
CITNAT 14 KDB 14 KDB 16
EIBKOR 14
INDKOR 14 WOORIB 15
150
SDBC 14 KDB 13 UOBSP 13 UT2
SDBC 15
EXIMCH 15
EXIMCH 14
100
D BSSP 15
50
AAA AA+ AA AA- A+ A A- BBB+
OAS vs rating, A-rated or better, 5+yrs, 7 March 2011
Maturity 5+ years
Asia MiddleEast
350
C OMQAT 19 LT 2
300
250 BNKEA 20 LT2

OAS ( bp)
BCHINA 20 LT 2
200
ICBCAS 20 sub
EIBKOR 20
EIBKOR 21
150
100
11
EM Banks abc
March 2011
OAS vs rating, BBB rated, 0-5 yrs, 7 March 2011

Asia EE LatAm
400
VT B 15 UT2
350 BKMOSC 15
BKMOSC 13
300 VTB 15
AXSBIN 15
RSHB 14
RSHB 14 ICICI 15
ICICI 16
BOBIN 15 DBKAZ 15
OAS ( bp )
250 SBERRU 15 RSHB 13

BOIIN 15
BANVOR 13
SBERRU 13 SBIIN 15
BRADES 15 SBIIN 14
SBERRU 13
200
BANBRA 15
BRADES 13
BBLTB 15
150
100
A- BBB+ BBB BBB- BB+
OAS vs rating, BBB-rated, 5+ years, 7 March 2011
Maturity 5+ years
Asia EE LatAm
400
350 GPBRU 16
VTB 18 BANVOR 20 sub
BBLTB 29 sub ICICI 20 UT2
VTB 20 CINDBK 20 LT2
VTB 35 VEBBNK 25
300 RSHB 17
RSHB 18
AXSBIN 16 BRADES 19 sub
VEBBNK 20 ICICI 20
DAHSIN 20 LT2 ITAU 20 sub
VEBBNK 17
BRADES 21 sub
OAS ( bp )
250 SBERRU 17
BANBRA 21 LT2 BNDES 19

BBLTB 20
200 BANBRA 20
BNDES 18
BNDES 20
150
100
12
EM Banks abc
March 2011
OAS vs rating, Non-investment grade, 0-5 years, 7 March 2011
EE
800
PRBANK 15
700
KKB 13
PROMBK 15 BCCRD 14 EXIMUK 16 LT2
600
EXIMUK 15
AT FBP 14
OAS (bp )
500
PROMBK 13
ALFARU 15 HSBKKZ 13
400 BKMOSC 15 LT2 ALFARU 13 HSBKKZ 13
GPBRU 14
GPBRU 15
GPBRU 13
300
200
BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C
OAS vs rating, non-investment grade, 5+ years, 7 March 2011
Maturity 5+ years
EE
1000
ALLIBK 17
900
BT AS 25 sub
800
BTAS 18
700
KKB 16
PROMBK 16 UT2
600
ATFBP 16
OAS ( bp)
500
400 HSBKKZ 17
300
200
100
13
EM Banks abc
March 2011
Rchp vs rating, A-rated, 0-5yrs, 7 March 2011
Asia LatAm MiddleEast
5
C ITNAT 14
4
NBADUH 14 NBADUH 15 EIBKOR 15 ADCB 14

SDBC 14 INDKOR 14 KDB 15
2 KDB 14 COMQAT 14
INDKOR 15 WOORIB 15
EXIMCH 15 EIBKOR 14 KDB 16
Ric h/Cheap
SDBC 15 WOORIB 16
EXIMCH 14 EIBKOR 13
1 SABBAB 15
KDB 13
WOORIB 15
BANBRA 14 sub
0
-1
-2
Rchp vs rating, A-rated 5+yrs, 7 March 2011
Maturity 5+ years
Asia
2.5
EIBKOR 20
EIBKOR 16
2.0
EIBKOR 21
1.5
BCHINA 20 LT 2
1.0
Ric h/Cheap
0.5
0.0
ICBCAS 20 sub
-0.5
-1.0
14
EM Banks abc
March 2011
Rchp vs rating, BBB-rated, 0-5yrs, 7 March 2011
Asia EE LatAm
1.0
SBERRU 15 RSHB 14
0.5 VT B 15 VTB 15 UT2
RSHB 14 BKMOSC 15
SBERRU 13
0.0 BKMOSC 13
RSHB 13
BBLTB 15 SBERRU 13 AXSBIN 15
ICICI 16
-0.5
ICICI 15
Rich/Cheap
-1.0
BRADES 15 SBIIN 14
BANBRA 15 DBKAZ 15
-1.5
-2.0
BRADES 13
-2.5
-3.0
Rchp vs rating, BBB-rated, 5+ years, 7 March 2011
Maturity 5+ years
Asia EE LatAm
1.5
VT B 18
1.0 RSHB 17
BBLTB 20
DAHSIN 20 LT2
VT B 20
SBERRU 17
0.5 BANVOR 20 sub
0.0 BRADES 19 sub

ICICI 20
Ric h/C heap
GPBRU 16
-0.5
ITAU 20 sub
-1.0
BANBRA 20
-1.5
BNDES 20 BNDES 19
-2.0
15
EM Banks abc
March 2011
Rchp vs rating, non-investment grade, 0-5 years, 7 March 2011
EE
1 ATFBP 14
-1
PROMBK 13
GPBRU 15 PROMBK 15
-2 GPBRU 13
ALFARU 15 BCCRD 14
ALFARU 13 H SBKKZ 13 KKB 13
GPBRU 14
Rich/Cheap
-3 HSBKKZ 13 EXIMUK 15
-4
EXIMUK 16 LT2
-5
-6
-7
-8
Rchp vs rating, non-investment grade, 5+ years, 7 March 2011
Maturity 5+ years
EE
1 ATFBP 16
-1
-2
HSBKKZ 17
Rich/Cheap
-3
-4
-5
-6
BT AS 25 sub
-7
-8
16
Trade recommendations Asian Banks: total expected supply for the region USD26bn
March 2011
EM Banks
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 Given the bank's special ministerial Credit profile is linked closely to the Mostly funded by internal bonds, which SDBC 14 (Aa3/AA-/A+, 145bp) and
in 3Q 2011. status, 100% state ownership and sovereign given the ownership and role are 0%-risk weighted. SDBC 15 (Aa3/AA-/A+, 135bp) trade
crucial policy role. it plays in China’s economy. Potential slightly rich to their rating and to the
adverse exposure to LGFVs could Asian Financial sector. Asset quality
weigh on asset quality and the bank’s concerns should constrain bonds’
capital structure going forward. 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 100% state owned. CEXIM plays an important policy role of Unlikely to use external debt. EXIMCH 14 (Aa3/Aa-/A+, 122bp) and
in 3Q 2011. promoting trade and its credit profile is EXIMCH 15 (Aa3/Aa-/A+, 127bp) are
inextricably linked to the China likely to continue their stable
sovereign. performance trading rich to the Asian
banking sector.
Source: Bloomberg, Fitch, Moody’s, S&P and HSBC
abc
17
18
Hong Kong Banks: total expected supply USD4bn
March 2011
EM Banks
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 Strong domestic franchise and its credit Limited issue due to pressure to constraint Sell: BCHINA 20 LT2 (A1/BBB+/A-, 208bp)
be resolved in 2Q 2011. profile, underpinned by the strength of its loan growth. Buy: SBERRU 17 (A3/NR/BBB, 253bp) to
parent, Bank of China, majority owned by pick up 45bp, move up in the capital
the government of China. 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 Strong deposit base, no bonds maturing in Sell: BNKEA 20 (A3/BBB+/NR,252bp)
will put pressure on the bank's capital. the next 2 years. We are concerned about the bank's high
Exposure to real estate in China could weigh exposure to China's market and real estate
on asset quality. 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 Strong deposit base, no maturities in 2011- Sell: CINDBK ’20 LT2
business cycle in Hong Kong. Concentration 12. (Baa3/NR/BBB,320bp)
risk to China corporates is a potential Buy Russian state owned VTB 18
concern. Majority shareholding by China (Baa1/BBB *-/BBB, 338bp) to improve rating
Citic Bank is a positive for CBI. 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 Growth in lending into China is a potential Strong deposit base and limited maturities in All DAHSIN bonds are small in size and
sector assets). source of asset quality risk but the cyclical 2011-12. relatively illiquid.
strength of the economies of Hong Kong and
China will allow the bank to preserve its
rating profile in 2011.
ICBC (Asia) A- Rating watch on/A2 ST/NR High Neutral Medium
The largest bank in China. Strong potential support from the parent, Limited retail deposits combined with loan Sell ICBCAS 20 (A3/NR/BBB+, 197bp)
however the bank's standalone profile will demand may put pressure on funding. subordinated
likely slip in 2011 on account of strong loan Buy SBERRU 17 (A3/NR/BBB, 253bp), the
growth placing pressure on the capital largest bank in Russia, to hedge against
structure and funding. 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)
abc
Wing Hang Bank A- St /A2 St /NR Moderate Neutral Medium
Limited size of the bank, although some Strong capitalisation but balance sheet has Deposit growth does not keep pace with loan Perpetual WINHAN ‘49-17c and WINHAN
support could come from other shareholders become less liquid as it pushes for earnings expansion and high balance sheet ’49-13c are relatively illiquid.
– Fung family and BONY. growth. Strong sector concentration of loans employment could put pressure on funding.
but the strength of underlying economies
should ensure stability of credit profile.

Trade recommendations Asian Banks (cont’d)
March 2011
EM Banks
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 Concern over the bank’s rapid balance Rapid growth in international operations Sell: AXSBIN 16 (Baa2/BBB-/BR, 288bp)
banking industry deposits. sheet expansion is offset by suggests higher USD debt supply risk. Buy:BKMOSC Mar 15 (Baa2/NR/BBB-
demonstrated profitability and India’s EUR2bn medium-term note (MTN) ,349bp) to pick up 61bp and benefit from
favourable macro outlook. programme. 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 Strong funding position with healthy Sell BOBIN 15 (Baa2/NR/BBB-, 269bp)
translate into asset quality concerns loan/deposit ratio. Buy: similarly rated Russian state owned
down the road. Nevertheless its credit BKMOSC Mar 15 (Baa2/NR/BBB-,
profile is underpinned by the 349bp) to pick up 80bp.
government's majority stake in the bank.
Bank of India NR /Baa2 St /BBB- St High Neutral Medium
On the back of majority state ownership. Credit metrics are showing strains from Strong deposit funding, however some Sell BOIIN Oct 15 (Baa2/BBB-/NR,
rapid growth, however credit profile will USD800m of maturing bonds in 2011-12. 252bp)
remain stable against the backdrop of a Buy: a similarly rated Russian state
favourable macro environment. 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 The bank remains profitable compared to Risk of fresh USD supply due to Potential supply of new bonds to
deposits and assets. peers and the macro environment expected growth and USD3bn in refinance USD3bn in 2012 should
remains favourable. redemptions by 2012. 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 Strong recent credit growth raises USD800m of maturities before 2012, Sell: state owned Indian SBIIN 14
abc
largest bank. Also it is majority state concerns on asset quality, however the however strong deposit funding (almost a (Baa2/BBB-/BBB-,222bp) Buy: Kazakh
owned (59.4%). macro backdrop remains favourable and quarter of the country's total) provides a bank HSBKKZ 17 (Ba3/B+/B+,427bp) to
majority state ownership supports credit. solid base. pick up 205bp.
Sell SBIIN 15 (Baa2/BBB-/NR,228bp), to
BKMOSC Mar 15 (Baa2/NR/BBB-,349bp)
to pick up 121bp.
19
20
March 2011
EM Banks
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 Total foreign currency funding needs in Sell: EIBKOR 8.125% 14 (A1/A/A+,177bp)
viewed favourably and should ensure that 2011 are expected to be in the region of is relatively expensive and is likely to be a
the ratings move in tandem with the USD7-8bn. frequent issuer in the medium term.
sovereign.
Hana Bank A- St /A1 Possible upgrade /A- Watch High Neutral Medium-High
Neg
S&P's watch negative outlook is likely to Owing to a track record of government Acquisition of 51% stake in KEB from Almost USD2bn of redemptions by Buy: senior debt of BKMOSC Mar 15
be resolved in 1Q 2011. support and systemic importance Lone Star Funds for (USD4.1bn) creates through 2012 combined with need to fund (Baa2/NR/BBB-,320bp Z-sprd) to pick up
uncertainty. acquisition 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 Recent results show stability in IBK's Only USD500m of maturities in 2011. Fairly priced
SME lending market. credit profile and expect its ratings to More cautious approach to FX lending
remain stable over the next year. would further limit borrowing needs.
Kookmin Bank A- St /A1 St /A St High Neutral Medium
Owing to a track record of government Greater focus on internal controls and Limited redemptions of USD1.2bn in Fairly priced. Supply might constrain
support and systemic importance. trimming costs ahead of acquisitive 2011-12 although BCC subsidiary in bond performance
growth. We expect improvement in asset Kazakhstan may require more funding.
quality going forward.
Korea Development Bank A+ St /A1 St /A Neg High Neutral Medium
Given the solvency guarantee, state Credit profile is closely linked to that of Bank likely to be a multiple issuer as Fairly priced. Supply might constrain bond
ownership and systemic importance. the sovereign. USD1.7bn of bonds are maturing in 2011- performance
12.
Korea Exchange Bank A- St /A2 possible upgrade /BBB+ St Extremely high Neutral Low
Given its unique role as one of the key Acquisition by Hana Financial Group will Limited USD300m in redemptions in Fairly priced
banks in trade facilitation and foreign benefit credit profile, while the bank’s 2012, combined with solid deposit base.
currency operations. stand alone credit metrics compare well
against peers.
Shinhan Bank A Neg /A1 St /A- St High Neutral Low-Medium
Fitch's negative outlook is likely to be Owing to a track record of government The restructuring of the shipping sector in Relatively liquid balance sheet compared Fairly priced
resolved in 2Q 2011. support and systemic importance. 2011 could weigh on earnings. Although to peers (Loans to deposits c 100%)
profitability is better than peers, the should make redemptions of USD800m
operating environment will present some due to 2012 manageable.
challenges.
abc
March 2011
EM Banks
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 With 19% of the system's deposits, we Potentially heavy redemptions in Sell: WOORIB 37 T1 (Ba2/BBB/BB+,
in the system. believe the level of government support for 2011 with USD1.5bn coming due. Zsprd 391bp)
the bank will remain very high. Senior ratings Buy: the largest private Russian bank
should remain stable on strong government ALFARU 15s (Ba1/B+/BB, Zsprd 405bp)
support. 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 Likely to refinance some USD1.6bn Fairly priced.
compared to its peers however its credit of maturities coming due in 2011.
profile is among the highest in Asia.
OCBC AA- St /Aa1 St /A+ St Very High Neutral Low
We think the bank is underrated by S&P High systemic importance to The move to acquire ING's private banking News issues likely to be driven by Fairly priced.
and has room for a 1-notch upgrade in the Singapore's economy. assets in Asia will differentiate and strengthen USD1.25bn of redemptions due in
year ahead. its franchise, in our view. 2011.
United Overseas Bank AA- St /Aa1 St /A+ St Very High Neutral Low
The bank's credit profile is on an Given it is one of Singapore's major Good customer base in the SME and Strong deposit base and liquid Fairly priced.
improving trend and it comfortably sits in three banks. consumer sectors and better than peers' balance sheet.
the AA category, in our view. We expect profitability. Its standalone profile is among
that S&P will raise UOB's senior debt the strongest in the region.
rating to AA- in the year ahead.
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 Owing to systemic importance to Thai The bank's credit metrics are strong and its No redemptions in 2011-12 while Fairly priced.
get a lift from a sovereign rating upgrade banking sector. ratings by S&P and Fitch are currently being deposits comfortably cover potential
in 2011. constrained by the sovereign, in our view. loan growth.
abc
21
22
Trade recommendations CIS banks: Total expected supply for the region: USD18n
March 2011
EM Banks
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 Weak fundamentals and the uncertainty No issuance expected. Buy ALLIBK 17 (Caa2/B-/B-, 991bp ALLIBK is a very
investment for Samruk-Kazyna National surrounding the future ownership weak credit on a stand-alone basis. However, it has come
Welfare fund. structure. 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 Privately owed. However, high probability The strengthening ties with a reputable No issuance expected. Buy: ATFBP 14 (Ba2/NR/BBB, 545bp) benefits from its
resolved in Q3 2011 of support from Unicredit, its 100% owner international parent (Unicredit) are the foreign ownership which is the main credit driver. Indeed
main factor underpinning the credit profile Italian Unicredito provides explicit and implicit support,
of ATF Bank. However, weak credit which makes the bank one of the cheapest Ba2/BBB
indicators constrain the credit profile. credits.
BTA B- St /Caa3 Possible upgrade /B- St Moderate Underweight No issuance expected.
Is not a strategic investment for Samruk The relationship with SK is the bank’s No issuance expected. Buy BTAS 18 (NR/NR/B-, 798bp) BTAS 18 trades rich
Kazyna, National Welfare fund. main credit driver. However, the bank to ALLIBK 17 (Caa2/B-/B-, 991bp), but also benefits from
struggles to recover from its recent failure, government support and potential for recovery supported
the credit fundamentals remain weak by advancing economy.
further undermined by very high NPLs Sell: EXIMUK 15 (B1/NR/B,565bp) to pick up 233bp
Development Bank of BBB- St /Baa3 St /BBB St High Overweight Low
Kazakhstan
100% state owned. Due to its government ownership and USD500m is possible. Bonds are very illiquid.
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.
EURDEV BBB+ Pos /A3 St /BBB St Strong Overweight Medium
Fitch's positive outlook is likely to be Strong support from Russian and Kazakh EDB’s has strong political profile, regional USD500m is possible. Sell: Russia 2015 (Baa1/BBB/BBB,159bp)
resolved in 3Q 2011. government owing to the bank's role as a development mission and direct Buy: EURDEV 14 (A3/BBB/NR,297bp) and pick up
multilateral development finance involvement of cash rich governments 138bp and a relative cheapness of around 2 rating
institution notches.
Halyk Bank B+ St /Ba3 St /B+ St Medium to strong Neutral No issuance expected.
The largest retail bank in Kazakhstan. Creditworthiness remains under pressure Has completed USD500m in Halyk bonds appear fair valued across all maturities.
Track record of government equity and due to the still challenging operating 2011. No more expected in
funding injections environment and fragile economic recovery. the current year.
This coupled with a low albeit stabilising
quality of the loan book.
KKB B- St /Ba3 St /B St Medium Neutral
abc
The largest bank is Kazakhstan by assets. One of the largest private banks in the In case of favourable market Buy KKB 14 (B2/B/B-,803bp) outright. Switch from
Track record of government equity and CIS and the market leader by total assets conditions around PRBANK 15 (B1/NR/B, 726bp) to ALLIBK 17 (Caa2/B-/B-,
funding injections. in Kazakhstan. However, credit volumes USD300m, however, the 987bp) to pick up 261bps. Ukrainian banks to underperform
stayed flat in H1 2010, reflecting a still base case scenario their peers in the Central Asian region as the economic
difficult economic situation and a scarcity assumes no issuance. recovery in Ukraine has not picked up momentum yet and is
of funding. lacking the support of natural resources.
Trade recommendations CIS banks: (cont’d)
March 2011
EM Banks
Russian Banks: total expected supply USD15bn
Alfa Bank BB St /Ba1 St/B+ Pos Limited Overweight Medium
S&P's positive outlook could be However, there is a track record of Seems well positioned to reap the benefits USD1.5-2.0bn Buy ALFARU 15 (Ba1/B+/BB, 437bp) ALFARU
resolved in Q1 2011 shareholder support. of the Russian’s continuing economic is a good choice for investors who want to switch
recovery. from pure quasi sovereign plays to a Russian
Strong credit profile and improving privately-owned financial institution.
financial performance is likely to continue. 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- No issuance expected. Buy: Following its acquisition by the state-
owned VTB would strengthen BOM’s owned VTB, BKMOSC15 (Baa2/NR/BBB-,
credit profile, lifting the bank from sub- 349bp) is our top pick among Russian quasi-
Sovereign control to direct Sovereign sovereign names. Also the rating of BKMOSC
ownership. Additionally the bank's should receive an uplift in case of a sovereign
performance has been improving over the upgrade.
past year. 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 Was demonstrated by injections from The bank’s relationship with Gazprom and USD1bn is possible. GPBRU 15 (Baa3/BB/NR, 344bp) is fairly priced,
resolved in Q2 2011 government during the crisis. the Russian government underpins its in our view.
credit profile. The banks profitability is
growing rapidly on the back of
strengthening economy driven by high
commodity prices.
Russian Agricultural Bank BBB St /Baa1 St /NR High Neutral Medium
100% state owned. Has a clearly defined role in the USD1,500bn. RSHB could be excluded from the bond index
implementation of the government’s given the state might divest a minority stake.
economic policy. Credit profile is closely According to the Ministry of Finance the
linked to that of the Russian government, transaction should take place by 2013. Also the
its 100% owner. However, the bank is risk of new supply is relatively high. Therefore
involved in the highly volatile agricultural the upside performance is limited.
business.
abc
23
24
Trade recommendations CIS banks: (cont’d)
March 2011
EM Banks
Russian Banks: total expected supply USD15bn
Sberbank BBB St /A3 St /NR Very high Overweight Medium
Plays the key role in the Russian A close proxy for Russian sovereign risk. Expected to be quite active on Buy: SBERRU 17 (A3/NR/BBB, 253bp)
economy as the largest bank. Majority The state is a controlling shareholder with debt capital markets in 2011. May Sberbank is one of the strongest financial credits
state owned. a 57.6% stake, while the bank’s systemic raise up to USD2bn. with undisputed leadership position in retail
importance is enhanced by its unmatched business.
retail franchise with 48% of retail deposits Sell: BCHINA ’20 LT2 (A1/BBB+/A-, 208bp) to
on its books. 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, Two benchmark issues totalling VEB is essential part of Russian government
so its creditworthiness is likely to mirror maximum USD3bn in 2011. finance. The bank is likely to be a frequent issuer
the developments the sovereign. The in the medium term as it plans to replace
banks enjoys extraordinary government government funding with wholesale funding. It is
support and plays crucial role to the fairly priced, in our view.
Russian economy.
VTB BBB St /Baa1 St /BBB St Full support Neutral High
Government is the controlling VTB’s credit profile is closely linked to that USD4.3bn Buy VTB 6.465% 15 (Baa1/BBB/BBB, 309bp) is
shareholder. of the Russian government, owner of fairly valued given the supply risk and integration
75.5% of its equity. State support has risk stemming from the recently acquired banks.
been forthcoming in the past, and remains Sell: HK's BNKEA 20 (A3/BBB+/NR,252bp) Buy
strong in our opinion. However, the bank’s Russia's second-largest bank VTB 18
aggressive acquisitions policy creates (Baa1/BBB/*-/BBB, 338bp) to upgrade seniority
integration risks. 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.
abc
Trade recommendations CIS Banks: (cont’d)
March 2011
EM Banks
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 Private ownership. However, Alfa Bank The bank's operating environment No issuance expected Buy: ALLIBK 17 (Caa2/B-/B-,991bp)
resolved in 1Q 2011. Consortium, the bank's ultimate remains weak and asset quality stays Sell: ALFAUA 12 (NR/CCC+/NR, 700bp) to play
shareholder, provided multiple capital under pressure. On the other hand, ABU’s Kazakh oil-driven recovery story, benefit from
injections during the crisis with the latest shareholder, AGC, provided continuous Kazakh state support and pick up 290bp.
one in March 2010 of USD93m. support to the bank during the crisis
including the latest capital injection of
USD116.4m in February ‘11.
Privatbank B St /B1 St /NR Possible Neutral Low
Given the large size and importance to Benefits from a strong domestic franchise Up to USD500m. Sell: EXIMUK 15 (B1/NR/B,565bp)
the Ukrainian banking sector. and solid financial performance. A strong Buy: PRBANK 15 (B1/NR/B,726bp) to reduce
market share of the retail sector boosts its maturity, reduce new supply and pick up 161bp.
systemic importance. However, weak
operating environment constrains further
upside performance.
Ukreximbank B St /B3 St /NR High Neutral Medium
Significant support was provided to the Enjoys support from its owner, the Up to USD1bn. Sell EXIMUK 15 (B1/NR/B,565bp)
bank by Ukrainian government. Ukrainian government, which injected Buy PRBANK 15 (B1/NR/B,726bp) to reduce
USD800m in fresh equity in H1 2010, maturity, reduce new supply and pick up 161bp.
although government finances remain For those who are not comfortable with Ukrainian
fragile. Also, the bank’s liquidity appears risks, we recommend to switching to high-yield
adequate and sufficient to cover liabilities Kazakh banks.
maturing in 2011.
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
abc
25
26
Trade recommendations Latin American Banks: total expected supply for the region USD20bn
March 2011
EM Banks
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 The bank's importance to the Brazilian Being one of the largest private banks in The bank enjoys strong liquidity from its Sell BRADES 15 (Baa2/BBB/WD,213bp)
resolved in 2Q 2011. banking sector is very high. Brazil and LatAm Bradesco’s credit profile local market and very light repayment Buy VTB 18s (Baa1/BBB/BBB, 338bp) to
benefits from high probability of state schedule of external debt in 2011-2012. pick up 125bp.
support and a good access to the local However, HSBC equity research expects
deposits though vast branch network and that the bank will grow 18% in 2011, which
strong brand recognition. 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.
Banco do Brasil SA BBB- Pos/Baa2 St/BBB- St Very High Medium-High
The bank might be upgraded in 2011, *Largest bank in Brazil* Majority owned by Banco do Brasil is one of the highest-rated Banco do Brasil has low refinancing needs Sell: BANBRA 21 (Baa2/NR/NR, 223bp)
particularly if sovereign is upgraded the federal government of Brazil banks in the LATAM universe. The bank in the short-term, but the bank will need to Buy: BANVOR 20 (Baa2/NR/NR, 342bp)
benefits from hefty liquidity on the back of fund expected 20% loan growth in 2011. to pick up 120bp.
vast deposit base, healthy margins and We estimate that BdB might issue USD3-
healthy capital base. 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.
Banco Votorantim BBB- Pos/Baa3 St /BB+ St High from Banco do Brasil Medium
Fitch's positive outlook is likely to be Banco do Brasil owns 49.9% of Banco The bank benefits from access to cheaper The bank is likely to be a regular issuer, Fairly priced.
resolved in 1Q 2011. Votorantin and longer funding from Banco do Brasil however it benefits from an access to
and a sizable market share in retail Banco do Brasil deposit base and
lending. potential of selling its retail loan portfolio to
Banco do Brasil in case of need.
BNDES BBB- Pos/Baa2 St /BBB- St High Medium
Fitch's positive outlook is likely to be BNDES is 100% state owned A quasi-sovereign risk, the bank is fully The bank is likely to be a regular borrower Sell: of BNDES 18 (Baa2/BBB-/NR,
resolved in 3Q 2011. owned by the government and is the given its funding structure and fast growth. 199bp)
major tool in implementing the state Buy BKMOSC 6.699% 15
policy. (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 Significant importance to Brazilian Constrained by sovereign ceiling, the bank With already high employment of balance Sell: Brazil 2019 (Baa3/BBB-/BBB-,
resolved in 1Q 2011. financial system is one of the best credits in the country sheet the bank will likely to be multiple 122bp)
abc
and will be benefiting from improvement of issuer. Buy: ITAU 20 (Baa2/NR/BBB-, 277bp) to
overall operating environment through its pick up 150bp in spread and 1 notch in
exposure to commercial lending and relative cheapness.
consumer credit.
Source: HSBC, Bloomberg, Fitch Rating, Moody’s
Trade recommendations Middle East banks: total expected supply for the region USD12bn
March 2011
EM Banks
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 The bank is likely to continue Some USD1bn of maturities due in MENA banks are cheap but wait for
Dhabi Investment Council (ADIC). consolidating its balance sheet and 2011 entry point
focus on improving its credit strength
this year. The group's operating
performance will likely remain subdued
meanwhile.
COMMERCIAL BANK OF QATAR A St / A1 St / A- St Extremely high Low-Medium
Given CBQ's systematic importance to Earnings pressure as its share of USD500m of redemptions in 2011 and MENA banks are cheap but wait for
Qatar banking system and track record business with public sector entities further pressure on loan/deposit ratio entry point.
of support. increases. Continued capital injection due to infrastructure lending may lead
from the state is credit supportive. to new supply
Emirates NBD PJSC A+ St / A3 St / NR Extremely high Low
Given its majority ownership by the Continued margin pressures due to Balance sheet rationalisation is to MENA banks are cheap but wait for
government of Dubai (56%) and track relatively higher cost of funding. continue. entry point.
record of support in the UAE. Exposure to Dubai remains a point of
concern and the bank will likely book
further impairments in 2011.
National Bank of Abu Dhabi PJSC AA- St / Aa3 St / A+ St Extremely high Medium
High importance to UAE banking Strong support from Abu Dhabi. The Modest redemptions in 2012 MENA banks are cheap but wait for
system, indirect majority ownership and group will likely focus on lending growth (cUSD700m) however growth focus and entry point.
close links to Abu Dhabi government. this year after a modest growth in 2010. already high loan/deposit ratio may lead
to more supply.
Source: HSBC, Bloomberg, Fitch Rating, Moody’s
abc
27
EM Banks abc
March 2011
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
Resumption in growth has terms we favour Brazilian, Russian and Olga Fedotova
Analyst
fundamental support Indian banks. HSBC Bank plc
+44 20 7992 3707
Emerging market (EM) banks offer an attractive Chart 1: EM debt outstanding by industry as of February olga.fedotova@hsbcib.com
2011 – financials have been the major source of supply
risk-adjusted premium over their Sovereigns in
Other
Chemicals
our view. As 2011 EM corporate issuance is Transportation 2% 8%
expected to be dominated by banks, they will be a 3%

RE
6%
key focus for debt investors. Metal & Mining
Finance
6%
45%
HSBC FI has performed extensive fundamental, Utility & Energy
relative-value analysis, including visiting many of 6%
Telecoms
the banks covered in the report, as well as
6%
investors, rating agencies and regulators. On this Oil & Gas
18%
basis, we believe growth in the sector is founded
Source: Dealogic
on solid fundamental ground, with no indications
yet that a bubble is forming.
In our opinion a favourable macroeconomic story
The different regions display converging growth underpinned by strong commodity prices will
prospects and credit stories, which offer numerous translate into positive momentum for banks in a
cross-regional arbitrage opportunities. In absolute number of EM countries. The current price of
crude around USD100 per barrel will support
28
EM Banks abc
March 2011
business activity in oil-exporting countries That said, in contrast to their developed market
including Russia, Kazakhstan, the UAE and Saudi counterparts, most EM banks – particularly those
Arabia. HSBC forecasts oil prices to stay above in Asia and Latin America – have already shaken
USD84 per barrel in the next two years, thus off the effects of financial market dislocation and,
securing the continuation of growth in oil with a few exceptions, the indications are that
producing economies. Improved business activity asset quality problems have already peaked.
in oil exporting countries will lead to an increased
The response to the crisis has strengthened
demand for banking services and thus have a
regulation, reduced leverage and increased the focus
positive bearing on local financial institutions.
on risk management, making EM banks more
Consequently we expect the banking sectors of
responsive to the underlying risks. Liquidity
commodity/oil exporting countries to deliver a
measures and capital injections introduced during
better performance than those of countries lacking
the crisis have increased the links between banks
these natural resources.
and governments, making the sector’s debt a
Chart 2: Oil net exporters/(importers) leveraged proxy for that of its Sovereigns,
380 something that is already reflected in credit spreads.
280
Nevertheless, even in the new post-crisis world,
180
m tonnes
80 most EM banks still carry old baggage of high

-20 related-party transactions, concentration risk,
-120 inconsistent corporate governance and maturity
-220 mismatches. The speed of the EM expansion, and
Qatar
Kazak hstan
India
Saudi
Brazil
UAE
Russia
Thailand
Singapore
China
inflows created by the excessive liquidity

provided by developed market policymakers has
also raised the question of whether a bubble may
Source: BP, 2009FY. Net exports = production - consumption be growing in EM banks.
Talk of bubbles is …but it is a risk in the future

premature… To be successful you have to be lucky, or a little
mad, or very talented, or find yourself in a rapid
Emerging markets account for 85% of the world’s
population according to Moody’s. They are growth field.
expected to grow at almost three times the rate of Edward de Bono
developed countries over next two years and have
Following a dip in 2009, strong inflows returned
half the banking sector penetration. EM banks
therefore have a firm foundation on which to to EMs, fuelled by loose monetary policy and
limited investment opportunities in developed
build healthy and profitable growth. A traditional
business model focused on deposit collection and markets. The Institute of International Finance
(IIF) forecasts that net private capital inflows into
loan origination also supports the long-term
growth prospects of EM banks. EMs will reach USD1trn in 2011, up from
USD669bn in 2009 (see Chart 3).
However, the expansion story is not free of risk,
These strong inflows coupled with limited
and the global financial crisis amply demonstrated
that EM banks are not immune to global events investment opportunities, and abundant liquidity
have already inflated asset prices in EM,
despite their more conventional business model.
29
EM Banks abc
March 2011
increasing concerns about bubble creation due to We are generally cautious about countries with
such imbalances as rising property prices and fast-growing banking systems, but in many EMs
rapidly increasing leverage. Indeed, this risk of this is caused by a still developing banking system
overheating, (while overheating does not and improving living standards, so that we believe
necessarily result in a bubble) has already been it will be two to three years before we see any
recognised by some governments and, with red flags.
inflation also becoming a concern in such
Chart 3: Capital inflows to emerging market economies
countries as China, Brazil and Korea, they are
1200
stepping in with counter-cyclical measures to cool
1000
off excessive growth.
800
USDbn
600
Highest growth will be in the BRICs,
400
Qatar and Hong Kong 200
HSBC forecasts high banking sector loan growth 0
in India (20%), Brazil (15%) and Russia (20%), 2009 2010 e 2011f 2012f
which should be well supported by positive
macroeconomic growth, low banking penetration, Equity inv estments, net Priv ate creditors, net
a large population as well as an under-penetrated Source: IFF research

SME and retail client base, coupled with robust
liquidity, capitalisation and profitability. Medium to lower growth in Singapore,
Korea, Thailand, Kazakhstan,
In China, HSBC economists are concerned about
Ukraine, Saudi Arabia and the UAE
loan growth rates that are above the long-term
trend (15-16%) even before accounting for off- In Singapore (10%), Korea (7.4%) and Thailand
balance-sheet transactions such as informal (7.5%), growth is constrained by a highly
securitisation and discounted bills, even though competitive environment and high banking
recent quantitative tightening measures appear to sector penetration.
be having an effect (China – Jan new lending Relatively lower growth is expected in
below expectation as tightening takes effect, 15 Kazakhstan, Ukraine, UAE, and Saudi Arabia. In
February 2011, Qu Hongbin). Kazakhstan (6.5%) and Ukraine (4%) it is due to
Qatar’s 18% growth is supported by anticipated poor asset quality, low capital, and negative
government capital expenditure on infrastructure demographics (relatively small bankable
projects, even though it doesn’t have the benefit of a population, defined as those earning enough
large population or low banking sector penetration. money to be eligible to be served by banks) in
Kazakhstan and falling population in Ukraine).
In Hong Kong (15%) growth is driven mainly by
demand from offshore Chinese companies.
30
EM Banks abc
March 2011
Chart 4: Summary of banks’ fundamentals outlook
Potential State
Potential Retail Growth Asset Net Interest Fundamental Support Overall
Macro Demographics loan growth growth Outlook quality Liquidity margin Capital Outlook likelihood 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
The UAE (5.1%) is significantly more leveraged Although Saudi Arabia (9.6%) has low banking
than its other Middle Eastern peers, having been sector penetration, forecasted economic growth
exposed to the Dubai construction sector and has (2011 4.8%) is low relative to population growth
suffered significantly during the crisis. Credit (14% over the next five years).
growth is likely to be constrained by a limited
Credit creation in energy producers is also
deposit base, although the banks would be looking
sensitive to oil price risk and could be higher than
for favourable windows of opportunity to attract
the above numbers if oil prices stay above
external funding.
USD100 a barrel (HSBC forecast USD84).
Chart 5: Growth in the emerging markets will boost global growth
% Contributions to global growth %

4.0 4.0
3.0 3.0
2.0 2.0
1.0 1.0
0.0 0.0
1970s 1980s 1990s 2000s 2010s 2020s 2030s 2040s
Dev eloped Markets Emerging markets Global
Source:
31
EM Banks abc
March 2011
Favourable economic backdrop Chinese growth in particular, is to outpace

The investor of today does not profit from developed countries for at least five years as inter-
yesterday’s growth regional competition and local economic
autonomy fuels the economy. HSBC economist
Warren Buffett
Karen Ward estimates that China and India will
HSBC economists expect EM growth (6.4%) to be the largest and third-largest economies in the
outpace the developed world (2.3%) over next world, respectively (Global Economics Quarterly
three years. Emerging economies in Asia are – a misfiring growth engine, Q1 2011).
expected to be the fastest growing (7.5% overall
Mainly supportive demographics trends
and 8.6% in China), followed by Latin America
There is no finer investment for any community
with 4.8% and EMEA with 4.1% (see The world
than putting milk into babies.
in 2050 – quantifying the shift in the global
economy, January 2011, and Global Economics Winston Churchill
Quarterly – a misfiring growth engine, Q1 2011).
Growth in retail loans is the key driver of banking
In a longer term HSBC forecasts that world output sector expansion across EMs, and is reinforced by
will treble, as growth accelerates on the back of the the strong demographic structure of the
emerging economies. On average annual world population (already accounting for some 85% of
growth is projected to be towards 3% compared the world’s total, with 4.8bn people), which is in
with growth of just 2% in 2000 (Chart 5). sharp contrast to the aging population of the
developed world. However, the number of people
Emerging market growth will contribute twice as
being put to work will vary substantially across
much as that of the developed world to global
growth between now and 2050. By 2050, the economies in the coming years.
emerging world will have increased five-fold and For example, Saudi Arabia with the highest fertility
will be larger than the developed world to global rate gets a significant boost to growth with the
growth over this period. 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.
UAE
5m Saudi Arabia
26m
15% India
1,173m
Bankable population growth (%)
10% Brazil
201m China
USA 1,330m
310m Singapore Kazakhstan
5% 5m 15m
Thailand
France 66m Korea
65m UK HK 49m
7m Germany
0% 62m 82m
Ukraine
Russia 45m
139m
-5%
Older Younger
Trend in aging of bankable population
Source: Central Banks, US government statistics
32
EM Banks abc
March 2011
Chart 7: Total leverage levels of EM economies: most EM countries remain underleveraged

245% HK
190%
UK
160%
Loans / GDP
Germany
130%
China
UAE
Korea Singapore
100%
France
Thailand
Ukraine
70% Qatar
Russia
Saudi Arabia Brazil
Kazakhstan India
40%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0%
CAGR loan growth (2007-2010)
Source: CB county websites, HSBC, 2010
On the other side of the spectrum South Korea’s Relatively low penetration, but not everywhere
and Russia’s demographic outlook is quite poor Don’t judge each day by the harvest you reap but
with the workforce shrinking by c30% by 2050. by the seeds that you plant
China, Singapore and HK will also see more than
Robert Louis Stevenson
double-digit declines in total working population.
Retail loans can grow even in the face of stable or
We will see a significant divergence of the growth
falling population trends as long as banking sector
trends even in the medium term (Chart 6).
penetration rates are increasing.
The structure of the population is very important
Banking loan penetration and growth patterns
as it indicates a trend in bankable population. For
vary greatly among emerging markets. Brazil,
example considering the under-15 population in
Russia, India and Qatar have experienced
India (34%), the UAE (30%) and Brazil (29%),
extremely strong loan growth in recent years, and
they are much larger than in the UK, France and
although the former three stumbled for a moment
USA (20%). This population structure results in
in 2009, the resumed growth still has some steam
high growth differential in bankable population
due to low level of credit penetration.
relative to developed markets for most Asian
countries in this report as well as for Brazil. The India shows the lowest penetration and is best
absolute growth potential is also strong in Brazil positioned to continue its high rate of credit
the Middle East, and India, which also create expansion (see Chart 7).
encouraging conditions for the development of the
The combination of high penetration and high
banking sector in the medium term.
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
33
EM Banks abc
March 2011
justified by its role as a regional financial centre and India, Russia and Saudi Arabia have significant
a gateway to China, which will continue to drive its room for retail loan growth as access to credit and
loan growth despite already high leverage relative to a consumer culture has yet to be fully developed
country’s GDP. Similarly, Singapore’s seemingly there. In India’s case limited savings and low
high leverage results from growth related to regional GDP/capita are a constraint, although its medium
trade flow, a trend that is highly correlated with the to long-term prospects are better then that of the
world (and Chinese) economic activity. other two countries considering the population
trends discussed above. Qatar has the best short-
In the CIS, Kazakhstan has been going through a
to-medium term prospects, as private sector
healthy contraction, which was needed to clean up
demand is expected to pick up. Brazil is seeing
the system. We expect Kazakhstan to start
increased appetite for retail credit, with household
benefiting from improved economic conditions
indebtedness increasing from 24% of income at
and higher commodity prices. Similarly, Russia’s
the end of 2006 to 39% at the end of 2010. In
low level of banking penetration is likely to
India, for example, the credit appetite of the
improve with stronger oil prices, even though
population is still low, therefore the main driver of
Russia’s recent growth trend has been distorted by
loan growth was infrastructure in 2010.
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.
34
EM Banks abc
March 2011
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
UK
80%
70%
60% HK
Retail loans / GDP
France
50%
Singapore
40% Germany
Korea
30% Ukraine China UAE
20% Thailand
Brazil Qatar
Kazakhstan Saudi Arabia
10% Russia
India
0%
0 10 20 30 40 50 76
GDP per capita (USD '000)
Source: CB county websites, HSBC, Fitch, 2010
However, in Korea retail growth will be exceptions (UAE, Kazakhstan, Ukraine), the peak
constrained by already relatively high leverage of the asset quality problems are also in the past.
among population. Brazilian credit quality could worsen slightly in
2011, as higher rates bite into
Traditional banking model at
consumer delinquencies.
the heart of system health
Structural risks still persist though, including
Life is not complex. Life is simple, and the simple
maturity mismatches, reliance of some sectors on
thing is the right thing.
wholesale funding, varying transparency and a high
Oscar Wilde level of related party transactions in a number of
countries. In addition, corporate governance risk is
The traditional banking model calls for funding
still substantial both in countries with a relatively
loans from deposits, with lower exposure to
weaker banking supervision such as the CIS and
structured products and market risk. The EM
also in countries with a more developed and
banks have been able to maintain this model (net
advanced regulatory mechanisms.
interest income represents 70-80% of total income
vs close to 50% in developed world) because EM banks will continue to enjoy
faster growth and wider margins have allowed strong government support
them to maintain profitability without having to The links between banks and the governments are
move down the risk curve. Long-term growth particularly strong in EM world. We believe that
opportunities and a high margin environment the emerging market governments will continue to
discouraged most banks from undertaking exotic provide strong support to the banking sector given
investments – with a couple of exceptions. its systemic nature and its extensive use in many
This business model has helped EM banks, countries as a tool in implementing the
particularly those in Asia and Latin America, to government’s economic policies and in indirectly
shake off the effects of the recent financial market supporting the other sectors of the economy, as
dislocation. Indications are that apart from a few
35
EM Banks abc
March 2011
well as due to high government participation in USD10bn fraud was combined with USD12bn of
the banking sector in many countries (Chart 9). external liabilities, was clearly too big to absorb for
a country with USD45bn of FX reserves at the time.
EM policy response during the crisis was fast and
efficient in most markets, and increased the links Chart 10: Government support capacity varies greatly across
EM economies, 2010F
between banks and the government, making the
5 00
banking sector a close proxy for the sovereign. 4 50
Externa l Debt/FX Rese rve s (%)

4 00
Indeed banks were used during the crisis as a 3 50
3 00
convenient tool for conducting government 2 50
2 00
economic policy. Examples are numerous: 1 50
controlled stimulus lending in China with counter- 1 00
50
cyclical supervision to increase SME lending; 0
Braz il
Qat ar
Thaila nd
Kaza khs tan
Ukraine
Rus sia
Sa udi Arab ia
UAE
Ko rea
“leading by example” restructuring in India (5%
I ndia
of the book vs 2% in private banks); VEB lending
in Russia to refinance external debt of highly
Source: Moody’s
leveraged corporates; tailored liquidity support in
the UAE (facilitating DW restructuring); and In our view the EM governments are very likely
capital injection by Banco Nacional de to continue providing a safety net to the banking
Desenvolvimento Economico e Social (BNDES) sector in case of need, prioritising it over other
for providing credit to corporates and for industries. However, if faced with a prolonged
infrastructure investment. economic downturn, the governments’ capacity
could be undermined by eroded FX reserves and
A notable exception to this trend was Kazakhstan
constrained liquidity and such support would be
and, to some extent, Ukraine, which has created a
more selective and limited to systemically
precedent that while state support is likely, it is not
important banks. There could be a further
always guaranteed, especially if the scale of the
prioritisation of the state-linked institutions over
problem is large in relation to the size of the
the privately owned and senior debt over
economy. For example in the BTA’s case, a
subordinated obligations.
Chart 9: Governments are highly involved in the banking sector across the board
80% 75% 74%

70%
60 %
Banking state own ersh ip (%)
60% 55%
50% 44% 44%
40% 33%
28%
30% 25%
19% 17%
20%
10%
0% 0%
0%
Qatar
India
China
Kazakhstan
Uk rain e
Brazil
Russia
Korea
Saudi Arabia
Thailand
Singapore
UAE
HK
Source: Bank data
36
EM Banks abc
March 2011
We are confident that the willingness of EM peak in Russia, Saudi Arabia, Qatar, HK, India
governments to support their banking sectors will and Korea. The exception is UAE, where we
be high across EMs, although capacity of the expect NPLs to peak in 2011 (Chart 11).
governments could be a constraint in
While overall NPL performance in many emerging
some countries.
countries appears to be superior to that of Western
Quality of assets: the worst is over Europe, reported NPLs often do not take into
You never know what can happen. I feel like I account restructured, re-priced or refinanced
problem loans, which is a widely used practice in
have a pretty good chance, but you never know.
many EM countries. According to our estimation
Carly Patterson such loans varied from 30% for Dubai-based banks
to 35% in Russia, 40% in Ukraine and 50% for some
A side-by-side comparison of EM banks is
Kazakh banks.
complicated by erratic growth, a lack of
transparency, and divergent reporting standards, Contraction of loan books during the crisis
for example with restructured and re-priced loans combined with a sharp deterioration of overall
not always being recognised as NPLs. However, it economic conditions, generally caused reported
is clear that the effect of the crisis on EM banks NPLs to increase dramatically. However, this
varied widely, from a momentary hiccup for most number can be distorted due to state intervention.
Asian banks, to continued intensive care for For example in Russia during the crisis where
Ukranian, Kazakh and Dubai-based banks. government action to provide foreign funding to
large corporations through state-owned banks
Broadly speaking, we believe that the NPL peak is (VEB, VTB and Sberbank) caused NPLs to
behind us in most markets, with 2010 being a be understated.
Chart 11: The peak in bad loans appears to be past for all EM banks, apart from the Middle East:
48%
Russia Asia LATAM & ME Europe
& CIS
25%
20%
NPL (%)
15%
10%
5%
0%
Kazakhstan Ukraine Russia Singapore India China Korea HK Brazil Qatar Saudi UAE UK Germany France
Arabia
2007 2008 2009 2010F 2011F 2012F
Source: CB county websites, HSBC, Moody’s
37
EM Banks abc
March 2011
In the UAE, which was exposed to the in pressure on profitability through increased
construction sector, NPLs have yet to peak provisioning.
(HSBC Equity Research expect this to peak in
Ample liquidity but maturity
2011), mainly driven by a possible restructuring
mismatches remain
in Dubai Holding and Dubai group. We also
expect provisions to increase, driven partly by "Reality is merely an illusion, although a very
new regulations and partly by under-provisioning persistent one"
in previous years. Albert Einstein
In Brazil, asset quality improved significantly in EM banks benefit from generally good liquidity on
2010 after the NPL peak in 2009, with NPLs the back of a growing (albeit volatile) deposit base,
dropping to 5%, which is lower than pre-crisis government support (both direct liquidity injections
levels, and in line with the expected level in Western by Central Banks and deposits from state-linked
Europe. Most Brazilian banks we met indicated that corporates) and positive external liquidity trends
they see the NPL level as stabilising around this (positive current account positions). While
level, with limited room for further improvement commodity-driven economies (Brazil, Russia) have
and even the probability of a slight deterioration. cash-rich corporates, in other EM countries banking
sector liquidity is also supported by positive current
Although these numbers are higher than those account position, which is the case for all banks
reported by some Asian banks, we note that given included in this report except for those in Brazil,
the high quality of disclosure and risk India and Ukraine.
management of Brazilian banks – among the best
in the emerging world – these are much more This strong liquidity of corporates and sovereigns
reliable than those reported by CIS, ME and some combined with still cautious lending and a limited
Asian countries. number of quality borrowers (in Russia and
Middle East, for example), or with counter-
For example reported NPLs in China are among the cyclical regulations in other countries (China,
lowest in our universe at 2.8%, but probably don’t Brazil, India and Singapore), have resulted in a
reflect the potential problem loans of local low utilisation of balance sheets.
government financing vehicles (some 26% of which
Chart 12: Most banks enjoy strong liquidity
are flagged as potentially problematic). If these were
100%
included NPLs would rise to 7%, which would be 90%
Loans / Total assets
80%
the highest among non-CIS issuers. 70%
60%
50%
Otherwise, reported NPLs in Asia were low, with 40%
hardly a noticeable increase as effects of the crisis 30%
20%
were shallow and short-lived in NPL terms, with 10%
0%
the most recent results giving the impression of
Korea
Thailand
Russia
HK
UAE
Brazil
India
Ukraine
Kazakhstan
Saudi Arabia
China
Singapore
Qatar
higher asset quality because of the resumption of

loan growth.
Source: Central Banks, 2010
The exception is Korea, where banks are still de-

leveraging even as high household debt and The loans/assets ratio for all countries (save for
exposure to the construction industry could result Korea) is close to or below 60%, with Brazil around
50%, indicating a very liquid balance sheet,
38
EM Banks abc
March 2011
supported by strong deposit inflows and access to proportion of interest income and among the
government paper offered at lucrative yields. lowest NIMs, although this situation improved in
Q4 2010. NIM rebounded on the back of: 1)
This is partly a reflection of prudent regulation and
benefits of the negative duration gap; 2) funding
proactive positioning by the Brazilian Central bank,
cost savings by the replacement of high-cost funds
which has learnt its lessons from previous banking
with lower ones; and 3) the resumption of interest
crises, and has now raised the mandatory reserve
payments on once-defaulted work-out loans.
ratio to equate to more than 30% of total deposits,
one of the highest in the world, a move which has Russia and Brazil enjoy the highest level of NIM,
now been mirrored by the Chinese regulator. although in the case of Russia this is partially a
Profitability improvement on upswing reflection of the re-pricing of bad loans and an
in credit cycle adjustment to more normalised margin is likely to
continue as credit conditions stabilise. At the same
The banks covered in this report are heavily
time, the quality of interest income remains a
reliant on a traditional banking model with a high
question due to a relatively high level of (non-cash)
proportion of interest income. Although this
accrued interest associated with restructured loans, a
increases stability of income, it also makes them
very dependent on both the net interest margin trend which is also seen in other CIS countries.
(NIM) trends and growth of the loan book. In the case of Brazil, NIMs are moving in the
EM banks generally enjoy healthy profitability opposite direction, reflecting strong demand for
with higher NIMs than their Western counterparts. credit, better employment of balance sheet
However these margins are under pressure from (Loan/Deposit ratio increased from 78% in 2008 to
increased competition for quality borrowers and over 100% in 2010) and still relatively cheap
tightening credit conditions, and there are also funding, despite increasing competition and
idiosyncrasies in each country (Chart 13). tightening spreads. Increased penetration of high
margin retail products (credit cards, car loans and
Korean banks appear to be in the most mortgages) and continuing strong demand for
disadvantageous position, with the highest
Chart 13: Profitability of EM banking sectors 2009 vs. 2010: margins are healthy but under pressure due to increasing competition
90%
Korea 09
Korea 10
Net interest income / Total income
80%
China 09 China 10
Saudi Arabia 09 Russia 09
Qatar 10
Russia 10
HK 09 Saudi Arabia 10 Brazil 10
70% HK 10 UAE 10 Kazakhstan 09
UAE 09
Kazakhstan 10 Brazil 09
Qatar 09
Singapore 09 India 10
India 09
Singapore 10
60%
2% 3% 4% 5% 6% 7% 8%
Net interest margin
Source: CB county websites, HSBC, Fitch
39
EM Banks abc
March 2011
credit is likely to keep margins healthy, but due to In our view the impact of Basel III regulations on
competition there will be NIM pressure. EM banks will be muted. Not only is it unclear
which countries will implement the guidance and
There is a significant divergence among countries
when, but EM banks also present some particular
within in the Middle East. HSBC (Equity
challenges: (a) the guidance will be difficult to
Research) expects overall flat NIMs, however
implement, particularly considering limited adoption
Saudi Arabia is experiencing shrinking margins
of Basel II by EM countries and more urgent policy
(driven by contracting asset yield), while Qatar is
priorities concerning stabilising the economy; (b)
seeing improvements as the country benefits from
EM banks generally have a simple business model
public-sector spending and has recently received a
with limited exposure to capital markets so that they
further long-term boost with the award of the
fall outside the main thrust of Basel III; and (c) EM
2022 World Cup. In the UAE, high competition
banks generally enjoy a strong capital position and
drove margins to the lowest in the Middle East
limited use of non-Tier 1 instruments.
because of the lack of good corporate clients and a
retail client base which is thin because of In our view local regulators, which often have
deterrent legislation that makes loan default a limited independence and power, will likely opt
criminal offence. As a result, future growth and for late adoption of the guidance in order to not
profitability improvement in UAE will be put local players at a disadvantage, with the
challenging, in our view. exception of Brazil.
Capital is healthy and unlikely to be The first challenge to Basel III adoption is that in
target of the new regulation addition to typical credit, market, or counterparty
The loftier the building, the deeper must the risks, EM banks have substantial structural
foundation be laid. deficiencies such as a high level of related-party
or single-borrower exposure and extremely high
Thomas Kempis loan and deposit concentration, which makes
While most EM banks have adequate capital, the probability-driven loss calculations superficial and
trend in post-crisis banking regulation is towards irrelevant, even if regulators do have appropriate risk
increasing capital requirements, which can reduce management tools, which is not always the case.
return on equity. However, we expect a limited In driving industry reforms, local regulators are
effect on EM banks. hampered by limited system readiness, and often
The recommendations proposed by the Basel prioritise more urgent local matters. For example
Committee on Banking Supervision in December these include: containment of credit growth in
2011 (Basel III) are aimed at strengthening the China, managing the risk of a real estate bubble
banking sector by optimising capital allocate for through tighter personal loan guidelines in
securities markets operations (counterparty and Singapore, encouraging restructuring and
market risks and exclusion of non-Tier 1 diversification of sector exposure in India,
instruments (CET1), improving leverage and reducing related party exposure in Russia,
liquidity by introducing a stringent liquidity expanding the government toolbox to control the
coverage ratio (LCR), and net stable funding banking sector in Kazakhstan, and imposing
requirements (NSFR). tighter controls on currency speculation in
Ukraine and Brazil.
40
EM Banks abc
March 2011
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.
41
EM Banks abc
March 2011
Tier 1 capital ratio of EM banks:

Chart 14-1: The majority of Asian banks benefit from healthy capitalisation
20%
18% Basel III requirement : 8.5%
Tier 1 capital (%)
16%
14%
12%
10%
8%
6%
4%
2%
0%
United Overseas Bank
DBS Bank
Korea Development Bank
Korea Exchange Bank
Bangkok Bank
Hana Bank
Woori Bank
Kookmin Bank
Axis Bank
China Development Bank

ICICI Bank Ltd
BOC Hong Kong
Dah Sing Banking Group
State Bank of India

Bank of East Asia
Bank of India
ICBC (Asia)
Bank of Baroda
Citic Bank International
OCBC
Shinhan Bank
Source: Company data, Latest, see profiles

Industrial Bank of Korea
Chart 14-2: Middle Eastern and LatAm Banks: Capital should be sufficient to support growth and asset quality
Basel III requirement : 8.5%

20%
18%
Tier 1 capital (%)
16%
14%
12%
10%
8%
6%
4%
2%
0%
National Bank
Bank
BNDES
Itau Unibanco
Commercial
Bank of Qatar
Abu Dhabi
Commercial
Emirates NBD
Bank
Banco
Bradesco
Banco
Saudi British
Banco do
of Abu Dhabi
Brasil
Votorantim
Chart 14-3: CIS Banks: Capital is generally strong, while capital position of ATF is likely to be supported by foreign parent
30%
25%
Tier 1 capital (%)
Basel III requirement : 8.5%

20%
15%
10%
5%
0%
Ukreximbank
Sberbank
Alfa Bank
Privatbank
Gazprombank
VEB
RSHB
VTB
Moscow
Halyk Bank
ATF
Bank of
KKB
42
EM Banks abc
March 2011
Chart 15: Most banks suffer from maturity mismatch, funding long-term loans with short-term liabilities
95%
Liquidity surplus (gap) as % of total assets
75%
55%
35%
15%
-5%
-25%
-45%
-65%
-85%
-105%
Commercial bank of Qatar

Sberbank
Ukreximbank
Saudi British Bank
Bangkok bank
Banco Bradesco
State bank of India
National Bank of Abu Dhabi

EXIM
OCBC
BOC Hong Kong

Halyk
< 1 year > 1 year
Source: Bank financials
Funding and supply: who is paying? vulnerable to external and internal shocks as
deposit growth is often insufficient to fund the
EM banks, whether strong or weak, suffer from
loan growth alone (Chart 16). Even if a bank
one big funding problem: their assets are longer
enjoys plenty of liquidity from a stable deposit
then their liabilities (Chart 15). In our view, this
base, it could be eroded due to potentially volatile
dislocation was one of the main reasons for bank
nature of EM deposits, sensitive to negative
defaults in Ukraine and Kazakhstan. This
market sentiments.
mismatch will continue to make EM banks more
Chart 16: Deposit growth is constraining loan growth and banking penetration, funding of EM banks
1247% HK
400% $1,546bn
350%
China
UK
Singapore $13,200 France
300% $12,287
$1,549bn $10,480
Banking assets / GDP
Germany
250% $11,115
Korea
200% UAE $1,422
$420bn
150% Saudi Arabia Qatar Ukraine
Thailand
$369bn $139bn $112bn
India $286bn Brazil
100%
$1,335 $2,206 Kazakhstan
$81bn
50% Turkey Russia
$576bn $903bn
0%
35.0% 55.0% 75.0% 95.0% 115.0% 135.0% 155.0% 198%
Loan-to-deposit ratio
Bubble size stands for asset size of banking system in particular country
Source: CB county websites, HSBC, Fitch, 2010
43
EM Banks abc
March 2011
Chart 17: Supply weighted towards Russia, Brazil and Korea However even companies with healthy loan-to-
EM financials debt outstanding by country as of Feb 2011
deposit ratios (a ratio of around 100% is
Russia
13% considered optimal), can suffer from some form
Other
28% of maturity mismatch.
Brazil
13%
These mismatches will be addressed by EM banks
Venezuela continuing to access external public markets
3%
India S. Korea frequently, although there will be a diversity of
3% 12%
Kazakhstan needs, timing, and scale.
Mexico
3% ChinaPhilippines
4% UAE 8%
6% 7%
Issuance by EM banks in 2010 exceeded all
earlier expectations. This was driven not just by
Source: Dealogic
the need to refinance public and private debt, but
also by a very low interest rate environment in the
EM banks are expected to be active borrowers
developed world, and need to raise sources with
in external debt markets
long-term maturities and to address demand for
Financials are by far the largest industry sector in
hard currency by the bank’s clients (Chart 19).
EM external debt, representing around 44% of
total (Chart 1). We expect around USD70bn of In 2010 Asian financials issued some USD24bn,
supply in 2011 (with South Korean, Brazilian, and well above our expectations, while just USD8.2bn
Russian issuers leading the pack) as EM banks of bonds matured. Similarly, in CIS and GCC
seek to fund their growth (Chart 17). countries the volume of issues reached USD17bn
and USD16bn, respectively.
While the banking system growth in several EM
countries outpaces by far both deposit growth and Brazilian banks issued some USD17bn, despite
the country’s GDP, the crisis had the painful but having strong liquidity and a light repayment
healing effect of reducing leverage and improving schedule, in attempting to fix low coupons and
the funding structure as deposit accumulation and extend maturity profiles.
more cautious lending policies has led to
Asian and Brazilian banks were active suppliers
improved loan-to-deposit ratios (Chart 18).
of hybrid capital instruments in 2010. We do not
Chart 18: Crisis triggered de-leverage in EM economies expect this trend to continue in the medium term
250% and do not favour hybrid structures, which could
be increasingly pushed to share more risks in case
Loan to deposit ratio
200%
150% of banks insolvency. Basel III treatment will also

100% entice banks to focus on Tier 1 capital.
50%
Banks will continue to borrow in 2011
0% As the capital markets start opening up again we
HK
Qatar
Kazakhstan
Ukraine
Korea
Russia
Thailand
China
Singapore
Brazil
Saudi
UAE
India
expect a growing number of banks from EM to

raise international debt. We have already seen
2008 2010
some established names placing Eurobonds in the
post-crisis period. Also banks from less-
Source: Central Banks websites, Fitch
traditional issuer countries such as Turkey, the
UAE, Saudi Arabia and Qatar have established
44
EM Banks abc
March 2011
successfully their presence in the Eurobond corporates. Redemptions in 2011 are only
markets and are likely to stay there. The interest USD1bn (Chart 4), so the net issuance of USD6bn
of banks in external borrowings will be further is a relatively significant supply for issuers rated
boosted by the demand of their corporate clients in the BBB-category.
for credit. It is much easier for banks to raise
Singaporean banks will see redemptions of
international debt than it is for corporates, which
USD2.8bn in 2011, which we expect will be
typically have to turn to domestic financial
refinanced. Total issuance could reach USD4bn
institutions for funding.
taking into account growth prospects.
Russia, Brazil, Korea and then UAE and India are
The level of sub-debt issuance out of Hong Kong
likely to be the most frequent issuers in 2011 Indeed,
this year will likely not be repeated in 2011.
2011 has already started with a strong pipeline of
However, given the strength of lending abroad by
issues, with USD11bn from the banks covered in
Hong Kong banks and the tighter loan-deposit
this report with those from Brazil leading the pack.
ratio of some banks, we expect issuance of about
Should the low interest rate environment and
USD4bn, particularly among subsidiaries of
investor demand continue, we expect this trend to
mainland banks.
lead to cUSD100bn of new issues, compared to
2011 refinancing need of USD30bn. Indonesian and Thai banks are showing strong
growth prospects and could also potentially access
Asia: we expect total borrowing of USD26bn
the US dollar-denominated debt market in 2011.
From Asia, we expect a total USD26bn, including
USD9bn of refinancing from Korea, USD7bn to In the CIS, new issues should also be in the
fund growth from India, USD4bn from each range of USD18bn. Among the CIS countries,
Singapore and HK and USD2bn from Thailand which face USD9.2bn of Eurobond maturities, we
and other Asian countries. expect at least USD15bn of external issues from
Russian banks to fund projected growth of 15-
For Korea, we think issuance could reach
20% in 2011. Kazakh banks, particularly KKB,
USD9bn, similar to levels in 2010. We think the
might come back this year but with quite
sector as a whole will remain in de-leveraging
moderate appetite.
mode, particularly the commercial banks. They
will likely substitute public debt with bilateral We expect manageable supply from GCC
borrowings and privately placed deals. The policy countries (USD12bn)
banks will likely step up issuance as it is their We expect lower supply from GCC countries, where
primary source of funding. Net issuance of maturing debt does not to exceed USD7bn this year,
USD4bn is not large for the Korean banking and a combination of inflows to deposit and earnings
sector, in our view. should be sufficient cover growth in 2011. However,
given the banks’ need to refinance short- dated
For example India might need about USD18bn of
deposits and bilateral funding with longer date
funding to cover the shortfall, but given its low loan
borrowings to match longer dated infrastructure
to deposit ratio we expect that less then a half of this
loans, we envisage USD12bn of supply, mainly
amount will be funded by public borrowing.
from UAE and Qatari banks.
Indian banks will likely be relatively big issuers in
2011, estimated at USD7bn given the strong
growth prospects and USD demand by Indian
45
EM Banks abc
March 2011
Chart 19: Strong supply of Eurobonds from EM banks expected in 2011
20
18
16
14
12
USDbn
10
8
6
4
2
0
HK
Russ ia
India
Kazakhstan
Saudi Ar abia
Qatar
UAE
S. Korea
Singapore
Thailand
Ukraine
China
Brazil
2009 2010 2011A 2011E
Source: Source: Dealogic, Bloomberg, HSBC
Brazilian banks are likely to issue USD20bn Overall, we believe the banking sector’s credit
Finally, Brazilian banks are likely to be the most metrics has improved for most EM countries, and
active borrowers with expected issuance to reach although the crisis is not fully over in some markets,
around USD20bn. USD4bn having already been we believe that the industry has turned the corner.
placed by the middle of February 2011. Brazilian We believe the peak in NPL has passed (barring the
banks have just USD2bn of public funding to be UAE and probably Brazil), liquidity and capital
repaid this year, but they are planning to grow positions are good, and profitability, although
another 15%-20% this year, while deposit growth shrinking due to competition, remains superior to
is likely to lag. that Western markets. Moreover, reliance on a
traditional banking model and limited exposure to
The EM banks will be competing for investor
structured products and capital markets mutes the
money with peripheral Eurozone financial
impact of Basel III.
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.
46
EM Banks abc
March 2011
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
Russia and Korea to remain active borrowers in 2011 and 2012

Chart 21a: 2011 maturity, Eurobonds
14
12
10
8
USDbn
6
4
2
0
UAE
Brazil
China
Kazakhstan
Indonesia
Ukraine
Venezuela
Chile
Arabia
Qatar
Philippines
Hungary
S. Korea
Russia
Mexico
Saudi
Financials Other corporates
Source: Dealogic
Chart 21b: 2012 maturity, Eurobonds
20
15
10
USDbn
0
Qatar
UAE
China
Chile
Kazakhstan
Brazil
Philippines
Venezuela
Arabia
S. Korea
Indonesia
Ukraine
Saudi
Hungary
Russia
Mexico
Financials Other corporates
Source: Dealogic
47
48
USDm
USDm
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0
500
1000
1500
2000
2500
3000
3500
4000
VTB
EM Banks
Export-Import Bank of Korea
Source: Bloomberg
Source: Bloomberg
OCBC
March 2011
ICICI Bank Ltd Korea Development Bank

Korea Developm ent Bank Export-Import Bank of Korea
VTB ICBC (Asia)
Alfa B ank Abu D habi Commercial Bank PJSC
Emirates NBD PJSC VEB
Hana Bank Emirates NBD PJSC
Axis Bank China Development Bank
China Development Bank DBS Bank

Chart 22a: Eurobond maturity by bank 2011
Chart 22b: Eurobond maturity by bank 2012

National Bank of Abu Dhabi PJSC Bank of Baroda
Sberbank
Kookmin Bank
Itau Unibanco
Shinhan Bank
Bank of India
Export-Import Bank (China)
Alfa Ukraine
KKB
Privat bank
Kookmin Bank
Korea Exchange Bank
Woori Bank
KKB
State Bank of India
ICICI Bank Ltd
State Bank of India
Ukreximbank
Itau Unibanco
COMMERC IAL BANK OF QATAR
Ukreximbank
Saudi British Bank
Banco Bradesco SA
Gazprombank
ICBC (Asia)
BNDES
ATF
Banco Votorantim
Russian Agricultural Bank Bank of Moscow
Bank of East Asia Bank of East Asia
Bank of India Banco Bradesco SA
Bank of Baroda Alfa Bank
Banco Votorantim Korea Exchange Bank
DBS Bank Axis Bank
Woori Bank Shinhan Bank
Citic Bank International Citic Bank International
BOC Hong Kong BOC Hong Kong

abc
USDbn
USDbn
USDbn
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
0
1
2
3
4
5
7
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Source: Dealogic
Source: Dealogic
Source: Dealogic
EM Banks
March 2011
Chart 23a: Asia

Banco do BTA
Chart 23b: EMEA

Brasil State Bank of India
VTB ICICI Bank
Banco BOC H ong Kong

Bradesco
VEB
Chart 23b: LatAm and Middle East

W oori Bank

Itau Unibanco Sb erbank
EM issuance by bank
Hana Bank
Kookmin Bank
Alfa Bank
200 9
BNDES Industrial Bank of Korea
2009
2009
2010
Gazpro mban k Shinhan Bank
2010
Banco
2010
Bank of India
2 011
Votorantim DBK
Bangkok Bank
2011
2011
Bank of East Asia
Commercial RSHB
bank of Qatar DBS Bank
Bank of
OCBC
National Bank Moscow
of Abu Dhabi Bank of Barod a
PJSC Alliance Bank
Axis Bank
Abu Dhabi
IC BC (Asia)
Commercial Ha lyk
Bank Citic Bank International
EDB Korea Exchange Bank

Saudi British
Bank Dah Sing Bank
ATF
Emirates NBD China Development Bank

KKB
Export-Import Bank of China
49
abc
50
Market overview
March 2011
EM Banks
Asia
China India Hong Kong Korea Singapore Thailand
GDP growth 2011 8.90% 8% 5.20% 4.90% 5.20% 5.30%
(HSBC forecast)
Country’s total FX 2,847 299 258 291 223 161
reserves (USDbn)
System structure  A total of 3,857 financial institutions,  81 commercial banks (27  23 banks incorporated in HK,  18 banks, with the top 4  205 banks, including 3 local  34 banks, including 14
including 5 large commercial banks and public, 22 private and 32 with the top 5 accounting for banks representing 48% banks (with 60% of country’s domestic banks; the top 4
12 joint-stock commercial banks foreign) 68% total assets sector assets loans) and 24 foreign banks banks account for 60% of
 Top 5 account for 51% of banking assets  Relatively high with full banking licence banking assets, the top 10 for
concentration, with top 10 88%
banks accounting for 57% of
banking assets
 State banks are prominent,
with 74% of assets
Market trends  Still high credit growth expected (20%+);  High inflation is likely to  Loan growth rebounded  Deleveraging of the banking  Economy is highly sensitive  Strong performance
although the government is taking steps erode savings and deposit strongly in 2010 on robust sector, with total credit/GDP to external trade and has throughout the global crisis
to cool it down growth growth in trade finance, the declining to 177% in Q1 2010 been very volatile and political turbulence
 No explicit credit quota for 2011, as use  After slowdown in 2008-09, domestic property market from 184% at YE 2008,  Strong growth momentum at  Loan growth has been
of discounted bills and informal the economy has returned to and lending outside HK however – still high vs. peers present, although the state limited since 2006 owing to
securitisation circumvented loan quotas pre-crisis growth level; high  Lending to corporates with  Banks’ funding structures has restricted speculative political instability, which has
in 2010 credit growth, which could end use in China rose improved on the back of mortgage lending resulted in few signs of an
 Concerns on non-performing loans to become a concern for asset significantly lowered loan growth and  Loan demand is expected to asset bubble
local government financing vehicles to quality  Asset quality continues to increased deposit funding improve, but NIM pressure to  Cautious approach to
weigh on asset quality and capital level  Margins have been improve but NIM is becoming  Further restructurings and continue owing to competition corporate leverage and
 Competition for deposits and higher expanding on strong credit squeezed in low rate provisions to come  Asset quality to improve, as conservative lending
reserve requirement (currently 17.5- demand and cheaper CASA environment  Expected loan growth NPLs peaked at 2.4% in standards
19.5%) are placing pressure on funding deposits, but are expected to between 4-7% in 2011 2009  NPLs likely peaked in 2008,
reverse on funding squeeze  Profitability likely to remain a at 5.7% (down to 4.6% in Q3
 Strong USD demand from challenge 2010)
Indian corporates pushed up
Indian banks’ offshore
financing
Source: HSBC
abc
Market overview (cont’d)
March 2011
EM Banks
Brazil and CIS
Brazil Kazakhstan Russia Ukraine
GDP growth 2011 5.10% 6% 4.80% 4%
(HSBC forecast)
Country’s total FX 302 31 497 32
reserves (USDbn)
System structure  Concentrated system, with 2 state-owned banks  Concentrated and relatively small system with  Large number of banks (1,087) but 55% of assets  185 commercial banks (14 in liquidation)
accounting for 60% of deposits only 37 banks, 11 of which have foreign are concentrated within the top, 5 state-owned  The top 10 banks accounting for 50% of system’s
participation banks, which receive disproportionate support assets
 The top 10 banks account for 92% of the  The second tier comprises 30 private and  High level of foreign ownership: 53 banks (45%
system’s assets foreign-owned banks, the rest are small financial of the system’s capital)
institutions
Market trends  Improving economy and increased liquidity  Three defaulting banks have been undergoing  Gradual exit from support measures  Continued deterioration in asset quality, with half
 Strong credit growth but government’s anti- restructuring (Alliance, completed; BTA and  Asymmetric support for top, state-owned banks of the loans being restructured or non-performing
cyclical measures aim to slow it down Temir, ongoing); for others, credit growth is  Weak asset quality but reasonable capitalisation  Extensive capital shortfall in the system: NBU
 Competition is increasing but cheap funding will depressed as most NPLs are still on the balance and provisioning has requested banks to raise some USD6bn in
support margins sheet  Likely consolidation to come capital
 Shift of focus to liquidity and asset quality from  Banks are accumulating liquidity and reluctant to  Severe run on deposits during the crisis
profitability lend
 Government banks replaced private sector  The system avoided a deposit run despite three
lending during the crisis, but this is now reversed failures
(state banks lending grew 40% and 32% in 2008  Shrinking NIM owing to tighter competition for
and 2009, respectively, and 20% in 2010 deposits and low interest rates
(expected))
Source: HSBC
Middle East
UAE Qatar Saudi Arabia
GDP growth 2011 3.30% 9.50% 4.40%
(HSBC forecast)
Country’s total FX 41 113 410

reserves (USDbn)
System structure  52 banks in total, with top nine banks accounting for 81% of banking  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 assets
Market trends  Economic environment likely to be subdued:  Very strong economic growth  Banks’ profitability is expected to grow in 2011 as provisioning
abc
 Progress in restructuring the debt of government-related entities  Healthy asset quality with low NPLs charges have already peaked
 Lending growth is expected to resume  World Cup 2012: local banks will be major beneficiaries of the  Saudi banks should remain well capitalised. Despite a formal
 Increased competition for deposits to put pressure on margin expected USD54bn spending minimum capital adequacy requirement of 8%, banks seem to
 Legacy exposure to real estate remains a risk factor maintain a 12% floor
 Efficiency is expected to remain strong
Source: HSBC
51
52
Summary of support measures during the crisis
March 2011
EM Banks
Asia
Support during the  Temporarily removed credit  Relaxation by RBI of loan  Temporary blanket deposit  The state set up a bank  USD16bn ‘Resilience package’  USD48bn stimulus package
crisis: quota (ie upper lending limit) restructuring criteria in 2008, guarantee was introduced recapitalisation fund to support economic stability introduced in 2009 through
for the year allowing for easier restructuring during the crisis; it expired in  Purchased bad loans from  Temporary blanket deposit 2012
 Temporarily suspended 75% of NPLs 2010 banks via majority state-owned guarantee from October 2008  Deposit protection extended to
loan-to-deposit ratio for small-  Capital injections in state Korea Asset Management Corp to December 2010 all type of deposits – to 100%;
to medium-sized banks banks with low capital and  Provided certain SMEs with  SME guarantee to share 90% this will decrease to
close to 51% state ownership; guarantees for bank loans of risk with banks USD34,000 by Aug 2012
other banks were free to tap  Direct liquidity and funding  Measure to reduce speculative
equity market support property demand
 USD100bn were available in  Bilateral swap lines set up with
the form of guarantees for the US Fed (USD30bn) and
banks to issue foreign currency Dutch DNB to support banking
debt system; lines were not used
Liquidity support  Central bank has always  RBI liquidity injections in 2010  Temporary measures to provide  The authorities made  MAS standing facility already  None
offered liquidity support to through REPO on government liquidity assistance from October USD50bn in short-term foreign existed pre-crisis but the type
banks in China. No paper 2008 to March 2009, including currency liquidity support of collateral was widened in
extraordinary support was  RBI made USD liquidity line the expansion of assets available to Korean banks in a 2009
required during the crisis. available for banks in 2008/09 acceptable to and the duration of combination of a swap facility
 Reduced the statutory liquidity liquidity assistance through the (USD10bn), a loan facility
ratio from 25% to 24% from 18 discount window, FX swaps and (USD30bn) and loans secured
December 2010 the lending of term money at the by export bills (USD10bn).
request of the banks  The government has given an
 Incorporating FX swaps and FX guarantee commitment of
term repo into HKMA’s ongoing up to USD100bn for three
market operations to offer HKD years, to enable banks to fund
liquidity assistance to banks, in the USD debt market
starting from April 2009
Capital injections  USD29bn injected into ICBC,  USD3.6bn was injected into  No capital injection required,  KRW20trn (USD15bn) bank  None  None
CCB, BOC and BoComm state banks in 2010, to although a Contingent Bank recapitalisation fund, that was
through participation in rights maintain 8% Tier 1 ratio Capital Facility was established available to all banks
issue or IPO in 2010:  The government injected
USD1.5bn to PSBC in 2010; KRW3.4trn into major banks
USD19bn into ABC in 2008
Bailouts/  None  No bank failures; some small  None  None  None  None
defaults/restructuring private banks were acquired by
state banks with no losses to
debtors
Source: HSBC
abc
Summary of support measures during the crisis (cont’d)
March 2011
EM Banks
Asia (cont’d)
Most recent  State council approved new bank  Introduction in 2008 of  Deposit protection increased  Loan/deposit ratio should be  No recent changes, as the  Consumer protection measure
regulations: capital rules, incorporating new guidance for loan restructuring from HKD100,000 less than 100% by end-2013 normative ratio already to limit unfair bank fees
ratios proposed under Basel III and NPL provision (USD13,000) to HKD500,000  Mid- to long-term financing exceeded global standards: (affecting some 6-10% of bank
 CBRC required banks to bring requirements (to 70% of NPLs (USD65,000), replacing the ratio to be raised to 100% from Tier 1 of 6% and CAR of 10% earnings)
trust loans back on to the by September 2010) temporary blanket guarantee 90% (versus 4% and 8% globally);
balance sheet in 2011  Introduction of limitation on introduced during the crisis  New limits on banks’ FX more stringent loan
 CBRC assigned higher risk sector concentration (including derivative positions (to 50% of classification (requiring the
weighting to non-performing capital markets, 40% of capital, equity capital for domestic monitoring of borrowers’ credit
lending to local government and real estate, 15% of loans) banks and 250% of equity weakness, rather than only
financing vehicles  Minimum capital requirement capital for foreign banks) non-payments); stricter
for new banks is expected to  The government is seeking to guidance on personal loans
increase from USD43m to introduce a bank levy on non-
USD107m core foreign currency
 LTV ratio ceiling set at 80%, borrowings in H2 2011
and risk weighting and
provisioning requirement on
residential housing loans raised
Source: HSBC
abc
53
54
March 2011
EM Banks
Brazil and CIS
Support during the  Looser reserve requirements, broader deposit  Limited support to banks, allowing three large banks  Quick crisis response by CBR and MinFin:  Initial response was relatively good, with sizeable
crisis: guarantees to fail and forcing losses on bondholders support started in Q4 2008, and was largest in liquidity measures equivalent to 13% of deposits
 Banks across the system have been active in  Total support amounted from the government to EM – 10% of GDP (cUSD200bn):
tapping international capital markets for both USD8.2bn (including USD2.9bn in capital and  Mostly took the form of liquidity injections, but
hybrid capital instruments and senior debt USD3bn in long-term deposits) also capital injections and bailouts
 Government cut the key base rate by 500bp to  USD5bn bonds from SamrukKazyna being used in  Reduced reserve requirements on liabilities
8.75% restructuring to convert into preference shares of  Unsecured 1-year loans from CBR (some
Alliance and BTA 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
Liquidity support  RUSD100bn liquidity through reduced  USD3bn in long-term deposits  USD100bn in short-term funding (12% of banking  NBU provided USD7.8bn in loans to banks in H1
mandatory provisioning (reinstated from March liabilities), including USD10bn subordinated loan 2009
2010) to Sberbank  NBU introduced a temporary memorandum on
 Increase in securities eligible for repo early deposit withdrawals in March 2009, which
transactions was eventually lifted in May 2009
 Foreign-owned banks received liquidity support
from parents
Capital injections  USD110bn in BNDS (USD18bn to finance  USD2.9bn of capital injected into BTA, KKB, Halyk,  Total: USD27.4bn: a USD15bn sub loan to  Initial capital injection of USD1.2bn into three
Petrobras shares) Alliance Sberbank; USD5.8bn capital injection and a nationalised banks to be followed by a further
USD6.7bn sub loan to VTB. Around 30 banks USD1.88bn commitment
received sub debt from state-owned VEB in 2009
Bailouts/  One bank (PanAmericano): no government  Government had to nationalise BTA, Alliance BANK  USD5.5bn bailout of Svyaz Bank, KIT Finance,  3 banks nationalised and 14 went bankrupt
defaults/restructuring involvement as private owners borrowed and Temirbank, but senior and subordinated Sobinbank and Globex
USD1.5bn from deposit guarantee fund debtholders suffered from significant haircuts  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
Most recent  Curb short selling on foreign currency  Extensive changes introduced, aimed at increasing  Key regulatory changes that could be introduced  Measures to limit currency speculation and
regulations:  Anti-cyclical measures from December 2010: state supervision of the sector: in 2011 include consolidated banking oversight tighten currency controls
increased reserve requirements from 15% to  Right for NBK to purchase over 10% of shares in and greater control over the banks’ single- and  Planned increase in minimum capital requirement
20%, higher provisioning requirements on risky banks in the event of a breach of normative ratios related-party exposure to USD15m from USD9m by 1 January 2012 was
retail loans were introduced in December 2010  Tightening of qualifications to the banks’  Improvements in the capital framework, accepted by the Ukrainian court. Around 69
management regulation of related-party exposure and Ukrainian banks could be adversely affected
abc
 Limits placed on banks’ ownership by “offshore” entities securities trading  Anti-crisis introduction of 0% reserve requirement
 Changes to the calculation of normative ratios  Capital requirements raised to USD3m from 2010 on foreign currency loans was abolished; 20%
(current liquidity and liabilities-related ratios) to and to USD6m from 2012 (only 80% likely to mandatory reserve requirement introduced from
include off-balance-sheet liabilities comply) October 2010
 Basel II/III unlikely to be adopted in the medium  As at November 2009, NBU prohibited foreign-
term exchange lending to individuals
Source: HSBC
March 2011
EM Banks
Middle East
Support during the  Government provided significant support through CBUAE short-  USD9bn support package launched in Q4 2008, including equity  Government provided significant support during the crisis in the
crisis: term facilities (USD13.5bn) and MoF deposits convertible into injections and liquidity support form of deposit injections
subordinate debt (USD19bn in total):  Aggressive interest rate cuts
 Most deposits were converted during 2009  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,  Government purchased the entire portfolio of locally listed equities  Injections of SAR34bn in the form of deposits in 2008, SAR57bn in
convertible into Tier 2 capital for cash and bonds 6m of 2009
 Special liquidity facility to support DW restructuring  Purchase of bank loans (including real estate)
 Substantial deposits in all banks
Capital injections  Most banks converted MoF deposits into subordinate debt in 2009  QCB purchased 10% stakes in local banks during 2008-09 and  None
 USD4.4bn injection of perpetual Tier 1 securities by AD government plans to increase it by another 10% in Q1 2011 to support continued
and USD1.1bn by Dubai growth
Bailouts/  None  None  None
defaults/restructuring
Most recent  Tightening of provisioning requirements and recognition of bad  Restrictions on Islamic banking by conventional banks  Reserve requirements were reduced to 7% of demand deposits
regulations: loans and to 4% of savings and time deposits
Source: HSBC
abc
55
56
Risks/strengths
March 2011
EM Banks
Asia
Strengths  Strong domestic liquidity  Strong profitability on the back  Very well capitalised compared  Reduced dependence on  Strong franchise supporting  Stable deposits (85-80% loan
supported by high savings rate; of a favourable macro with peers in the region wholesale funding stable funding base; to deposits) and low level of
average loan-deposit ratio of backdrop  Funded through deposits and  Improving asset quality owing  Good liquidity (loan-to-deposit wholesale funding resulted in
69% for the banking system as  Stable retail deposit funding maintain relatively liquid to recovery in the economy and ratio of 71%) and capitalisation strong liquidity and sector
at December 2010 base balance sheets massive NPL sales (CAR above 16%) stability
 Sound liquidity  Strong regulatory oversight  Well-capitalised banking  Reasonable profitability  improved earnings quality and
system, with average Tier 1  Good quality assets, suffered capital
and capital adequacy ratios at limited impact during the global  good asset quality owing to
11.3% and 14.3%, respectively, crisis tight credit control
as at H1 2010  Conservative provisioning  solid regulation, adoption of
Basel II
Risks  Reliability of information  Accelerated pace of loan  Risk of excessive credit growth  Household debt in Korea  Borrower concentration and real  Ongoing political uncertainty –
disclosure is limited by its growth with possibility of an owing to loose monetary policy remains high estate exposure remains credit inflow and strengthening
fragmented nature, and asset bubble, masking potential  Increase in mainland China  High exposure to significant (about 50% of SGD currency could impair the credit
unreported activity related to weakness of asset quality and exposure may lead to credit construction/real estate sector loans) quality of exporters and
informal collateralisation and loan performance of restructured quality concerns  Restructuring of the shipping  Significant exposure outside contribute to the creation of an
sell-down, which distort the size loans  Lower NIM could hurt and shipbuilding sector in 2011 Singapore asset bubble
and industry breakdown of the  Potential need for capital in profitability will keep loan provision high  Margin pressure from  Pressure on fee income from
loan portfolio public banks to support growth competition; fee income to remain government consumer
 Problem loans may be masked  Low earnings diversification of volatile protection measures
by high credit growth public banks  High credit concentration
 Vulnerable to real estate (300% of Tier 1 for top 20
market and asset price borrowers)
correction
 Capital levels are low relative
to credit growth and profitability
metrics
Source: HSBC
Brazil and CIS

Strengths  Its largely local funding base insulates it from the  Good system liquidity  Government support, particularly to top state-  Significant number of banks with foreign capital
volatility in international capital markets  Funding composition has improved in non- owned banks (47% of sector assets)
 Strong capitalisation, stable margins defaulting banks following deleveraging, mostly  Improved profitability
 None of the private banks defaulted during the through deposits from state-owned companies  Strong, although potentially volatile, domestic
crisis funding base
Risks  Asset quality could deteriorate when new loans  Quality of assets remains a risk factor  Limited control of securities operations  Undercapitalisation
abc
start to season  Poor transparency of loan portfolio performance  Gaps in monitoring of related-party transactions  Asset and earning quality
 Medium-sized banks could have quite high  Concentrated funding  Risk management and corporate governance  Weak corporate governance
external leverage  Corporate governance  Limited liquidity with high loans/deposits of
 Liquidity is a still priority and a risk  Quality of earning questionable owing to high almost 200%
accruals of interest
Source: HSBC
Risks/strengths (cont’d)
March 2011
EM Banks
Middle East
Strengths  Capitalisation appears sufficient to absorb NPL increase  Strong growth  NPLs are adequately covered
 Inter-Emirates support (by Abu Dhabi to Dubai) is a stabilising factor  Healthy asset quality with NPLs at 1.7%  Comfortable liquidity levels
 Good liquidity: deposits provided a strong funding base – 2005-09  Adequate capital adequacy ratios
CAGR of 20% for demand deposits and 47% for time deposits  Prudent and strict regulator ensures Saudi banks’ readiness to cope
 Solid capitalisation with downturns
Risks  NPLs expected to peak in 2011  Pressure on NIM  High credit concentration
 Liquidity pressure to remain;  High loan/GDP of close to 90%  High deposit concentration. Top 20 deposits account for 20-40% of
 Concentration risk likely to increase the total on Moody’s estimates
 Concentrated funding (mostly deposits) with increasing costs  Mismatch in maturity profile of assets and liabilities
 Political instability
Source: HSBC
abc
57
EM Banks abc
March 2011
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
Credit spreads are fairly well Chart 1: spreads vs ratings for EMBI and CEMBI names, 17
February 2011
Keerthi Angammana
Analyst
explained by ratings alone HSBC Bank plc
7.5 ++44 207 991 5431
A convenient initial reference point for investors 7.0 y = 0.14x + 4.27 olga.fedotova@hsbcib.com
trying to evaluate risk/reward across regions, 6.5 R2 = 0.71 Olga Fedotova

Log(Spread)
6.0 Analyst
industries, and countries, is a company’s credit HSBC Bank plc
5.5 +44 207 9923 707
rating. Even though rating agencies are sometimes
5.0 keerthisri.angammana@hsbcib.com
criticised for being behind the curve, it is hard to 4.5
ignore that rating differences are able to explain 4.0
differences in credit spreads fairly well. For 0.0 5.0 10.0 15.0 20.0
Av g Rating (AAA=1, C=21)
example chart 1 shows that currently over 70% of
the average spread differences among names in Source: Bloomberg, Reuters, HSBC Calculations
the Emerging Market Bond Index (EMBI) and

Corporate Emerging Market Bond Index But differences in sector are
(CEMBI) are explained by their average credit also important
ratings from the three major agencies.
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
58
EM Banks abc
March 2011
exist among spreads due to duration, industry sector, security, which makes for easier comparisons than
or region. In contrast, chart 2 highlights financials in if richness or cheapness were expressed in terms
black, and sovereigns in red to illustrate the of a spread difference.
systematic differences between the sectors. The
Richness or cheapness expressed in this way is
fitted black line (representing financial institutions)
naturally risk-adjusted for volatility through its
being to the left of (or above) the red line
association with ratings. However we emphasise
(representing sovereigns) indicates that on average
that to be a true valuation measure it has to be
financial sector credits trade as if they were lower
combined with a fundamental and a directional
rated than those of a sovereign issuer of the
view on the likely evolution of richness and
same rating.
cheapness in the relevant sector. At this stage we
Chart 2: spreads vs ratings for EMBI and CEMBI names for focus our attention exclusively on the volatility
Sovereigns and Financials, 17 Feb 2011
adjustment, without trying to understand if the
Gov ernment Financial
7.5
cheapness represents a true opportunity, or
7.0 y = 0.14x + 4.35 whether it is just another way of expressing the
6.5 R 2 = 0.75
beta of a sector.
Log(Spread)
6.0
5.5 Chart 2 is for illustrative purposes, and for clarity
5.0
y = 0.15x + 4.00 shows regressions for just two sectors (Financials
4.5 R 2 = 0.72
4.0 and Sovereigns). But in the full model we capture
0.0 5.0 10.0 15.0 20.0 multiple differences by simultaneously fitting the
Av g Rating (AAA=1, C=21) sector (Government, Financial, Energy,
Source: Bloomberg, Reuters, HSBC Calculations Communications), region (Asia, Eastern Europe,
Middle East, and Latin America), and duration.
In terms of terminology, we use the horizontal Chart 3 shows how the differences among sectors
distance between the fitted lines representing have evolved over time.
different sectors as a measure of relative value
It can be seen from chart 3 that the financial sector,
that is expressed in rating notches. For example in
for example, currently trades around 2½ rating
chart 2, since on average financials offer a spread
notches cheaper than sovereigns, but that difference
pick-up over similarly-rated sovereigns, we would
has been as much as four notches in the past. This
call the financials ‘cheap’ to sovereigns, or say
also provides a convenient way of evaluating the
that the sovereigns are “rich” relative to
downside risk associated with the extra carry of 2½
financials, to a degree measured by the fitted
rating notches: this equates to 1½ notches, on the
horizontal distance between the two lines.
assumption that conditions could revert back to
There is an advantage to expressing relative where they were in April 2009.
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
59
EM Banks abc
March 2011
Chart 3: richness/cheapness measured in rating notches Chart 5: richness/cheapness (in rating notches) for different
(negative numbers indicate richness), EMBI + CEMBI regions (negative numbers indicate richness)
Govt Fin Energy Comm Asia EE LatAm MidEast

1.0 2.0
0.0 1.5
-1.0 1.0
Rich/Cheap
Rich/Cheap
0.5
-2.0
0.0
-3.0
-0.5
-4.0 -1.0
-5.0 -1.5
Sep -09
Aug -10
Dec-10
Feb -09
Jun-09
Sep -09
Jan-10
Aug -10
Dec-10
Feb-09
Jun-09
Jan-10
May-
May-
Source: Bloomberg, Reuters, HSBC Calculations Source: Reuters, Bloomberg, HSBC Calculations
Chart 4 shows the relative spread distribution over Chart 6 is similar to Chart 4, and plots regional
the last two years. The fairly linear relationships spreads relative to Asia. In this it appears that
among the sectors supports the argument that the Eastern Europe is a leveraged play on Asia during
corporate EM sectors are a leveraged play on sell-offs (The black circles appear to fall on a line
Sovereigns, with the Financials being the with a higher slope than the red).
most leveraged.
Chart 6: size- and duration-weighted sector Spreads vs Asia,
Feb 2009-Feb 2011, EMBI + CEMBI
Chart 4: size- and duration-weighted sector spreads vs
Government spreads, Feb 2009-Feb 2011, EMBI + CEMBI
Asia EE LatAm MidEast
Gov t Fin Energy Comm 1200
1000
Region OAS (bp)
1400
1200 800
Sector OAS (bp)
1000 600
400
800
200
600 0
400
100 300 500 700
200
Asia OAS (bp)
200 400 600
Gov ernment OAS (bp)
However this chart does not show the relative

Regional differences also ratings of the regions, and indeed chart 7 shows
matter how ratings for Eastern European credits were
generally worse than for their peers during the
Chart 5 quantifies the widely held perception that
first half of 2009, which may be a better
Asian credits, for example, are rich relative to
explanation for worse spread performance than
Eastern European credits. However, comparison
assuming higher beta. Charts 5, 6, and 7 highlight
with chart 3 shows that regional differences are in
the advantage of our methodology of fitting all
general smaller than the differences due to its
sectors and regions simultaneously relative to
sector, although the recent spread widening in the
rating rather than the usual approach of using
Middle East is significant.
index sectors, because it adjusts naturally for
credit quality.
60
EM Banks abc
March 2011
Chart 7: issue-weighted average rating for the different through a rating change, but it does give the analyst a
regions, February 2009 - March 2011
clear picture of what is priced into spreads. In Chart
Asia EE LatAm MidEast 9 the vertical black arrow points to the actual rating
A- A-
of the selected name, and the grey arrow points to
BBB+ BBB+
BBB BBB the implied rating.
BBB- BBB- Chart 9: illustration of implied rating and actual credit rating
BB+ BB+
BB BB
7.5
7.0
Rating
Feb-09
Dec-09
Apr-09
Aug -09
Feb-10
Dec-10
Oct -09
Apr-10
Aug -10
Oct-10
Jun-09
Jun-10
Feb-11
6.5
Log(Spread)
6.0
5.5
Source: Bloomberg, Reuters, HSBC Calculations 5.0
4.5
Chart 8 shows the average rating for the different 4.0
sectors has evolved over time 0.0 5.0 10.0 15.0 20.0
Av g Rating (AAA=1, C=21)
Chart 8: Issue-weighted average rating for different industry
sectors, Feb 2009-March 2011 Source: Bloomberg, Reuters, HSBC Calculations
Gov Fin Ener Comm

Working with an implied rating has several
A- A-
BBB+ BBB+
advantages because it does not change if the
BBB BBB spread does not move relative to the market. This
BBB- BBB- is a useful feature to have, and ensures that
BB+ BB+
changes in implied ratings are driven by
BB BB
idiosyncratic changes in the spread of the credit
Apr -09
Aug -09
Oct -09
Dec-09
Apr-10
Aug -10
Oct -10
Dec-10
Feb-09
Jun-09
Feb -10
Jun-10
Feb-11
rather than changes in overall market spreads.
Broadly speaking, all credit spreads move in the

Source: Bloomberg, reuters, HSBC Calculations same direction unless there is a specific reason for
a particular credit to buck the trend. The size of
Combining the effect of the co-movement is quantified as the credit's
sector, region, and duration ‘beta’, or sensitivity to the market, and represents
Simultaneously allowing for differences in sector, how many basis points the credit typically moves
region, and duration allows us to calculate an when the market moves by a single basis point.
adjusted measure that we call “Implied Rating”, When looking for relative value trades, it is
which is a measure that should be globally typical to look for movements that cannot be
comparable, and represents the theoretical spread explained through the beta. This is a good
the bond would have if there were no differences approach in theory, but often breaks down in
in sector, region, or duration. practice because betas are not stable, and it is not
The difference between the implied and actual rating clear over what period they should be calculated
of a bond gives a measure of possible mispricing. in order to be relevant for the future.
Obviously, at this point it is not possible to form an However, since changes to the implied rating
opinion as to whether the mispricing is more likely exclude changes that are related to the market, and
to be resolved through a spread adjustment or
61
EM Banks abc
March 2011
since the implied rating is a spot estimate that The difference between implied- and forecast-
depends on history, it is not subject to adjusted ratings indicate the richness or cheapness
inaccuracies resulting from a beta calculated over that the countries credit spreads are currently trading
a possibly unrepresentative historical period. relative to their ratings, growth, and inflation
forecasts, and chart 11 shows the results for the
Differences among sovereigns
countries associated with the banks in this report.
must also be accounted for
Chart 11: relative richness/cheapness of selected countries
While we have developed a single measure of expressed in rating notches (negative numbers indicate
richness)
relative valuation accounting for the differences Country Rich/Cheap Country Rich/Cheap
among regions and sectors, often two companies Brazil -3.0 Russia -1.7
China 1.8 Saudi Arabia 2.0
from different countries are compared solely on Hong Kong -1.7 Singapore N/A
the basis of where they trade relative to the India 0.2 Thailand -0.9
Kazakhstan 0.6 Ukraine -0.4
sovereign, and a key question is whether the Korea 1.3 UAE 3.5
underlying sovereign itself is trading rich or cheap. Qatar 4.7
Source: HSBC Calculations
We have developed a separate quantitative model

that attempts to answer this question using credit Our methodology in practice, ITAU vs
ratings, consensus growth forecasts, and Brazil
consensus inflation forecasts (see Emerging Chart 12 shows the OAS of ITAU 2020
Sovereigns: A new tool for identifying (Baa2/NR/BBB-) and Brazil 2021
opportunities in sovereign CDS, January 2010). (Baa3/NR/BBB-) over the last year.
The output of the model is also an ‘Implied Chart 12: ITAU 2020 vs Brazil 2021, Mar 2010-Mar 2011
Rating’, which is the theoretical rating that the
ITAU 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
credit would have if it fell exactly on the fitted
400 250
relationship between spreads and ratings, and the
350
200
Forecast Adjusted Rating (FAR) is the rating the 300
OAS ( bp)
Diff ( bp)
250 150
model assigns to the credit. A sample output is
200 100
shown below for Russia.
150
50
100
Chart 10: evolution of rating, implied rating, and forecast
adjusted rating (FAR), Mar 2010-Mar 2011 50 0
Sep-10
Jun-10
Dec -10
Mar-10
Mar-11
Russia FAR Average Implied

A A
Source: Bloomberg, HSBC Calculations
A- A-
It would seem, at first glance, that ITAU is several
BBB+ BBB+ rating notches cheaper than Brazil considering
that it is better rated, and offers a spread pick-up
BBB BBB of around 150bp. However we have seen that
10-Aug
19 -Sep
8-Dec
17-Jan
26-Feb
3-Mar
12-Apr
22-May
29-Oct
1-Jul
financial companies generally trade at several

notches cheaper than sovereigns. Our model
Source: Reuters, Bloomberg, HSBC Calculations 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
62
EM Banks abc
March 2011
the risk-adjusted spread pick-up between ITAU The usual way to make such a scorecard is to
and Brazil is only around 1 rating notch. subjectively decide the weights that are to be
used. However recognising that the market pays
Chart 13: relative richness/cheapness, ITAU vs Brazil
different levels of attention to factors based on
ITA U 6.2 15.04.20 BRAZIL 4.875 22.01.21 Diff
current conditions, we have attempted to weight
3.0 3.00 the factors on the basis of ability to explain
2.0
implied ratings using a discriminant analysis of
1.0 2.00
Difference
0.0 the factors. The model finds that currently the

1.00
-1.0 most important factors that determine where EM
-2.0 0.00
-3.0
bank bonds trade are, in order of importance,
-4.0 -1.00 sovereign support, country inflation, NPLs/total
Jun-10
Dec-10
Sep-10
Mar-11
Mar-10
loans, ROE, loans/deposits, costs/income, and

loans/assets. However we have found that
Source: Bloomberg including sovereign support and inflation merely
generates a scorecard that mimics ratings. We
Rating change or spread change? have therefore removed the sovereign support and
The framework for relative value presented so far inflation factors and chart 14 shows the
has focused on identifying richness or cheapness richness/cheapness relative to the scorecard value,
relative to ratings, region, sector, and duration. and chart 15 shows the credit rating relative to the
However it is agnostic about whether the scorecard value.
discrepancy would be resolved through a change
As with any technique that attempts to automate
in spread or through a change in rating, and
valuations, some of the scorecard values appear
generally speaking we leave this judgement to the
unrealistic, but we keep it as a quantitative tool
analyst. However we have produced a
that gives an additional perspective to the analysis
fundamental scorecard that tries to separate the
of the credits.
better credits from the weaker ones.
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).
63
EM Banks abc
March 2011
Richness/cheapness relative to fundamental scorecard, 3 March 2011
4.0
EURDEV
3.0
NBADUH
EIBKOR
CITNAT INDKOR
2.0 COM QAT
SDBC
KDB EXIM CH BCHINA
ADCB SABBAB
DAHSIN ICBCAS
1.0 RSHB BBLTB WOORIB KEB
VTB OCBCSP
Rich/Cheap
VEBBNKSBERRU UOBSP
ATFBP CINDBK
BNKEA
0.0 BANVOR HANABK
ITAU BKM OSC
DBSSP
BANBRA AXSBIN
DBKAZ
-1.0
BRADES ICICI BOBIN
BNDES
GPBRU
SBIIN BOIIN
-2.0
ALFARU
ALLIBK HSBKKZ
-3.0 EXIM UK KKB

UKRSIB
BTAS
-4.0
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4
Adjusted Scorecard
Source: Bloomberg/Reuters, HSBC Calculations
Relationship between scorecard value and credit rating, 3 March 2011
B+ ALLIBK B+
BTAS KKB
BB- BB-
BB BB
ATFBP EXIMUK EURDEV
BB+ HSBKKZ BB+
UKRSIB
BBB- ALFARU BBB-
BKMOSC CINDBK
VTB BANVOR GPBRU
VEBBNK DAHSIN AXSBIN
BBB RSHBITAU BBB
DBKAZ BRADES
BBLTB ICICI BNKEA BOBIN
BOIIN
SBERRU SBIIN BCHINA
BBB+ COMQAT ICBCAS BBB+
ADCB WOORIB KEB
BANBRA BNDES
SABBAB INDKOR EIBKOR
A- KDB CITNAT HANABK NBADUH A-
UOBSP
A SDBC A
EXIMCH
OCBCSP
A+ A+
DBSSP
AA- AA-
-0.5 -0.4 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5
Adjusted Scorecard
64
EM Banks abc
March 2011
Bank profiles
65
EM Banks abc
March 2011
66
EM Banks abc
March 2011
Asian banks
67
EM Banks abc
March 2011
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
Credit growth and risks reach RMB10.8trn (USD1.63trn) – growth of Yi Hu

Analyst
understated 27% y-o-y, or 29% of nominal GDP. Comparing The Hongkong and Shanghai
the strong credit expansion against 16% nominal Banking Corporation Limited
Loan growth in the first 11 months of 2010 kept +852 2996 6539
GDP growth in 9M10 suggests to us a degree of yi.hu@hsbc.com.hk
up its momentum at 19.4% y-o-y, with total new credit misallocation that is likely to be reflected in Devendran Mahendran
loans (RMB and FX) spiking up to RMB7.79trn banks’ asset quality. Year-to-date, new lending to Analyst
The Hongkong and Shanghai
(USD1.18trn), exceeding the government’s corporates was mainly distributed to the Banking Corporation Limited
RMB7.5trn new-loan target for the whole year. +852 2822 4521
infrastructure, manufacturing and real-estate devendran@hsbc.com.hk
Moreover, according to Fitch estimates, around development sectors, which contributed 47%,
RMB3trn of additional credit, in the form of either 14% and 7% of total loans outstanding. Lending
undiscounted acceptances or credit-related wealth to households grew at an unprecedented 42% y-o-
management and trust products, has not been y as of September 2010, of which 55% was in the
reflected in the banks’ balance sheets. If the form of mortgages. Note, loans to households
RMB3trn is incorporated, total new credit would account for 20% of loans outstanding.
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
68
EM Banks abc
March 2011
Considering both mortgage loans and loans to The capital level of China’s commercial banking
property developers, lending to the real estate sector has kept trending upwards. The total capital
sector rose by 34% y-o-y and accounted for 19% adequacy ratio and the Tier 1 ratio edged up to
of total loans. 11.6% and 9.5%, from 11.4% and 9.0%,
respectively, in December 2009, thanks to strong
Headline asset quality continued to improve, with
profit generation and recapitalisation activities.
commercial banks’ gross NPL ratio down to 1.2% as
After very strong loan growth in 2009, China’s
at September 2010, from 1.6% at end 2009, and the
banks conducted, or announced, large capital-
provision coverage ratio up to 203% from 155%
raising plans during that year. The top five banks
over the same period. However, the real concerns
alone either completed, or announced, a total of
over the banking system’s asset quality lie in the
RMB416bn (USD62bn) raised via either common
estimated RMB2trn of non-performing loans to local
equity or convertible bonds this year. However, as
government financing vehicles (LGFVs), which are
we expect credit growth to remain relatively
not yet captured in the above indicators. In July, the
robust, banks’ capital structures will likely remain
Ministry of Finance, the National Development and
under some pressure, in our view.
Reform Commission, the People’s Bank of China
and the China Banking Regulatory Commission We believe China’s bank regulator has been well
(CBRC) issued guidelines for cleaning up LGFVs. aware of the potential risks of continuous high
In mid-October, China Securities reported that loan growth and for this reason has imposed
around 26% of the RMB7.66trn lending to LGFVs is higher capital and provision requirements (eg,
problematic – ie has been extended to borrowers total provisions/total loans of 2.5x on top of the
who have encountered financial difficulties and existing 150% loan-loss coverage-ratio
consequently are having problems servicing their requirement). Given China banks’ central role in
debt. If the implied RMB2trn is counted as NPLs, providing financing and driving economic growth,
we estimate that the NPL ratios of commercial banks capital misallocation is likely to persist, in our
and the banking sector would rise to 5.1% and 7.0%, view. In addition, we continue to have concerns
from 1.3% and 2.8%, respectively (Figure 2). over asset quality, especially over loans
According to 21st Century Business News, the guaranteed by local governments. Consequently,
results of CBRC verification show that RMB3.6trn, we believe the contingent risk that China’s
or 49% of lending to LGFVs, is guaranteed by local banking industry poses to the sovereign credit
governments, which equates to around 60% of profile is high.
China’s current public debt level, or 10% of
nominal GDP.
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
69
EM Banks abc
March 2011

Increasing China’s competitiveness China
Key events and risks to monitor Credit profile
 Loan provisioning could rise due to LGFV exposure Rating Outlook Rating Outlook
 Funding costs could rise if CDB bonds are designated 20% risk-weight
Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Fitch Fitch A+ Stable
We continue to view CDB’s credit profile as linked closely to the sovereign, given the Senior unsecured A+ Stable Moody's Aa3 Positive
ownership and role it plays in China’s economy. We note that the bank is commercially Sub-debt S&P AA- Stable
oriented and has a niche in financing medium-term infrastructure projects, which we Moody’s
view positively. The downside risk to our recommendation include: any adverse Senior unsecured Aa3 Positive Major shareholders (as at Dec’09)
exposure to local government financing vehicles (LGFVs), which could weigh on asset Bank-deposit Ministry of Finance 51.3%
quality and the bank’s capital structure. However, the credit profile of CDB is strongly Sub-debt Central Huijin Investment Ltd 48.7%
linked to that of the government and is likely to move with the latter, which is both an Financial strength
upside and a downside risk. S&P
Senior unsecured AA- Stable Bloomberg
HSBC FI Research view Sub-debt SDBC
Financial strength
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 Key dollar-denominated bonds
the year with most new loans flowing to public infrastructure, petrochemical projects
and public highways. Asset quality deteriorated, with gross NPLs up 25%. Capital Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
level weakened, with Tier 1 down to 8.8% in FY09 from 11.3% in FY08 on rapid SDBC ’14 (A+/Aa3/AA-) 600m 4.75%
credit expansion. Total CAR held up at 11.8% due to a RMB40bn sub-debt issued in SDBC ’15 (A+/Aa3/AA-) 1,000m 5.0%
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, Bank in brief
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 China Development Bank Corporation (CDB) was one of three policy banks
weaker than that implied by NPL ratios. Its conversion to a commercial bank allowed established in China in 1994 pursuant to a Special Decree of the State Council (the
it to solicit customer deposits, which grew 58% in FY09. Despite the commercialisation, country’s highest administrative body) as a policy-oriented statutory financial
CDB is wholly owned by the government and will continue to fulfil its policy role. institution. In December 2008, as part of a commercialisation process, the bank was
According to CBRC, the risk-weight of RMB bonds issued by CDB before 2010 will reorganised by as joint-stock corporation that is 51% owned by the Ministry of
remain at 0% but might be extended beyond 2011. CDB has a funding advantage as Finance and 49% by Central Huijin Investment. The bank had 35 branches and 3
RMB bonds issued by other commercial banks carry a 20% risk-weight. representative offices. Assets totalled RMB4,540bn (USD666bn) as at Dec09.
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521

Yi Hu yi.hu@hsbc.com.hk +852 2996 6539
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 27.8
Interest expense -7,919 -10,545 -17,046 -17,679 Assets 21.9 25.1 32.0 18.8
Net interest income 6,624 9,180 11,926 10,865 Pre-provision profit 29.0 24.7 31.3 -13.8
Other operating income -38 -505 538 746 Net income 21.4 6.9 -14.4 31.3
Operating 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 0.8
Pre-provision profits 5,540 7,241 10,409 9,128 Pre-provision profits/Average assets 2.1 2.1 2.2 1.5
Provisions for loan losses -493 -1,411 -5,635 -2,976 Net interest margins 2.53 2.89 2.60 1.89
Pre-tax 5,047 5,830 4,774 6,153 Cost-income ratio 15.9 16.5 16.5 21.4
Taxation -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 4,093
Key balance sheet items Loan Loss Res/NPLs 191 251 210 215
Deposits 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 11.8
Total assets 296,530 370,896 559,501 664,986 Tier-1 ratio na na 10.1 8.8
Total 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.
70
EM Banks abc
March 2011
Export Import Bank of China

Championing China abroad China
 Strong credit growth could lead to asset impairment down the road Rating Outlook Rating Outlook
 Profile could evolve with China’s ‘go global’ push
Senior unsecured A+ Stable Moody's Aa3 Positive
The state sets the strategic direction but allows management a degree of Sub-debt S&P AA- Stable
independence in balancing policy goals and commercial objectives. Information Moody’s
disclosure remains thin, so future performance may surprise. Nevertheless CEXIM Senior unsecured Aa3 Positive Major shareholders (as at Dec’09)
continues to play an important policy role in promoting trade and its credit profile is Bank-deposit Government of China 100%
inextricably linked to the China sovereign. Taken all together, we have a Neutral Sub-debt
fundamental recommendation on the issuer. The risks to our recommendation, to Financial strength
both the upside and the downside, are directly linked with the owner, the state and S&P
changes in its credit profile and relationship with CEXIM. Senior unsecured AA- Stable Bloomberg
Sub-debt EXIMCH
HSBC FI Research view
Financial strength
Export Import Bank of China’s (CEXIM) net income in 2009 rose 13% y-o-y as loan-
Key dollar-denominated bonds
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%. Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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. EXIMCH ’14 (A+/Aa3/AA-) 1,000m 5.25%
Asset quality improved with CEXIM’s NPL ratio declining to 1.10% in FY09 from EXIMCH ’15 (A+/Aa3/AA-) 1,000m 4.875%
1.52% in FY08. Capitalisation improved slightly, with an equity/asset ratio of 1.3%
in FY09, down from 1.2% in FY08.
Bank in brief
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 CEXIM is one of China’s policy banks and is directly wholly owned by the Chinese
facilitating trade. The support mechanism includes certain funding advantages and government. It was established in 1994, pursuant to a special decree of the State
government fiscal subsidies to cover its policy objectives. We believe that unlike the Council, as a policy-oriented statutory financial institution. CEXIM is the only export
move to commercialise CDB, CEXIM will continue to remain a policy bank, so the credit agency in China and is subject to the supervision and direction of the PBOC,
question of a dilution in the government’s shareholding should not arise. 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*
Net interest income 51 331 521 512 Pre-tax income -8.9 -60.4 1480.5 23.4
Other operating income 108 -141 390 353 Net income 23.2 23.6 1931.1 13.5
Operating income 158 190 911 865 Profitability
Operating expenses -102 -167 -290 -327 ROAA 0.04 0.03 0.44 0.35
Pre-provision profits 57 24 622 538 ROAE 1.57 1.49 26.64 28.37
Impairment losses - - -244 -91 Net interest margins** 0.19 0.88 0.82 0.49
Non-operating profit - - 28 64 Cost-income ratio 64.2 87.6 31.8 37.8
Pre-tax 57 24 407 510 Asset quality
Taxation -46 -9 -87 -141 Gross NPL ratio 3.47 2.45 1.52 1.10
Net 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 na
Key balance sheet items Capital structure
Deposits 3,875 4,351 6,471 7,511 Total CAR na na na na
Advances 29,332 43,380 64,804 86,698 Total equity/total assets 2.2 2.4 1.2 1.3
Total 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
71
EM Banks abc
March 2011
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
Growth of lending into China property sector (Figure 2). Lending to the property Devendran Mahendran
Analyst
is a concern sector in Hong Kong grew by 18% y-o-y as of The Hongkong and Shanghai
September 2010. Lending to the property sector Banking Corporation Limited
Loan growth in the Hong Kong banking sector has +852 2822 4521
comprises construction, property development and devendran@hsbc.com.hk
been strong, reaching 26% y-o-y as of September mortgages and accounted for 52% of lending in Yi Hu
2010 compared with flat loan growth as at Hong Kong, or 38% of loans of Hong Kong banks Analyst
The Hongkong and Shanghai
December 2009. Lending for financing trade grew as at September 2010. Banking Corporation Limited
by 54% y-o-y while loans to be used in Hong Kong +852 2996 6539
yi.hu@hsbc.com.hk
grew by 21% y-o-y and loans to be used outside There are signs that funds are being directed into
Hong Kong grew by 41% (Figure 1). Strong Mainland China by Hong Kong and Mainland
growth in trade financing is not surprising given the corporates although there is no clarity on how
sharp drop-off in trade in 2009. However, credit these funds are being used in Mainland China.
expansion into Hong Kong raises some concerns, Our concern is that much may be finding their
particularly as it seems to be pouring into the way into property.
Hong Kong SAR – key data on the banking sector

LTM
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
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
72
EM Banks abc
March 2011
1. Loans in Hong Kong by use (as at September 2010) However, concerns over credit misallocation are
HKDm % y-o-y % total mitigated by strong capital levels and the still-liquid
Loans for financing trade 256,379 54% 6% balance sheet of the banking sector. The capital
HKD 68,611 8%
FC 187,768 80% adequacy ratio of the sector stood at 16.2% while the
Loans for use in HK 3,050,061 21% 74% loan-deposit ratio was 59% as at June 2010.
HKD 2,595,386 19%
FC 454,675 29%
Loans for use outside of HK 784,761 41% 19% Given its status as a financial centre, total
HKD 185,442 34% credit/GDP is understandably high, standing at
FC 599,319 43%
Loans where place of use unknown 34,844 29% 1% 252% (bank credit/GDP was 221%) as at June
HKD 6,770 26%
FC 28,074 30% 2010. However, the contingent risk to the
Total 4,126,045 26% 100% sovereign is viewed as low, in our view, given the
Source: HKMA
strength of the banking sector.
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
73
EM Banks abc
March 2011
BOC Hong Kong

Leading lender in Hong Kong Hong Kong
 Strong credit growth could put pressure on capital structure Rating Outlook Rating Outlook
 Vulnerable to headline risk of its parent
 Likely to benefit from development of renminbi business in Hong Kong Credit rating profile FC government bond ratings
Fitch Fitch AA+ Stable
Credit profile outlook (Neutral) Senior unsecured A Stable Moody's Aa1 Positive
Sub-debt A- S&P AAA Stable
As the second-largest bank in Hong Kong, BOCHK has a strong domestic franchise Moody’s
and its credit profile is underpinned by the strength of its parent, Bank of China, Senior unsecured NR Major shareholders (as at Jun’10)
which is majority owned by the government of China. We have a long-term Bank-deposit Aa3 Stable Bank of China Limited 66.06%
fundamental recommendation of Neutral on the issuer. Risks to our view include: Sub-debt A1 Stable Shareholding of Bank of China Limited
headline risk from its parent, for instance on provisioning regarding exposure to Financial strength C+ Stable Central Huijin 67.53%
local government financing vehicles (LGFVs) in 2011. Thinning capitalisation as a S&P
result of credit expansion represents a downside risk to our view. Upside risks Senior unsecured A- Positive Bloomberg
would include a significant jump in profitability. Sub-debt BBB+ BCHINA
HSBC FI Research view Financial strength B
BOC Hong Kong (BOCHK) reported a 7.5% increase in net income for H1 2010 to Key dollar-denominated bonds
HKD7.2bn on the back of the reversal of impairment charges on both loans and Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 BCHINA ’20 (A-/A1/BBB+) [LT2] 2,500m 5.55%
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 Bank in brief
strong presence of its parent, Bank of China. Asset quality remains strong with gross
BOCHK is the second-largest banking group in Hong Kong and is one of the three
NPLs down 26% h-o-h and loan loss coverage up to 174% from 128% at end 2009.
HKD note-issuing banks. In 2003, the bank was appointed by the PBOC as the sole
Capital levels remain strong, as reflected by its total CAR, Tier 1 and tangible common
clearing bank for renminbi business in Hong Kong. BOCHK assets totalled
equity/total assets of 16.2%, 11.3% and 8.4% at end June 2010. Overall profitability
HKD1,302bn (USD168bn) and accounted for 13% of deposits and 14% of loans in
remains good, with ROA of 1.2% in H1 10. Despite strong loan demand, HK banks may
the HK banking sector. At end-June 2010, the bank had 269 branches in Hong
continue to come under pressure to attract deposits both in Hong Kong and the
Kong and 23 branches and sub-branches on the mainland. In 2009, BOCHK
mainland. This, in our view, will put a strain on HK banks’ loan growth and downward
transferred its mainland branches and sub-branches to Nanyang Commercial Bank
pressure on margins. We have a Neutral fundamental recommendation on the credit.
(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
Interest expense -3,417 -1,942 -484 -220 Assets 16.8 7.5 5.7 13.6
Net interest income 2,486 2,589 2,313 1,153 Pre-provision profit 34.3 -14.0 -17.0 -9.4
Other operating income 1,007 690 1,048 460 Net income 11.6 -78.4 310.6 7.5
Operating expenses -996 -1,126 -1,566 -583 ROAA 1.6 0.3 1.2 1.2
Pre-provision profits 2,497 2,152 1,795 1,030 Pre-provision profits/Average assets 2.0 1.5 1.2 1.3
Impairment allowances -186 -1,615 154 21 Net interest margins 2.07 2.00 1.69 1.58
Disposals/fair value adj 136 -15 202 77 Cost-income ratio 28.5 34.4 46.6 36.2
Other 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 0.4
Taxation -424 -138 -345 -182 Net NPL ratio 0.3 0.3 0.2 0.1
Minority interests -48 43 -41 -21 Gross NPLs (USDm) 231 276 228 169
Net 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 16.2
Deposits 101,714 103,556 108,626 114,555 Tier-1 ratio 12.2 10.9 11.6 11.3
Advances 53,860 60,578 67,980 76,691 TCE/total tangible assets 8.9 7.4 8.7 8.4
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.
74
EM Banks abc
March 2011
Bank of East Asia

Looking to China for growth Hong Kong
 China’s macro outlook given BEA’s 62% loan exposure to the sector Rating Outlook Rating Outlook
 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 rating profile FC government bond ratings
Credit profile outlook (Underweight) Senior unsecured - Moody's Aa1 Positve
Sub-debt - S&P AAA Stable
We think BEA’s weak profitability and strong credit growth will put pressure on the Moody’s
bank’s capital levels. In addition, exposure to real estate in China could weigh on Senior unsecured A2 Stable Major shareholders (as at Jun’10)
asset quality should there be a downturn in China property. Hence we are inclined Bank-deposit A2 Criteria CaixaCorp 14.99%
to the view that BEA’s credit profile will weaken over two years. The upside risks Sub-debt A3 Guoco Management Co Ltd 9.12%
to our view include substantial improvements in asset quality and capitalisation. Financial strength C-
HSBC FI Research view S&P
Senior unsecured A- Stable Bloomberg
Bank of East Asia (BEA) reported a 65% increase in net income to HKD4.2bn. Sub-debt BBB+ BNKEA
Excluding disposal gains and valuations losses on own debt issued as well as Financial strength B
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 Key dollar-denominated bonds
improved from 55% in 2009 to 69% in 2010, but remains lower than its peers in the Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 BNKEA ’20 (NR/A3/BBB+) [LT2] 600m 6.125%
contributed by lending to China. If the end use of credit is considered, BEA’s non-bank BNKEA ‘49-19c (NR/Ba3/BBB-) [T1] 500m 8.5%
exposure to mainland China increased 55% and accounted for 62% of the bank’s loan BNKEA ’17-12c (NR/A3/BBB+) [LT2] 600m L+52bps
book. The bank’s capital levels remained relatively unchanged in 2010, with a total BNKEA ’49-12c (NR/Baa3/BBB) [UT2] GBP300m 6.125%
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 Bank in brief
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 BEA is the largest independent local bank in Hong Kong. At June 2010, the bank’s
early next year, although the call is still subject to regulatory approval. We are consolidated assets were HKD478bn (USD62bn) and accounted for 3% of
Underweight on the credit on concerns over the bank’s underlying asset quality and customer deposits in Hong Kong. The bank’s core businesses are deposit-taking
capital pressure, and reiterate a sell trading call on BNKEA 8.5% ’49-19c. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 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
Net interest income 766 872 870 973 Pre-provision profit 0.6 -83.6 498.7 4.0
Other operating income 363 -43 444 462 Net income 20.6 -99.1 6476.9 64.7
Operating income 1,130 829 1,314 1,435 Profitability
Pre-provision profits 528 87 524 545 Pre-provision profits/Average assets 1.2 0.2 1.0 0.9
Provisions for loan losses -28 -72 -143 -37 Net interest margins* 1.8 1.8 1.7 1.78
Other impairment losses -23 -50 -5 -3 Cost-income ratio 53.2 89.5 60.2 62.1
Disposals 138 50 14 60 Asset quality
Valuation gains on inv ppty 38 -22 27 55 Gross NPL ratio 0.6 0.7 1.0 0.5
Profits of associates 12 7 34 44 Net NPL ratio 0.4 0.5 0.8 0.4
Pre-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 69.2
Net income 531 5 331 545 Capital structure
Loans 30,171 31,448 33,762 41,217 TCE/total tangible assets 7.1 7.3 7.3 7.7
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.
75
EM Banks abc
March 2011
Citic Bank International

Leveraging China connectivity Hong Kong
 Mainland exposure accounts for 44% of loan book Rating Outlook Rating Outlook
 Facilitates overseas expansion and investments by China corporates
 Will benefit from RMB settlement business in Hong Kong Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured BBB+ Stable Moody's Aa1 Positive
Sub-debt BBB S&P AAA Stable
While the bank’s franchise in Hong Kong is small, we think its standalone credit profile Moody’s
will remain stable in 2011 on the strength of its capital structure and a favourable Senior unsecured Baa2 Stable Major shareholders (as at Nov’10)
business cycle in Hong Kong. The downside risks include: excessive exposure to Bank-deposit Baa2 Citic Int’l Financial Holdings 100%
China corporates while the upside is related to significant improvements in financial Sub-debt Baa3 Shareholding of Citic Int’l Financial Holding
performance. Majority shareholding by China Citic Bank is a positive for CBI. Financial strength D+ China Citic Bank 70%
HSBC FI Research view S&P BBVA 30%
Senior unsecured -- Bloomberg
Citic Bank International’s H1 2010 net income jumped by 38% y-o-y to HKD587m Sub-debt -- CINDBK
on stronger net interest income (+26%) and lower impairment charges (-45%). Non- Financial strength --
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 Key dollar-denominated bonds
attributed to preparation for network expansion in Asia. Loans and deposits growth Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 CINDBK ’20 (BBB/Baa3/NR) [LT2] 500m 6.875%
lending to wholesale and retail trade (+135% h-o-h), manufacturing (+44%) and CINDBK’17-12c (BBB/Baa3/NR) [LT2] 250m L+175bps
trade finance (60%). Asset quality remains stable, with gross NPLs up 7% h-o-h but CINDBK ’49-12c (BBB-/Ba1/NR) [UT2] 250m 9.125%
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 Bank in brief
to balance sheet expansion, with Tier 1 and tangible common equity/total assets
Citic Bank International (CBI) was established in 1922, providing corporate and retail
down from 11.9% and 10.2% at end-2009 to 10.3% and 8.8% in H1 10, but remain
banking and treasury services. The bank operates with around 1,500 employees and 30
adequate, in our view. Total CAR rose to 18.0% from 16.4% during the same period
branches in Hong Kong, with a presence in Macau, Shanghai and the US. The bank is
thanks to the USD500m sub-debt issued in June 2010. We view the bank’s credit
also on track to expand in the ASEAN region. At end June 2010, the bank’s assets
profile as stable, do not expect any swings in core credit indicators, and have a
totalled HKD143bn (USD18bn), and accounted for 1.7% of deposits and 2.1% of loans
Neutral fundamental recommendation.
in the banking system. Its wholly owned subsidiary CITIC Ka Wah Bank (China) has
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 gained regulatory approval to offer onshore RMB and foreign currency banking services.
Citic Bank International: financial summary (consolidated)

Interest income 648 516 382 177 Loans 30.5 11.0 -2.8 20.2
Interest expense -469 -318 -132 -48 Assets 23.5 10.0 -1.4 22.2
Net interest income 179 199 250 129 Pre-provision profit -89.1 303.0 206.1 22.0
Other operating income -12 39 162 68 Net income -88.4 20.6 642.7 38.0
Impairment allowances -13 -49 -72 -15 Net interest margins 1.86 1.53 1.73 1.69
Disposals/fair value adj 10 3 10 2 Cost-income ratio 90.1 71.7 49.9 47.2
Pre-tax income 14 21 144 90 Asset quality
Taxation - -5 -22 -15 Gross NPL ratio 1.2 1.9 1.8 1.6
Net 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
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.
76
EM Banks abc
March 2011
Dah Sing Banking Group

More risk for higher profits Hong Kong
 Overall margins still under pressure Rating Outlook Rating Outlook
 Overseas lending grew 21% h-o-h and accounts for 25% of loan book
 Policy tightening in China could have asset-quality implications Credit rating profile (on DSB) FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A- Stable Moody's Aa1 Positive
Sub-debt BBB S&P AAA Stable
We believe the cyclical strength of the economies of Hong Kong and China will Moody’s
allow the bank to preserve its credit profile in 2011. We have a Neutral Senior unsecured A3 Stable Major shareholders (as at Jun’10)
recommendation on its fundamentals. Risks to our recommendation, to both the Bank-deposit A3 Dah Sing Financial Holdings 74.13%
upside and the downside, are related to the profitability in the home market, also the Sub-debt Baa1 Shareholding of DSFH
growth in lending into China may become an asset-quality risk. Financial strength C David Shou-Yeh Wong 40.15%
HSBC FI Research view S&P Mitsubishi UFJ Financial Gp 15.07%
Senior unsecured BBB+ Stable Bloomberg
Dah Sing Banking Group reported a 65% increase in net income to HKD507m for Sub-debt BBB DAHSIN
1H10. The improvement was driven by lower operating expenses (-33% y-o-y) and * Note: S&P ratings are unsolicited
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 Key dollar-denominated bonds
expanded 11% h-o-h in H1 2010, on property-related lending, trade finance and Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 DAHSIN’20 (BBB+/Baa1/NR) [LT2] 225m 6.625%
tighter credit quotas faced by mainland lenders, especially in certain industries, DAHSIN’13 (A-/A3/NR) 175m L+138bps
which we see as a potential risk to asset quality should the economy slow or the DAHSIN ’49-17c (BBB/Baa2/BBB-) [UT2] 200m 6.253%
property market correct. Asset quality has improved significantly, with gross NPLs DAHSIN ’17-12c (BBB+/Baa1/BBB) [LT2] 150m 5.451%
DAHSIN ’16-11c (BBB+/Baa1/BBB) [LT2] 150m L+75bps
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 Bank in brief
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 Dah Sing Banking Group (DSBG) is the holding company for the DSFH Group’s
asset pricing and deposit taking. Room for further credit-cost reduction is likely to be banking subsidiaries, including Dah Sing Bank (DSB), MEVAS Bank Ltd and D.A.
limited. Although overall profitability is low, there is enough improvement in credit H. Holdings. DSB accounts for 96% of DSBG’s assets. DSBG holds 48 branches in
metrics for ratings to remain stable, in our view. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 1.3% of the sector’s deposits. DSFH also operates in insurance business. Lending
Yi Hu yi.hu@hsbc.com.hk +852 2996 6539 outside HK accounts for 25% of the loan portfolio.
Dah Sing Banking Group: financial summary

Interest income 750 592 390 167 Loans 26.5 6.2 -3.6 2.6
Interest expense -485 -309 -114 -38 Assets 13.6 -3.1 1.1 -0.6
Net interest income 265 284 275 128 Pre-provision profit 18.5 -13.7 -58.2 112.4
Other operating income 115 104 26 24 Net income -33.1 -76.4 218.5 65.3
Provisions for loan losses -23 -85 -55 -5 Net interest margins 2.16 2.11 1.95 1.9
Gains on disp/revaluation 46 -8 7 1 Cost-income ratio 43.0 51.6 73.9 54.4
Profits 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 0.53
Impairment on AFS/HTM -133 -84 - - Net NPL ratio 0.22 0.80 0.40 0.22
Pre-tax income 117 27 88 73 Gross NPLs (USDm) 36 134 71 45
Taxation -14 -3 -11 -8 Loan Loss Res./NPLs 128.8 81.9 123.4 162.0
Net income 103 24 78 65 Capital structure
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.
77
EM Banks abc
March 2011
ICBC (Asia)
Tapping cross-border flows Hong Kong
 Strong lending growth into China and China-related corporates raises concerns Rating Outlook Rating Outlook
 Potential strain in funding as it does not have the retail funding breadth of peers
Credit profile outlook (Neutral) Fitch Fitch AA Stable
Considering the potential support from its parent, we view the bank’s credit profile Senior unsecured A- RWP Moody's Aa2 Positive
as stable and have a Neutral recommendation on the credit. However the bank’s Sub-debt BBB+ S&P AAA Stable
standalone profile is likely to slip in 2011. The downside risks to our view include: Moody’s
strong loan growth puts pressure on the capital structure and funding. The upside Senior unsecured NR Stable Major shareholders (as at Nov’10)
risk is related to significant improvement in credit indicators. Bank-deposit A2 ICBC 72.81%
Sub-debt A3 Shareholding of ICBC (as at Jun’10)
HSBC FI Research view Financial strength C- Central Huijin 35.4%
ICBC (Asia) H1 2010 net income rose 32% y-o-y to HKD1,229m on higher interest S&P Ministry of Finance 35.3%
income (+16%) and lower provisions (-21%). Higher interest income is in line with Senior unsecured -- Bloomberg
robust loan growth of 43% y-o-y. The sharpest credit expansion was in loans for Sub-debt -- ICBCAS
trade finance (+404% y-o-y, 108% h-o-h) and for use outside Hong Kong (+45% y- Financial strength --
o-y, 16% h-o-h). Lending for overseas use, the property-related sector, and trade Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
(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 ICBCAS ’20 (BBB+/A3/NR) sub 500m 5.125%
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
Bank in brief
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 ICBC (Asia) is the HK subsidiary of Industrial & Commercial Bank of China (ICBC)
under pressure, with the loan-to-deposit ratio up to 102% in H1 2010 from 91% in and is to be privatised by its parent by December 2010. ICBC (Asia) was
FY09 and the bank’s tier-1 capital ratio down to 8.4% from 9.0% in the same period, established in 1964 as Union Bank Limited and acquired by ICBC in 2000. It
which is the lowest among the HK banks we cover. Note that at end December provides retail, commercial and corporate banking services, with 44 branches in
2009, the bank’s HKD loan-to-deposit ratio had reached 124%. With continued Hong Kong. The bank’s assets totalled HKD256bn (USD33bn) as of June 2010,
strong credit growth, the bank’s funding and capitalisation should remain under and accounted for 3% of deposits and 5% of loans in the HK banking sector. The
pressure, which could be partly eased by the USD500m sub-debt issue this year. bank also conducts offshore RMB business and banking services in mainland
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 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
Interest income 1,134 996 578 323 Loans 60.9 12.6 7.3 43.3
Interest expense -828 -611 -190 -102 Assets 31.4 1.2 11.0 17.2
Net interest income 306 385 388 222 Pre-provision profit 23.7 22.3 13.3 20.8
Other operating income 101 97 152 71 Net income 29.2 -39.8 160.7 32.3
Impairment provisions -17 -156 -75 -27 Net interest margins 1.47 1.55 1.56 1.51
Gains on revaluation/disp 4 -29 102 11 Cost-income ratio 35.7 33.4 32.4 29.8
Profits of associates 1 0 3 1 Asset quality
Pre-tax income 250 137 396 190 Gross NPL ratio 0.53 0.65 0.92 0.66
Net 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
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.
78
EM Banks abc
March 2011
Wing Hang Bank

Growth in property and China Hong Kong
 HK property market accounts for 37% of loan portfolio Rating Outlook Rating Outlook
 China and Macau account for 33% of loans
Credit profile outlook (Neutral) Fitch Fitch AA+ Stable
Senior unsecured A- Stable Moody's Aa1 Positive
Wing Hang’s capitalisation is strong. However, its balance sheet has become less liquid Junior sub-debt BBB S&P AAA Stable
as it pushes for earnings growth. As a result, its loan-to-deposit ratio and loan-to-asset
Moody’s
ratio is at its highest for at least the past five years. The fast expansion in China and
Senior unsecured - Stable Major shareholders (as at Jun’10)
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 Bank-deposit A2 The Bank of New York Mellon 20.28%
its loan portfolio. However, the strength of the Hong Kong and China economies should Junior sub-debt Baa1 The Fung Family 20.07%
ensure stability in the bank’s credit profile in 2011. Financial strength C+ Aberdeen Asset Mgmt & sub 8.00%
S&P
HSBC FI Research view Senior unsecured - Bloomberg
Wing Hang Bank’s H1 2010 net profits increased by 49% y-o-y to HKD761m, on the back of
Sub-debt - WINHAN
strong loan growth (+16% y-o-y) and a write-back of loan-loss provisions. Net interest margin Junior sub-debt -
improved to 1.91% from 1.79% a year ago, boosted by the bank’s treasury operations and Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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- WINHAN ‘49-17c (BBB/Baa1/NR) [UT2] 400m 6.0%
deposit ratio edged up to 74.4%, close to the upper limit of the bank’s target (70%-75%). WINHAN ’49-13c (BBB/Baa1/NR) [UT2] 225m 9.375%
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 Bank in brief
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 Wing Hang Bank is the holding company and the principal operating company of the
expansion in China is a risk factor to be watched carefully in our view, especially when the group, providing corporate and retail banking, FX and treasury services. The bank has a
economy slows or the property market sees significant correction. We expect the bank’s network of 65 branches, with a presence in Macao and mainland China through
credit ratings to remain stable and maintain a Neutral recommendation on the credit. 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

Interest income 939 749 507 264 Loans 26.5 6.0 1.3 15.5
Interest expense -629 -435 -190 -94 Assets 14.3 -3.8 9.5 3.5
Net interest income 310 314 317 170 Pre-provision profit 6.6 12.0 -42.4 16.9
Provisions for loan losses -0 -57 -7 6 Net interest margins 1.90 1.84 1.82 1.91
Impairment losses on AFS - -38 10 1 Cost-income ratio 39.7 41.2 55.1 48.8
Gains 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 0.37
Pre-tax income 300 175 185 119 Net NPL ratio 0.29 0.41 0.40 0.29
Taxation -40 -26 -29 -21 Gross NPLs (USDm) 42 73 53 43
Net income 260 149 155 98 Loan Loss Res./NPLs 74.4 75.4 60.4 65.2
Capital structure
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.
79
EM Banks abc
March 2011
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
Macro backdrop favourable profitability of Indian commercial banks as Devendran Mahendran

Analyst
but supply risk is high measured by return on average assets (ROAA) at The Hongkong and Shanghai
above 1% in the foreseeable future, particularly Banking Corporation Limited
The credit cycle remains strong in India with +852 2822 4521
given the favourable backdrop. devendran@hsbc.com.hk
banking-sector loan growth of 19% y-o-y as of
Yi Hu
September 2010, supporting economic growth Higher policy rates in 2011 may lead to valuation Analyst
losses at banks on government bond portfolios in The Hongkong and Shanghai
that HSBC’s economists expect to reach 8.8% in Banking Corporation Limited
the fiscal year 2010/11. Compared with its peers 2011 but we doubt that will derail the credit +852 2996 6539
yi.hu@hsbc.com.hk
in Asia, this credit cycle probably has a long way growth cycle. Note HSBC Economics forecasts
to run. Overall indebtedness in the country the policy rate will rise 125bps to 7.5% in 2011.
remains low with total credit/GDP of 58% as at Overall asset quality looks good; commercial
June 2010. Such a trend should sustain the banks had a net NPL ratio of 2.52% as at March
India – key data on the banking sector

LTM
Nominal GDP (USDbn) 1,227 1,533 1,874 Total Assets (USDbn) 1,029 1,335 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
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.
80
EM Banks abc
March 2011
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.
81
EM Banks abc
March 2011
Axis Bank
Strong growth India
 Strong credit growth raises concerns about credit underwriting standards Rating Outlook Rating Outlook
 Rapid growth in international operations suggests higher USD debt supply risk
 Profitability supports credit profile Credit rating profile FC government bond ratings
Fitch Fitch BBB- Stable
Credit profile outlook (Neutral) Senior unsecured BBB- Stable Moody's Baa3 Stable
Sub-debt BB+ S&P BBB- Stable
Concern over the bank’s rapid balance sheet expansion is offset by demonstrated Moody’s
profitability and India’s favourable macro outlook, in our view. We think the bank’s credit
Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010)
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
Bank-deposit Ba1 Stable Unit Trust of India 23.78%
performance is the upside risk. Sub-debt Baa3 Stable Life Insurance Corp of India 9.60%
Financial strength C- Stable General Insurance Corp 1.89%
HSBC FI Research view S&P Overseas Investors 46.02%
Senior unsecured BBB- Stable Bloomberg
Axis Bank reported a 36% jump in net income for Q3 FY 2011 (the three months ending Sub-debt BB+ AXSBIN
Dec 2010) to INR8.91bn (USD199m), on higher interest income and lower loan loss Financial strength C
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 Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 AXSBIN’15 (NR/Baa2/BBB-) 350m 5.25%
it vulnerable to any correction in the real estate market. Robust loan growth has put the AXSBIN’16 (NR/Baa2/BBB-) 500m 4.75%
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 Bank in brief
the bank will start to address the Tier 1 ratio in FY 2012 aiming for a target range of 8.5-
Axis Bank is the tenth largest domestic bank and third largest private sector bank in
9%. Therefore, a capital increase could be on the cards if the bank’s asset growth
India. It began operations in 1994 as UTI Bank and was renamed Axis Bank in 2007.
continues at the current rate. International assets rose 83% y-o-y and 21% q-o-q on
The bank had assets of INR1,998bn (USD45bn) as at September 2010. The public
strong demand from Indian corporates overseas. We suspect further new supply from the
shareholding is 53.81%. The bank operates with 1,095 branches and over 4,846 ATMs,
bank if the current strong demand is sustained
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
Interest income 1.6 2.2 2.5 0.9 Loans 61.8 36.7 27.9 45.7
Interest expense -1.0 -1.5 -1.4 -0.5 Assets 49.6 34.8 22.3 37.4
Net interest income 0.6 0.8 1.1 0.4 Pre-provision profit 76.1 67.3 40.7 20.6
Other operating income 0.4 0.6 0.9 0.3 Net income 62.5 69.5 38.5 35.9
Operating 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 1.8
Pre-provision profits 0.5 0.8 1.1 0.4 Pre-provision profits/average assets 2.4 2.9 3.2 3.3
Provisions for loan losses -0.1 -0.2 -0.3 -0.1 Net interest margins 3.5 3.3 3.8 3.8
Pre-tax 0.4 0.6 0.8 0.3 Cost-income ratio 49.2 43.4 41.4 42.4
Taxation -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 0.34
Deposits 20.2 24.3 31.6 34.6 Coverage ratio 49.8 63.6 72.4 82.7
Advances 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 12.5
Total equity 2.0 2.1 3.6 4.1 Tier-1 ratio 10.2 9.3 11.2 8.9
FX assets & liabilities TCE/total tangible assets 8.0 6.9 8.9 9.0
FX 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.
82
EM Banks abc
March 2011
Bank of Baroda
Focused on quality of growth India
 Growth and exposure to foreign lending could entail material risk Rating Outlook Rating Outlook
 NPAs may be understated owing to the presence of restructured loans
 Funding position is strong with a loan-to-deposit ratio of 74% Credit rating profile FC government bond ratings
Sub-debt [UT2] BB- S&P BBB- Stable
We have some concerns about BOB’s rapid credit growth, which could translate Moody’s
into asset quality concerns in future. Nevertheless its credit profile is underpinned Senior unsecured Baa2 Stable Major shareholders (as at Sep 2010)
by the government’s majority stake in the bank and hence our outlook for the Bank-deposit Ba1 Stable Government of India 53.81%
bank’s credit profile remains stable. Downside risk includes that aggressive loan Sub-debt Baa3 Stable Life Insurance Corp of India 7.08%
growth put capital under pressure, while a substantial improvement in the bank’s Financial strength D+ Stable
financial performance is the upside risk. S&P
HSBC FI Research view Senior unsecured BBB- Stable Bloomberg
Sub-debt [UT2] BB BOBIN
Bank of Baroda reported a 28% increase in net income to INR10.7bn (USD0.2bn) Financial strength C
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 Key dollar-denominated bonds
3.20%. Provisions were up by 25% y-o-y, mainly owing to provisions for Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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, BOBIN’15 (BBB-/Baa2/NR) 500m 5%
driven by extremely strong credit growth of 33% y-o-y and 7.4% q-o-q. Lending
BOBIN’15 (BBB-/Baa2/NR) 350m 4.75%
overseas rose by 37% y-o-y and 7.7% q-o-q, and accounted for 27% of the bank’s BOBIN’22-17c (BB-/Baa3/BB) [UT2] 300m 6.625%
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 Bank in brief
the bank’s capital structure, as the total CAR and Tier 1 ratio fell to 12.5% and 7.7% BOB was established in 1908 and was listed in 1996. It had assets totalling
in Q3 FY 2011 from 13.2% and 8.2% in Q2 FY 2011, respectively. In April- INR3,129bn (USD70bn) as at Sep 2010. The bank had 38,960 employees, 3,100
December 2010, the bank raised INR7.1bn in Tier 1 and INR15bn in UT2 securities, domestic branches and 48 foreign branches as at Mar 2010. Its market share of
and it has said its strategy is to continue above-average credit growth rate. Although domestic deposits is at 5.6%. International assets account for 25% of the bank’s
this will boost the bank’s profitability on the back of a favourable macro backdrop, balance sheet. BOB has a strong presence in agricultural lending, with 59% of
capital levels will come under pressure, in our view. branches in rural and semi-urban areas.
Bank of Baroda: financial summary (non-consolidated)

Net income 0.4 0.4 0.7 0..2 Gross NPAs (USDbn) 0.46 0.38 0.54 0.62
FX assets & liabilities TCE/total tangible assets 6.1 5.6 5.4 5.5
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.
83
EM Banks abc
March 2011
Bank of India
Corporate focus India
 Lending to corporate sector is high, accounting for 57% of domestic loans Rating Outlook Rating Outlook
 Strong growth in FX loans raises concerns about further USD debt supply
 Rising rates could strain corporate cash flows Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured -- Moody's Baa3 Stable
Sub-debt -- S&P BBB- Stable
While some of the bank’s credit metrics are showing the strain caused by rapid Moody’s
growth, we think the bank’s credit profile will remain stable against the backdrop of Senior unsecured Baa2 Stable Major shareholders (as at Mar 2010)
a favourable macro environment. Hence we maintain our Neutral fundamental Bank-deposit Ba1 Stable Government of India 64.47%
recommendation on the credit. The downside risk to our recommendation is Sub-debt Baa3 Stable Life Insurance Corp of India 8.56%
significant deterioration in credit metrics, while the upside risk is further Financial strength D+ Stable Lazard Asset Management 2.71%
improvement in profitability. S&P
HSBC FI Research view Senior unsecured BBB- Stable Bloomberg
Sub-debt BB+ BOIIN
Bank of India (BOI) reported a 61% jump in net income to INR6.53bn (USD0.1bn) Financial strength C
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 BOIIN’15 (--/Baa2/BBB-) 750m 4.75%
0.9% duringQ3 FY 2011. Domestic credit expansion came mainly from lending to BOIIN’21 (--/Baa2/BBB-) 500m 6.25%
corporates, which grew 47% y-o-y and accounted for 58% of the bank’s domestic BOIIN’21-16c (--/Baa3/BB) [UT2] 240m 6.625%
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 Bank in brief
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 Established in 1906, BOI is the fifth-largest bank in India, with assets totalling INR2,896bn
profitability and strong loan growth. The total CAR and Tier 1 ratio slipped to 12.4% (USD65bn) as at Sep 2010. The bank operates 3,208 branches domestically, has a
and 8.0% in Q3 FY 2011, respectively, from 13.0% and 8.4% in Q3 FY 2011. network of 29 overseas branches and has 40,155 employees. It has a 5.0% share of
Financial Chronicle reported that the bank has said it will explore various options to domestic banking deposits. BOI’s subsidiaries include BOI Shareholding Ltd (a joint
raise capital, which is reasonable to support future credit growth. 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
Net interest income 1.0 1.1 1.3 0.4 Pre-provision profit 54.5 47.4 -13.8 22.9
Other operating income 0.5 0.6 0.6 0.1 Net income 78.9 49.7 -42.1 61.1
FX assets & liabilities Total equity/total assets 5.9 6.0 5.2 5.4
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.
84
EM Banks abc
March 2011
ICICI Bank
Growth challenges India
 Credit growth and domestic acquisitions are likely to put downward pressure on Rating Outlook Rating Outlook
capital
 Rollover risk from over USD3bn in redemptions in 2012 Credit rating profile FC government bond ratings
 Rising domestic rates likely to weigh on securities portfolio
Senior unsecured BBB- Stable Moody's Baa3 Stable
Credit profile outlook (Neutral) Sub-debt [UT2] BB- S&P BBB- Stable
Moody’s
The bank has always indicated that it would resume growth once a better foundation Senior unsecured Baa2 Stable Major shareholders (as at Jul 2010)
was in place; this means there will be some pressure on its credit metrics and the risk of Bank-deposit Ba1 Stable Deutsche Bank Trust (ADRs) 28.9%
fresh USD supply is now much higher, in our view. The bank is still more profitable than Sub-debt Baa3 Stable Life Insurance Corp India 10.5%
peers and the macro environment remains favourable. We therefore expect its credit Financial strength C- Stable Temasek Holdings 5.7%
profile to be stable in the year ahead. The downside risk to our recommendation is S&P
excessive acquisition appetite and credit growth, while the upside risk is lower-than- Senior unsecured BBB- Stable Bloomberg
expected bond supply. Sub-debt BB ICICI Debt
Financial strength C ICICIBC IN Equity
HSBC FI Research view Key dollar-denominated bonds
ICICI Bank reported a 31% rise in net income to INR14.37bn (USD0.3bn) for Q3 FY 2011 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
(the three months ending Dec 2010) on higher interest income and lower loan loss provisions. ICICI’16 (--/Baa2/BBB-) 500m 5%
Overall profitability was impressive, as reflected by ROAA of 1.5% for the quarter. However, ICICI’20 (--/Baa2/BBB-) 1,000m 5.75%
the bank expects margin pressure owing to higher funding costs. Loan growth was 15% y-o-y ICICI’20 (--/Baa3/--), [LT2 issued by UK sub] 150m 7%
and 6% q-o-q, the strongest growth being in domestic corporates. Loan loss coverage edged ICICI’15 (--/Baa2/BBB-) 750m 5.5%
up to 72% in Q3 2011 from 69% in Q2 2011. The bank has achieved the 70% coverage ICICI’49-16c (--/Ba1/--), [UT2 issued by UK sub] 150m 6.375%
requirement three months earlier than the deadline set by the RBI. A strong provisioning level ICICI’22-17c (BB-/Ba1/BB), [UT2] 750m 6.375%
pushed down the net NPA ratio to 1.16% from 1.37% a quarter ago, and its capital structure is ICICI’49-16c (--/Ba2/BB), [T1] 340m 7.25%
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 Bank in brief
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 ICICI Bank used to be a development financial institution before it transformed itself into a
relatively high, given that: (1) the bank has indicated a 20% credit growth target for FY 2012; diversified financial group in the 1990s. It is now the second-largest commercial bank in
and (2) ICICI faces redemptions of around USD3bn in 2012. We have a Neutral India, with assets totalling USD88bn, as well as shares of 6% of loans and 5% of deposits in
recommendation on the credit. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 Canada through its subsidiary, ICICI Bank Canada.
ICICI Bank: financial summary (non-consolidated)

Interest income 7.1 6.4 5.6 1.5 Loans 15.2 -3.2 -17.0 15.30
Interest expense -5.4 -4.7 -3.8 -1.0 Assets 16.0 -5.1 -4.2 10.30
Net interest income 1.7 1.7 1.8 0.5 Pre-provision profit 35.5 12.1 9.0 -1.10
Other operating income 2.0 1.6 1.6 0.4 Net income 33.7 -9.6 7.1 30.50
Net income 1.0 0.8 0.9 0.3 Gross NPLs (USDbn) 1.75 2.00 2.12 2.27
Deposits 56.3 45.1 45.2 48.4 Coverage ratio* 57.3 53.5 59.5 71.80
FX assets & liabilities TCE/total tangible assets* 9.0 9.2 10.3 n.a
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.
85
EM Banks abc
March 2011
State Bank of India

Sovereign proxy India
 Recent gains from margin improvements will likely end as rates rise Rating Outlook Rating Outlook
 Strong credit growth could translate into future loan losses
 Capital ratios are likely to face pressure from growth Credit rating profile FC government bond ratings
Sub-debt - S&P BBB- Stable
Strong credit growth in recent years raises concerns about credit underwriting
Moody’s
standards and could keep loan provisions high. However, the macro backdrop Senior unsecured Baa2 Stable Major shareholders (as at Jun 2010)
remains favourable and, as SBI is the largest bank in India and is majority owned
Bank-deposit Ba1 Stable Government of India 59.41%
by the government, we continue to view its credit profile as stable and hence
Sub-debt Baa3 Stable Life Insurance Corp of India 6.07%
maintain our Neutral recommendation. The downside risk to our recommendation
Financial strength C- Stable The Bank of New York 3.22%
is substantial deterioration in credit indicators, while the upside risk is the S&P
significant improvement in asset quality.
Senior unsecured BBB- Stable Bloomberg
HSBC FI Research view Sub-debt BB+ SBIIN
Financial strength C
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 Key dollar-denominated bonds
growth in net interest income thanks to significant margin expansion (+79bp) over
Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 SBIIN ’15 (BBB-/Baa2/BBB-) 1,000m 4.5%
catching up to meet 70% loan loss coverage requirement by Mar 2012. The bank’s SBIIN ’14 (BBB-/Baa2/BBB-) 750m 4.5%
loan loss coverage therefore edged up to 64% in Q3 FY 2011 compared to 56% in SBIIN ’49-17c (BB-/Ba2/BB) [T1] 400m 6.439%
Q3 FY 2010. Asset quality showed stabilisation, with gross NPAs up 1% q-o-q and SBIIN ’49-17c (--/Ba2/BB) [T1] 225m 7.14%
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 Bank in brief
sector (+28%). Deposit growth has been relatively moderate, at 14% y-o-y and 3% SBI is the oldest and largest domestic commercial bank in India, with total (non-
q-o-q, which, together with robust loan growth, has increased the loan-to-deposit consolidated) of INR11,045bn (USD248bn) at end-Sep 2010. SBI operates over
ratio to 83% from 78% a year ago. SBI’s capital structure remains stable, with total 12,500 branches and has 200,000 employees. It has an estimated market share
CAR and Tier 1 staying at 13.2% and 9.6% at end Dec 2010. Note that the bank is amounting to 17% of the banking system’s deposits (23% if we include its
currently awaiting approval for the INR200bn rights issue from the government, associates). The SBI group includes five associated banks, in which SBI has
which holds a 59.4% stake in the bank. 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
Interest expense -7.4 -8.9 -10.3 -2.7 Assets 27.4 33.7 9.2 n.a
Provisions and contingencies -0.6 -0.8 -1.0 -0.5 Net interest margins 3.1 2.9 2.7 3.61
Total assets 166.1 199.4 235.6 n.a Total CAR 12.6 14.3 13.4 13.2
Total equity 11.3 12.0 14.7 n.a Tier-1 ratio 9.1 9.4 9.5 9.6
FX assets & liabilities TCE/total tangible assets 6.1 5.7 5.9 n.a
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.
86
EM Banks abc
March 2011
87
EM Banks abc
March 2011
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
Deleveraging continues banks and non-bank financial corporations. A Devendran Mahendran

Analyst
closer inspection reveals that the household sector The Hongkong and Shanghai
The sector has been deleveraging as expected,
remains highly leveraged, which suggests Banking Corporation Limited
with credit growth in the low single digits. In +852 2822 4521
policymakers may have less flexibility to drive devendran@hsbc.com.hk
particular, foreign currency lending by Korean
growth should global growth slow. Yi Hu
banks is showing year-on-year declines. Hence Analyst
the level of indebtedness in Korea as measured by Banks’ fundamentals have largely stabilised, The Hongkong and Shanghai
Banking Corporation Limited
private credit/GDP has declined from a peak of helped by sound regulatory oversight, in our view. +852 2996 6539
184% in December 2008 to 177% in Q1 2010, yi.hu@hsbc.com.hk
The authorities have shifted from providing
although it remains higher than its peers’. Note, liquidity or capital support to fixing the structural
private credit includes private external debt and weaknesses of the banking sector in funding,
corporate debt, which is in addition to loans at 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**
Nominal GDP (USDbn) 842.4 1,002 1,154 Total assets (USDbn) 1,363 1,412 1,511
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
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
Total deposit growth (%) 17.0 6.2 4.5
Gross 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***
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.
88
EM Banks abc
March 2011
have also carried out corporate restructurings that The sector’s capital adequacy ratio (CAR)
are helping to clean up bank balance sheets. improved slightly from 14.4% in December 2009
to 14.6% in September 2010. Similarly, the
One area where we think the authorities have not
funding positions of banks have improved with
moved aggressively enough is the build-up of
the loan-deposit ratio of commercial banks
household debt. We believe they recognise the
declining from 109% at the end of 2009 to 106%
problem, and in the past have instituted measures
at the end of September 2010.
such as debt-to-income and loan-to-value limits to
curb speculation and safeguard banks’ loan books. Challenges remain, as we expect the restructuring
The government also had in place property tax of the shipping and ship-building sector in 2011
measures and a supply of public housing that was will keep loan provisions elevated. In addition
meant to prevent an acceleration of home prices. banks should need to do more to improve
However, the government seems to be easing off operating efficiencies and lift profitability, but this
on some of those measures to alleviate the should not detract from the stability of banks’
downturn in the construction sector. credit profiles. We still see the contingent risk
posed by banks sector to the sovereign as average,
In addition, household debt in Korea remains
which takes into account the fact that lending by
high. Aggregate household debt/GDP was 68% as
policy or specialised banks – KDB, IBK, KEXIM,
at March 2010. Moreover, based on flow of funds
NACF and NFFC – accounts for 35% of bank
data (comparable across OECD countries) and
lending or 40% of GDP as at Q3 2010.
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.
89
EM Banks abc
March 2011

Globalising the national economy Korea
 Vulnerable to global demand and geopolitical risks Rating Outlook Rating Outlook
Credit profile outlook (Neutral) Credit rating profile FC government bond ratings
Fitch Fitch A+ Stable
We take a favourable view of the level of government support, which should Senior unsecured A+ Stable Moody's A1 Stable
ensure that the ratings move in tandem with the sovereign. We expect total foreign Sub-debt - - S&P A Stable
currency funding needs for 2011 to be in the region of USD7-8bn. The risks to our Moody’s
view, to both the upside and downside, are mostly related to the movements in the Senior unsecured A1 Stable Major shareholders (as at Dec 2009)
credit standing of the KEXIM’s owner, the government. Bank-deposit - - Korean government 73.67%
Sub-debt - - Bank of Korea 23.26%
HSBC FI Research view Financial strength - - Korea Finance Corporation 3.07%
S&P
Export-Import Bank of Korea’s (KEXIM) non-consolidated net income in 2009 Senior unsecured A Stable Bloomberg
decreased by 73% y-o-y to KRW26bn (USD21m) on lower net interest income and Sub-debt - - EIBKOR
higher loan loss provisions. The net interest margin declined to 0.65% in 2009 from Financial strength - -
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 Key dollar-denominated bonds
for export credit and import credit during the year were KRW25,251bn and
KRW3,623bn, growth of 53% and 3%, respectively. Overseas investment credit Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
disbursement, however, declined by 25% to KRW3,970bn. Funding mainly comes EIBKOR 01/21 (A+/A1/A) 1,000m 4%
from borrowings. During the year, the bank issued KRW8,150bn won-denominated EIBKOR 1/14 (A+/A1/A) 2,000m 8.125%
bonds and USD4bn in the offshore market, of which USD3.5bn in bonds were EIBKOR 1/15 (A+/A1/A) 1,500m 5.875%
denominated in US dollars and USD0.5bn in other currencies. The bank’s foreign EIBKOR 9/15 (A+/A1/A) 1,000m 4.125%
currency term borrowings outstanding at end-2009 were USD15.4bn, with 40% due EIBKOR 6/20 (A+/A1/A) 1,250m 5.125%
before end-2012. The total CAR improved to 11.2% from 8.7% a year ago, thanks EIBKOR 02/14 (A+/A1/A) 700m 5.25%
to the KRW1,050bn capital injection by the government, which equals to 21% of the
Bank in brief
capital base before the recapitalisation. Currently the government is encouraging
Korean companies to venture abroad to sell services (for instance build power The Export-Import Bank Korea (KEXIM) was established in 1976 as a special
plants) and acquire/develop resources – which we see as areas of growth for financial institution under the Export-Import Bank of Korea Act to facilitate trade.
KEXIM. 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 14.0
Net interest income 0.3 0.3 7.9 4.6 Pre-provision profits -20.5 -13.3 -6.3 29.3
Other operating income 0.6 1.1 84.7 52.0 Net income -25.0 9.5 -49.0 -72.5
Pre-tax income 0.2 0.3 4.5 0.7 Cost-income ratio 55.1 76.7 92.8 86.4
Net income 0.2 0.2 2.2 0.5 Gross NPL ratio 0.34 0.38 0.62 1.13
Key balance sheet items Gross NPLs (USDbn) 0.05 0.08 0.16 0.35
Borrowings 1.9 2.1 4.2 2.5 Loan Loss Res./NPLs 1301.3 937.3 507.6 304.2
Total equity 5.1 5.3 4.3 5.6 Tier-1 ratio 10.0 9.2 n.a n.a
Summary of FX balance sheet TCE/total tangible assets 27.3 20.9 14.1 15.4
Borrowings 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.a
Liabilities 11.8 17.2 20.1 19.2 Loan/assets 82.5 85.0 88.6 86.5
Assets 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.
90
EM Banks abc
March 2011

IPO in the works Korea
 The government expects to have a large majority stake post privatisation Rating Outlook Rating Outlook
 Funding in the wholesale market could be more expensive post IPO
 Finding a profitable niche post IPO is likely to be challenging Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A+ Stable Moody's A1 Stable
Management has clarified that KDB’s debt outstanding at the point of the initial sale Sub-debt - - S&P A Stable
will be fully guaranteed by the Korean government, as authorised by the revised Moody’s
KDB Act. An initial public offering (IPO) is expected in 2011. Management has Senior unsecured A1 Stable Major shareholders (as at May 2010)
indicated that KDB will focus on corporate banking activities, namely providing term Bank-deposit A1 - Korea Finance Corporation 94.2%
facilities in key sectors, and will increase its commercial focus over time. We expect Sub-debt - - Korea Government 5.8%
KDB to continue its track record as a stable performer. The downside risks to our Financial strength D Stable
recommendation include aggressive global expansion strategy, while the upside S&P
risks are related to more explicit government guarantee. Senior unsecured A Negative Bloomberg
Sub-debt - - KDB
HSBC FI Research view Financial strength - -
Korea Development Bank (KDB)’s consolidated net income rose by 131% to Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
margins (-3bp). Asset quality deteriorated significantly, with gross NPLs up 82% over the KDB 3/16 (A+/A1/A) 900m 3.25%
year and loan loss coverage ratio down to 83% from 104% a year earlier, despite loan KDB 1/14 (A+/A1/A) 2,000m 8%
loss provision charges being 1.5 times higher in the year. Capital levels improved, with KDB 8/15 (A+/A1/A) 750m 4.375%
the total CAR and Tier 1 ratio up to 16.4% and 14.7% in 2009 from 13.6% and 12.2% in KDB 9/13 (A+/A1/A) 750m 5.75%
2008, respectively, thanks to a decline in the asset base after KDB transferred KDB 1/13 (A+/A1/A) 1,000m 5.3%
KRW19trn in securities holdings and KRW4trn in loan receivables to Korea Finance
Corp. During the year, the Korean government injected capital of KRW900bn. In Bank in brief
October 2009, KDB Financial Group (KDBFG) and Korea Finance Corporation (KoFC)
KDB was incorporated under The Korea Development Act in 1954 to help finance
were established in line with a previously announced move to privatise the commercial
the development of Korean industries. The Act requires the government to ensure
operations of KDB while shifting its policy functions to KoFC. KoFC, which was
the solvency of the bank. The bank had assets totalling USD119bn and operates
established under the KoFC Act in October 2009, will be wholly owned by the Korean
with 2,327 employees as at end 2009. It has 47 domestic branches and operations
government. KoFC’s mandated policy role will be to assist SMEs and to extend capital
in 10 countries. Currently, KoFC holds a 94.3% stake in KDB FG, which owns KDB,
to promote national economic growth, while KDBFG will be privatised.
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
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 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 1.67
Net 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.
91
EM Banks abc
March 2011

SMEs the primary focus Korea
 Restructuring of shipping sector in 2011 keeps provisions high Rating Outlook Rating Outlook
 Weakness in external demand could weigh on SME asset quality
 Strategy to grow retail deposits should improve funding structure Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A+ Stable Moody's A1 Stable
Sub-debt - - S&P A Stable
Management is being more cautious about extending FX loans to SMEs and expects to Moody’s
gradually reduce FX loans by USD1.2bn over the next five years. According to management,
Senior unsecured A1 Stable Major shareholders (as at Dec 2009)
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
Bank-deposit A1 - Korean government 65.0%
to remain stable over the next year. The upside risks to our view include better funding Sub-debt A2 - Korea Finance Corporation 8.9%
structure, while the downside risks come from underperformance of SME sector which would Financial strength D+ - KEXIM 2.3%
weigh on asset quality. S&P
Senior unsecured A Stable Bloomberg
HSBC FI Research view Sub-debt A- - INDKOR
Financial strength C+ -
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 Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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. INDKOR 14 (A+/A1/A) 1,000m 7.125%
Asset quality slipped in the quarter, with gross NPLs rising 9.2% q-o-q. This is in line with INDKOR 15 (A+/A1/A) 350m 4.375%
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 Bank in brief
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 IBK was set up in 1961 under the IBK Act to promote the independent economic
8.8%, respectively, in Q2 2010. While the CAR is not particularly high by comparison activities of small- and medium-sized enterprises in Korea. Under the Act, the
with the industry, we view it as stable and maintain our Neutral fundamental government is obligated to ensure the solvency of the bank. IBK has 595 branche,s and
recommendation on the credit. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 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
Net interest income 3.1 2.9 2.8 0.9 Pre-provision profit 22.4 2.8 -13.3 53.2
Other operating income 0.8 0.4 -0.1 0.1 Net income 10.9 -34.3 -7.4 66.2
Non-operating profit 0.1 0.0 0.0 0.0 Cost-income ratio 36.3 36.9 40.3 28.4
Taxation -0.5 -0.3 -0.1 -0.1 Gross NPL ratio 0.72 1.43 1.20 1.85
Key balance sheet items Loan Loss Res./NPLs 203 129 145 118
Deposits 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 12.2
Total assets 129.0 119.3 124.5 142.4 Tier-1 ratio 8.2 7.4 8.5 9.0
Total equity 7.2 6.3 7.6 8.8 TCE/total tangible assets 5.4 4.9 5.7 5.8
Summary of FX balance sheet Funding
Loans 4.7 6.4 5.3 na Loan-to-deposit ratio 242 261 229 224
Deposits 1.6 2.2 2.2 na Loan/assets 74.8 74.1 77.0 75.6
Borrowings 3.1 4.4 4.3 na FX loan-to-deposit ratio 287 286 244 na
Bonds 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.
92
EM Banks abc
March 2011
Hana Bank
Acquisition presents uncertainty Korea
 Regulatory approvals and acquisition funding remain hurdles to the acquisition Rating Outlook Rating Outlook
 Longer-term integration issues between KEB and Hana could present risks
 Niche in household sector and wealth management in Korea Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A- Stable Moody's A1 Stable
Sub-debt BBB+ - S&P A Stable
Hana Bank’s parent Hana Financial Group (HFG) has signed an agreement to
Moody’s
purchase a 51% stake in Korea Exchange Bank (KEB) from Lone Star Funds for
Senior unsecured A1 Neg (rfd) Major shareholders (as at Dec 2009)
KRW4.75trn (USD4.1bn). The purchase is subject to necessary approvals, which
Bank-deposit A1 Hana Financial Group 100%
are not expected until March 2011. KEB’s total assets of KRW96trn as at Q4 2010
Sub-debt A2 Shareholder of HFG
are equal to 61% of HFG’s consolidated assets as at Q4 2010. Our Neutral
Financial strength C- Angelica Investment Ptd. Ltd 9.62%
fundamental recommendation is based on our expectation of stable performance of
S&P GS Dejakoo, L.L.C. & affiliates 8.66%
key credit indicators. The main risk, to both the upside and downside, is related to
Senior unsecured A- Neg (cwn) Korea National Pension Services 4.11%
the acquisition and its integration with KEB.
Sub-debt BBB+ - Bloomberg
HSBC FI Research view Financial strength C+ - HANABK
Hana Bank reported a 36% y-o-y increase in net profits to KRW268bn for Q4 2010, Key dollar-denominated bonds
on higher net interest income, gains on disposals and valuation, and lower loan Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
loss provisions. Loan growth was more robust than for the banking industry as a
HANABK 15 (A-/A1/A-) 500m 4.5%
whole at 4.8% y-o-y and 1.4% q-o-q. Lending to large corporates and household
HANABK 12 (A+/A1/A-), [Govt guaranteed] 1,000m 6.5%
was strong, while lending to SMEs contracted. In contrast to other Korean banks,
HANABK 16-11c (BBB+/A2/BBB+) [LT2] 400m 5.875%
Hana Bank’s asset quality slipped during the quarter, with gross NPLs up 4% q-o-q,
HANABK 17-12c(BBB+/A2/BBB+) [LT2] 500m 5.375%
despite this the coverage ratio remains unchanged. The deterioration in asset
HANABK 49-12c (BB+/NR/BBB) [T1] 200m 8.748%
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 Bank in brief
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% Hana Bank, a wholly owned subsidiary of Hana Financial Group (HFG), is the fourth-
and 12.5% in Q3 2010, due to around KRW2.4trn dividends paid to its shareholding largest commercial bank in Korea. The bank accounts for 88% of the group’s assets and
company for KEB acquisition. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 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
Net interest income 2.3 2.0 1.5 0.6 Loans 3.6 16.1 -0.8 4.8
Other operating income 1.2 0.7 0.5 0.1 Assets 5.5 25.4 -7.6 2.6
Operating income 3.5 2.7 2.0 0.7 Pre-provision profit 13.8 -10.7 -29.7 40.2
Operating expenses -1.3 -1.1 -1.0 -0.3 Net income 0.5 -54.9 -42.3 35.5
Pre-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 0.8
Non-operating profit -0.1 0.1 -0.0 -0.0 Pre-provision profits/average assets 1.7 1.3 0.9 1.4
Pre-tax income 1.6 0.6 0.3 0.3 Net interest margins 2.31 2.06 1.72 2.24
Taxation -0.5 -0.1 -0.1 -0.1 Cost-income ratio 38.8 41.6 51.2 39.6
Net income 1.1 0.4 0.2 0.2 Asset quality
Key balance sheet items Gross NPL ratio 0.77 1.20 1.05 1.50
Customer deposits 84.7 76.8 74.2 82.6 Gross NPLs (USDbn) 0.74 1.06 0.91 1.4
Loans 92.8 83.9 81.5 91.7 Loan Loss Res./NPLs 169 127 130 106
Total 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 14.2
Summary of FX balance sheet Tier-1 ratio 7.7 9.4 11.3 12.4
Loans 4.5 5.6 3.8 n.a TCE/total tangible assets 6.6 6.0 6.7 5.9
Deposits 2.4 3.5 3.0 n.a Funding
Borrowings 6.0 5.5 3.5 n.a Loan-to-deposit ratio 109 109 110 111
Bonds 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.
93
EM Banks abc
March 2011
Kookmin Bank
Strengthening controls, trimming costs Korea
 Most exposed to the household sector, which accounts for 57% of its loans Rating Outlook Rating Outlook
 Bank CenterCredit in Kazakhstan (42% owned) may require more capital
Kookmin had a poor Q2 2010 which management attributes to conservative provisioning Senior unsecured A Stable Moody's A1 Stable
policies following the appointment of new CEOs for Kookmin Bank and its parent Sub-debt - - S&P A Stable
KB Financial Group. It appears the bank has new priorities focused on strengthening Moody’s
internal controls and trimming costs ahead of growth through acquisitions. We expect Senior unsecured A1 Stable Major shareholders (as at Mar10)
few surprises on asset quality and view the credit and rating profile of the bank as stable. Bank-deposit A1 - KB Financial Group 100%
The main risks to our view, to both the upside and the downside, are related to Sub-debt A2 - Shareholding of KBFG
significant unexpected changes in key credit metrics in either direction. Financial strength C- - Korea National Pension Service 4.98%
S&P ING Bank N.V. 5.02%
HSBC FI Research view Senior unsecured A Stable
Sub-debt A- - Bloomberg
Kookmin Bank reported a net loss of KRW305bn for Q4 2010, due to one-off expenses
Financial strength B - CITNAT
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 Key dollar-denominated bonds
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 CITNAT 14 (NR/Aa1/AA) [Covered bond] 1,000m 7.25%
deposits grew by 7.1% y-o-y and eased the loan-to-deposit ratio to 107% in Q4 2010 CITNAT 11 (A/A1/A) 500m Float
from 114% in Q4 2009. Deposit growth mainly came from saving deposits while CDs CITNAT 12 (A/A1/A) 300m 5.875%
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 Bank in brief
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 Kookmin Bank is the largest bank in Korea with assets of KRW262trn (USD230bn)
period. Capital structure remains strong, as reflected by total CAR, tier-1 and tangible as at end-September 2010. In October 2008, the banking group was reorganised
common equity/total assets of 13.4%, 10.9% and 7.5% respectively, as at end 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.
December 2010. We have a Neutral recommendation on the issuer.
Kookmin had 1,483 branches, 18,422 employees, and 21% of the sector’s deposits
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 at end-September 2010.
Kookmin Bank: financial summary (non-consolidated)

Interest income 14.7 15.0 11.3 3.1 Loans 14.5 15.8 -1.8 0.6
Interest expense -7.2 -8.5 -6.4 -1.4 Assets 12.1 19.8 -2.1 -0.6
Net interest income 7.5 6.6 4.9 1.6 Pre-provision profit 8.4 -21.8 -17.3 -50.0
Other operating income 1.7 0.3 0.4 -0.0 Net income 12.2 -45.5 -57.9 -1812
Operating expenses -4.0 -3.5 -2.8 -1.3 ROAA 1.3 0.6 0.2 -0.5
Non-operating profit 0.3 0.3 -0.0 -0.1 Cost-income ratio 43.2 50.0 52.9 78.2
Pre-tax income 4.9 2.0 0.5 -0.2 Asset quality
Net income 3.0 1.4 0.5 -0.3 Gross NPLs (USDbn) 1.4 2.2 2.0 3.2
Loans 185.5 167.2 167.6 173.5 Total CAR 12.6 13.2 14.0 13.4
Loans 6.3 7.3 4.8 n.a Loan-to-deposit ratio 124 125 114 107
Deposits 1.8 2.4 2.7 n.a Loan/assets 78.4 75.8 76.0 77.0
Borrowings 6.1 7.0 5.2 n.a FX loan-to-deposit ratio 349 308 182 n.a
Bonds 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.
94
EM Banks abc
March 2011
Korea Exchange Bank

Strength in FX and trade Korea
 Acquisition by Hana Financial Group should benefit credit profile Rating Outlook Rating Outlook
 FX funding accounts for 26% of funding, 62% of which is sourced through
deposits Credit rating profile FC government bond ratings
 The bank’s credit metrics compare well against peers Fitch Fitch A+ Stable
Senior unsecured A- Stable Moody's A1 Stable
Credit profile outlook (Neutral) Sub-debt BBB+ S&P A Stable
Moody’s
There is uncertainty over Korea Exchange Bank’s ultimate shareholder as the sale of a Senior unsecured A2 Positive (rfu) Major shareholders (as at Jun 2010)
majority stake by Lone Star remains incomplete. Risks to our fundamental Bank-deposit A2 LSF-KEB Holdings 51.02%
recommendation, to both the upside and the downside, include the eventual sale by Sub-debt A3 KEXIM 6.25%
Lone Star and a participation of a banking institution in the shareholder structure. In the Financial strength C- BOK 6.12%
meantime the outlook for Korea Exchange Bank’s credit profile remains stable and we S&P
maintain our Neutral fundamental recommendation. Senior unsecured BBB+ Stable Bloomberg
HSBC FI Research view Sub-debt BBB KEB
Financial strength C+
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 Key dollar-denominated bonds
has been muted, up 0.3% q-o-q but declining 0.3% y-o-y. New lending has been Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
extended to households and credit cards, while lending towards SMEs and large
corporates have seen contraction. Asset quality showed impressive improvement KEB 16 (NR/A2/BBB+) 500 4.875%
on a sequential basis, with gross NPLs down 13% q-o-q and loan loss coverage up KEB 12 (A-/A2/BBB+) 300 Float
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 Bank in brief
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 KEB was established in 1967 as a policy bank specialising in FX and trade finance.
to strengthen, as total CAR and tier-1 ratio went up to 16.3% and 13.2% in Q4 2010 In 2003, US investment fund Lone Star became the largest shareholder with a 51%
from 15.6% and 12.6% in Q3 2010. This set of results further strengthened KEB’s stake but has been attempting to sell the stake for the past five years. KEB is the
credit metrics, which already compare well against peers. However, uncertainty fifth-largest commercial bank in Korea, with a 7% deposit share. The bank operates
remains as the acquisition by HFG is still subject to approval. with 354 domestic branches and 27 overseas branches. At the end of September
2010, assets totalled KRW99trn (USD87bn).
KEB: financial summary (non-consolidated)

Net interest income 2.0 2.0 1.5 0.5 Loans 19.1 19.2 -2.8 -0.3
Other operating income 1.1 0.8 0.7 0.1 Assets 18.1 26.4 -7.1 -0.4
Operating income 3.2 2.8 2.2 0.6 Pre-provision profit -3.5 7.0 -20.6 -9.2
Operating expenses -1.2 -1.0 -1.0 -0.3 Net income -4.5 -18.6 13.9 -22.9
Pre-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 1.0
Pre-tax income 1.6 1.1 0.6 0.3 Pre-provision profits/average assets 2.4 2.1 1.6 1.6
Taxation -0.6 -0.3 0.1 -0.1 Net interest margins 3.23 2.90 2.39 2.82
Net 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 1.26
Deposits 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 204 142 153 131
Total 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 13.2
Summary of FX balance sheet TCE/total tangible assets 8.0 6.4 8.2 8.2
Loans 5.9 7.6 6.8 n.a Funding
Deposits 10.0 10.7 11.6 n.a Loan-to-deposit ratio 122 114 110 102.8
Borrowings 6.4 5.9 4.7 n.a Loan/assets 65.9 62.1 65.0 65.1
Bonds 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.
95
EM Banks abc
March 2011
Shinhan Bank
New management keeps the course Korea
 Investigation into management conduct raises governance issues Rating Outlook Rating Outlook
 Exposure to shipbuilding, real estate and construction sectors at 12% of loans
 Margins set to improve on higher rates, in our view Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A Negative Moody's A1 Stable
The restructuring of the shipping and shipbuilding sector in 2011 could weigh on Moody’s
earnings. The recent controversy surrounding the CEO of Shinhan Financial Senior unsecured A1 Stable Major shareholders (as at Dec 2009)
Group raises questions about the bank’s internal controls, although we view the Bank-deposit A1 - Shinhan Financial Group 100%
problem as contained and unlikely to affect the bank’s credit profile. The main Sub-debt A2 - Shareholding of SFG:
risks to our view, both to the upside as well as the downside, are related to Financial strength C- - BNP Paribas 6.35%
significant changes in key credit metrics in either direction. S&P Korea National Pension Fund 4.45%
HSBC FI Research view Senior unsecured A- Stable Bloomberg
Sub-debt BBB+ SHNHAN
Shinhan Bank’s Q4 2010 net income rose by 5.2% y-o-y to KRW194bn on higher Financial strength C+
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 Key dollar-denominated bonds
deposits. Loan growth was 5.9% y-o-y and 1.5% q-o-q, with strongest growth Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 SHNHAN 09/15 (NR/A1/A-) 700m 4.375%
during the quarter. As a result, the bank’s gross NPL ratio declined from 1.77% in SHNHAN 12 (NR/A1/A-) 500m 6%
SHNHAN 2/16-11c (BBB+/NR/BBB) [UT2] 300m 5.75%
Q3 2010 to 1.31% in Q4 2010 and loan loss coverage ratio rose to 133% from 109%
SHNHAN 35-15c (BBB+/Ba1/BBB) [T1] 300m 5.663%
during the same period. The funding structure has been strained, as the loan-to- SHNHAN 36-16c (BBB+/Ba1/BBB) [T1] 350m 6.819%
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% Bank in brief
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 Shinhan Bank is part of the Shinhan Financial Group (SFG), which is the second-
recommendation on the bank. 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 sector’s deposits at end-September 2010. The bank accounts for 77% of the group’s
Yi Hu yi.hu@hsbc.com.hk +852 2996 6539 assets, and operates 951 branches and had 10,659 employees at end-June 2010.
Shinhan Bank: financial summary (consolidated)

Interest income 10.4 10.6 7.7 2.0 Loans 13.8 13.2 -3.3 5.9
Interest expense -6.3 -6.9 -4.8 -1.1 Assets 17.7 19.8 -6.4 0.3
Net interest income 4.0 3.8 2.9 0.9 Pre-provision profit 64.0 -20.3 -12.2 6
Other operating income 2.4 0.8 0.9 0.4 Net income 26.1 -29.5 -48.3 5.2
Non-operating profit -0.1 -0.0 -0.1 0.0 Cost-income ratio 40.3 44.0 48.8 53.8
Loans 134.8 118.9 117.4 128.0 Total CAR 12.1 13.4 15.1 15.9
Bonds 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.
96
EM Banks abc
March 2011
Woori Bank
Capital pressure Korea
 Restructuring of shipping/shipbuilding sector in 2011 is likely to weigh on Rating Outlook Rating Outlook
capital
 Vulnerable to shipbuilding, real estate and construction sectors (25% of loans) Credit rating profile FC government bond ratings
Credit profile outlook (Neutral) Senior unsecured A- Stable Moody's A1 Stable
The outlook for the bank seems uncertain at the moment with the government intent on Moody’s
privatising the bank and asset quality concerns still weighing on earnings. With the local Senior unsecured A1 Stable Major shareholders (as at Oct 2010)
banks out of the picture the likelihood of Woori being privatised in 2011 is low, in our Bank-deposit A1 - Woori Financial Group 100%
view. With 19% of the Korean banking system’s deposits, we believe the level of Sub-debt A2 - Shareholding of WFG
government support for the bank will remain very high and thus we maintain our Neutral Financial strength C- - Korea Deposit Insurance Corp 56.97%
fundamental recommendation on the company. The downside risks to our view include:
S&P
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. Sub-debt BBB+ - WOORIB
Financial strength C+
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
jumped 28%. Net interest income grew 6.8% y-o-y on margin expansion from lower funding WOORIB 02/15 (A-/A1/A-) 800m 7%
costs. Gross NPLs dropped 17% q-o-q and loan loss coverage improved to 71% from 63% a WOORIB 10/15 (A-/A1/A-) 500m 4.5%
quarter ago, but the coverage level remains low compared to last year (114%) and to its
WOORIB 01/16 (A-/A1/A-) 600m 4.75%
peers in Korea. Deleveraging continues, as the bank’s loan book contracted by 2.9% y-o-y
WOORIB 16-11c (BBB+/A2/BBB+) [LT2] 1,000m 6.125%
and 1.2% q-o-q, which together with strong deposit growth pushed down the loan-to-deposit
WOORIB 37-17c ((BB+/Ba2/BBB) [T1] 1,000m 6.208%
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 Bank in brief
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 Woori Bank (Woori) is part of the Woori Financial Group (WFG), which is the largest
Southeast Asia may put pressure on capital. Media articles are citing the bank’s CEO that financial group in Korea. The bank accounts for 79% of the group’s assets and remains
Woori is making a shortlist for possible M&A targets in Southeast Asia. We have a Neutral the largest profit contributor. Woori has an estimated 18% share of the banking system’s
recommendation on the issuer. deposits and operates 911 branches with 14,461 employees. WFG had assets totalling
KRW297trn (USD260bn) at end-September 2010.
Woori Bank: financial summary (consolidated)

Interest income 11.4 12.2 9.0 2.5 Loans 18.7 18.5 -1.1 -2.9
Interest expense -6.8 -7.8 -5.4 -1.3 Assets 17.8 16.9 -2.5 0.6
Net interest income 4.6 4.3 3.6 1.2 Pre-provision profit 2.2 -27.8 40.2 -11.8
Other operating income 0.9 -0.4 0.5 0.1 Net income 2.9 -86.2 307.6 14.1
Non-operating profit 0.0 0.1 0.1 0.0 Cost-income ratio 41.8 51.6 42.2 44.6
Net income 1.8 0.2 0.7 0.2 Gross NPLs (USDbn) 0.99 1.77 2.34 5,453
Loans 154.0 142.0 143.3 143.3 Total CAR 11.7 11.7 14.3 14.4
Total equity 13.2 10.0 11.7 12.6 TCE/total tangible assets 6.1 4.8 5.7 n.a
Summary of FX balance sheet* Funding
Bonds 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.
97
EM Banks abc
March 2011
Singaporean Banks
 Deposit funding is strong
 Asset quality shows improvement
 Capitalisation of the sector is the highest in the region
Well prepared for Basel III Overall indebtedness as measured by total Devendran Mahendran
Analyst
credit/GDP stood at 354% as at June 2010, which The Hongkong and Shanghai
Loan growth of the Singapore banks reached 14% Banking Corporation Limited
has been relatively stable over the past two years.
y-o-y as of November 2010 compared with 1.4% +852 2822 4521
Lending by local banks or bank credit/GDP devendran@hsbc.com.hk
as of December 2009. Loan growth here includes
(comprising the three local banks) was much Yi Hu
the growth of the banks’ regional businesses. Analyst
lower at 129% as of September 2010. Given
Asset quality improved, with the non-performing The Hongkong and Shanghai
Singapore’s status as a financial centre, the level Banking Corporation Limited
loan ratio declining from 2.33% in December +852 2996 6539
of outstanding credit in relation to the economy is yi.hu@hsbc.com.hk
2009 to 1.73% in September 2010. The
manageable, in our view. Hence, we judge the risk
capitalisation of the sector is the highest in the
posed by the banking sector to the sovereign to be
region – the weighted capital adequacy ratio
low, particularly given the strong credit metrics of
(CAR) of the three local banks stood at 17.1% as
the Singaporean banks.
at September 2010.
Singapore – key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 Sep 2010
LTM
Nominal GDP (USDbn) 182.6 225.4 266.0 Total assets (USDbn) 1,376 1,372 1,549
CPI, average (% y-o-y) 0.6 2.8 3.2 Loans/Total assets (%) 29 31 32
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*
Gross 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
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
98
EM Banks abc
March 2011
DBS Bank
Margin pressure Singapore
 Margins are likely to remain under pressure in a low rate environment Rating Outlook Rating Outlook
 Exposure to property accounts for 39% of loans (includes mortgages)
Credit profile outlook (Neutral) Fitch Fitch AAA Stable
Senior unsecured AA- Stable Moody's Aaa Stable
Notwithstanding the headline improvement, the bank seems to be facing challenges in
Sub-debt A+ S&P AAA Stable
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 Moody’s
profile is among the highest in Asia. We view its ratings profile as stable and like this Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010)
credit as a defensive play. The downside risk to our recommendation is the deterioration Bank-deposit Aa1 Stable Temasek Holdings 27.6%
in asset quality and capitalisation, while the upside risk is the substantial lowering of Sub-debt Aa2 Stable
sector concentration in its loan portfolio. Financial strength B Stable
S&P
HSBC FI Research view Senior unsecured AA- Stable Bloomberg
DBS Group Q4 2010 net income jumped 38% y-o-y to SGD678m on lower loan loss Sub-debt A DBSSP
provisions for non-Asia exposure. In Q4 2009 The bank disclosed SGD558m bilateral Financial strength B+
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, Key dollar-denominated bonds
due mainly to a sharp margin contraction (-23bps over the year) on lower yields on Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 DBSSP ’15 (AA-/Aa1/AA-) 1,000m 2.375%
loan exposure to Greater China as a whole accounted for 32% of the bank’s loan book. DBSSP ’17-12c (A+/Aa2/A+) (LT2) 1,500m L+22bps
Asset quality improved, with gross NPL ratio down to 1.9% in Q4 2010 from 2.1% in Q3 DBSSP ’17-12c (A+/Aa2/A+) (LT2) 500m 5.125%
2010 and loan loss coverage ratio up to 91% from 87% during the same period. The DBSSP ’19-14c (A+/A1/A) (UT2) 750m 5%
bank’s total CAR and tier-1 ratio rose to 18.4% and 15.1% in Q4 2010 from 16.3% and
DBSSP ’21-16c (A+/A1/A) (UT2) 900m L+61bps
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 Bank in brief
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 DBS Bank (DBS) is wholly owned by the DBS Group. It is the largest bank in Singapore
the economy correct. In the year ahead, we still expect DBS’ rating profile to remain with assets totalling SGD279n (USD212bn) as at September 2010. DBS has an
stable and have a Neutral recommendation on the credit 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
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 employees in 15 markets. Singapore and HK accounted for 62% and 21%, respectively
Yi Hu yi.hu@hsbc.com.hk +852 2996 6539 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
Interest expense -3,306 -2,701 -1,141 -253 Assets 18.0 10.2 0.8 9.7
Net interest income 2,726 3,040 3,064 788 Pre-provision profit 15.5 -4.1 17.7 8.8
Other operating income 1,364 1,238 1,478 444 Net income 0.4 -15.3 5.8 37.5
Operating expenses -1,737 -1,877 -1,791 -556 ROAA 1.1 0.8 0.8 1.0
Pre-provision profits 2,353 2,402 2,751 676 Pre-provision profits/average assets 1.6 1.4 1.6 1.3
Allowances for credit and other losses -409 -628 -1,068 -112 Net interest margins 2.17 2.04 2.02 1.79
Share of profits of associates 73 53 45 17 Cost-income ratio 42.5 43.9 39.4 45.1
Pre-tax income 2,016 1,827 1,729 582 Asset quality
Minority interest -113 -148 -129 -48 Net NPL ratio 0.7 0.9 1.8 1.1
Net 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 18.4
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.
99
EM Banks abc
March 2011
OCBC
Building wealth management Singapore
 Margins under pressure from low rates Rating Outlook Rating Outlook
 Managing and integrating BOS franchise is key to improving profitability
Credit profile outlook (Neutral) Fitch Fitch AAA Stable
Senior unsecured AA- Stable Moody's Aaa Stable
The move to acquire ING’s private banking assets in Asia will differentiate and Sub-debt A+ S&P AAA Stable
strengthen its franchise, in our view. We think the bank is underrated by S&P and Moody’s
has room for a 1-notch upgrade in the year ahead. In our view credit indicators will Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010)
remain stable and therefore we have a Neutral fundamental recommendation on Bank-deposit Aa1 Stable Lee Family 27%
OCBC. The main risks to our view are related to significant changes in key credit Sub-debt Aa2 Stable - Lee Foundation 19.28%
metrics in both directions. Financial strength B Stable Aberdeen Asset Management 5.44%
S&P
HSBC FI Research view Senior unsecured A+ Stable Bloomberg
Sub-debt A OCBCSP
OCBC’s 2010 net income was up 15% to SGD2.25bn on higher fee and Financial strength B+
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 Key dollar-denominated bonds
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 OCBCSP ’22-17c (A+/Aa2/A) [LT2] 500m 3.75%
BOS, which has lower-yielding, higher-quality assets. The pace of loan growth OCBCSP ’11 (A/A1/A-) [UT2] 1250m 7.75%
was strong at 23% y-o-y (excluding BOS); the housing, general commerce, and OCBCSP ’19-14c (A+/Aa2/A) [LT2] 500m 4.25%
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 Bank in brief
2010 from 1.1% in Q4 2009. The bank’s CAR and tier-1 ratio increased to 17.6%
Overseas-Chinese Banking Corporation (OCBC) is one of the three largest banks in
and 16.3%, respectively, from 16.4% and 15.9%; this improvement was due to
Singapore and accounts for an estimated 28% share of deposits and 33% of loans in the
issue of shares as scrip dividends and the issue of SGD1bn LT2 by OCBC’s
domestic banking system. The bank’s assets totalled SGD224bn (USD170bn) as at
Malaysian and Indonesian subsidiaries. We think the bank is well positioned
September 2010. Its insurance subsidiary, Great Eastern Holdings, is the largest
regionally to capture growth opportunities.
insurance group in Singapore and Malaysia by assets. Outside Singapore, the bank has a
Analysts Devendran Mahendran strong presence in Malaysia, which contributed 25% of pre-tax income in 9M 2010.
devendran@hsbc.com.hk +852 2822 4521
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)

Interest income 3,494 3,723 2,881 828 Loans 20.2 11.9 1.3 29.8
Net interest income 1,489 1,967 1,943 548 Pre-provision profit 3.7 -1.1 17.3 -1.3
Other operating income 1,352 1,162 1,369 399 Net income 3.4 -15.5 12.2 0.6
Operating income 2,841 3,129 3,312 947 Profitability
Amortisation of intangible assets -31 -33 -32 -11 Net interest margins 2.10 2.27 2.23 1.96
Provisions for asset impairment -24 -316 -295 -34 Cost-income ratio 39.2 41.9 37.3 46.7
Share 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 0.9
Minority 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
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.
100
EM Banks abc
March 2011

Regional focus Singapore
 Acquisitions within the region are a possibility based on public company information Rating Outlook Rating Outlook
 Domestic market remains competitive
 Exposure to property (including mortgages) comprises 54% of loans Credit rating profile FC government bond ratings
Fitch Fitch AAA Stable
Credit profile outlook (Neutral) Senior unsecured AA- Stable Moody's Aaa Stable
Sub-debt A+ S&P AAA Stable
UOB has a resilient franchise and has recovered well from the recession. The bank has Moody’s
a good customer base in the SME and consumer sectors, and it has been more
Senior unsecured Aa1 Stable Major shareholders (as at Mar 2010)
profitable than peers in Singapore. Its standalone profile is among the strongest in the
Bank-deposit Aa1 Stable Wee Cho Yaw 17.39%
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 Junior sub-debt A1 Stable
raise UOB’s senior debt rating to AA- in the year ahead. We have a Neutral Financial strength B Stable
fundamental recommendation on UOB, as we believe that the standalone profile is S&P
stable. The risks to our recommendation, to both the upside and the downside, are Senior unsecured A+ Stable Bloomberg
mainly related to potential acquisitions and resulting integration challenges. Sub-debt A UOBSP
Financial strength B+
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
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 UOBSP ’13 (A/A1/A-) [UT2] 1000m 4.5%
profitability is strong with return on average assets (ROAA) of 1.4% in Q3 2010. Asset UOBSP ’19-14c (A/A1/A-) [UT2] 1000m 5.375%
quality improved from a year earlier but slipped in the most recent quarter with gross UOBSP ’49-16c (A/A3/A-) [T1] 500m 5.796%
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 Bank in brief
strength of the bank’s capital structure is unbeatable in this region with a CAR of 19.9%,
United Overseas Bank (UOB) is one of the three largest banks in Singapore with assets
tier-1 ratio of 15.1% and common equity/tangible assets of 7.4% as at Q3 2010. The
totalling SGD202bn (USD154bn). UOB takes around a 35% share of loans in
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. Singapore. The bank’s efforts to diversify its franchise geographically are proceeding
meaningfully. In 9M 2010, Malaysia, Indonesia and Greater China contributed 12%, 7%
Analysts Devendran Mahendran devendran@hsbc.com.hk +852 2822 4521 and 4% of pre-tax income respectively. The bank has more than 500 offices in 19
Yi Hu yi.hu@hsbc.com.hk +852 2996 6539 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 8.9
Interest expense -2,913 -2,319 -1,021 -285 Assets 8.5 4.6 1.4 15.0
Net interest income 1,978 2,528 2,527 674 Pre-provision profit -8.0 12.1 4.1 12.3
Other operating income 1,256 1,184 1,191 446 Net income -17.9 -8.2 -1.8 37.6
Amortisation of intangible assets -7 -8 -7 -2 Net interest margins 2.04 2.27 2.36 2.07
Provisions for asset impairments -199 -570 -771 -102 Cost-income ratio 41.4 39.0 38.4 37.8
Share 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 1.9
Minority interest -44 -19 -13 -4 Gross NPLs (USDbn) 1,167 1,401 1,609 1,652
Net income 1,400 1,369 1,308 525 Loan Loss Res/NPLs 112 106 113 123
Capital structure
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.
101
EM Banks abc
March 2011
Bangkok Bank
Better times ahead Thailand
 Political risk, although subdued, remains a concern Rating Outlook Rating Outlook
Credit profile outlook (Neutral) Credit rating profile FC government bond ratings
Fitch Fitch BBB Neg
We think the ratings of Bangkok Bank will get a lift from a sovereign rating Senior unsecured BBB+ Stable Moody's Baa1 Stable
upgrade in 2011. The bank’s credit metrics are strong and its ratings by S&P and Sub-debt BBB S&P BBB+ Neg
Fitch are currently being constrained by the sovereign, in our view. Consequently Moody’s
we have Neutral fundamental recommendation on the bank. The downside risk to Senior unsecured A3 Stable Major shareholders (as at Mar 2010)
our recommendation is sudden political instability, while the upside risk is very Bank-deposit Baa1 Stable Sophonpanich family 1.1%
strong improvement in financial performance. Sub-debt Baa1 Stable Thailand Securities Depository Co 4.18%
HSBC FI Research view Financial strength D+ Stable State Street Bank and Trust Co 4.08%
S&P
Bangkok Bank’s Q4 2010 earnings declined 5.3% y-o-y to THB5.6bn on higher tax Senior unsecured BBB+ Stable Bloomberg
expenses. Pre-tax income rose 25% y-o-y due to strong net interest income, Sub-debt BBB BBLTB
investment gains, and fee and service income. Loan growth was healthy at 10% y- Financial strength C
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 Key dollar-denominated bonds
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 BBLTB ’15 (BBB+/A3/BBB+) 400m 3.25%
improved significantly, with gross NPLs declining 16% q-o-q and loan loss coverage BBLTB ’20 (BBB+/A3/BBB+) 800m 4.8%
rising to 159% (from 134% a year ago). The bank’s capital ratios have come down BBLTB ’29 (BBB/Baa1/BBB) [LT2] 450m 9.025%
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 Bank in brief
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 Bangkok Bank is the largest bank in Thailand, with assets totalling THB1,832bn
compared with 79% in Q4 2009 on modest deposit growth over the year. The (USD61bn) and deposits of THB1,352bn (USD45bn) as at September 2010. The
bank’s balance sheet remains very liquid, as cash and money market funds bank has an estimated 19% share of deposits in Thailand’s banking system and
accounted for 20% of total asset as of December 2010. Overall we believe the operates 896 domestic branches. The bank was established in 1944 by the Chin
bank’s credit profile remains sound and stable, and we view the result as credit Sophonpanich family. The bank has a presence in Hong Kong, Singapore, China,
neutral. We have a Neutral fundamental recommendation on the issuer. 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 9.8
Net interest income 1,362 1,587 1,439 417 Pre-provision profit 3.0 5.7 2.3 22.0
Other operating income 671 646 783 267 Net income 7.6 5.3 2.6 -5.3
Operating income 2,033 2,233 2,222 684 Profitability
Pre-provision profits 989 1,081 1,075 335 Pre-provision profits/average assets 2.2 2.2 2.1 2.3
Pre-tax income 828 884 853 280 Cost-income ratio 51.4 51.6 51.6 51.0
Taxation -267 -275 -245 -106 Asset quality
Minority interest -3 -2 -4 -2 Gross NPL ratio 7.86 4.65 4.86 3.62
Net 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
Advances 29,003 32,881 32,374 36,684 Total common equity/total assets 10.4 10.5 11.1 11.9
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.
102
EM Banks abc
March 2011
EMEA banks
103
EM Banks abc
March 2011
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
The banking system of Kazakhstan has made Tier 1 capital and total capital funded 11.8% and Pavel Simacek, CFA
Analyst
good progress on its way to recovery. Asset 15.2% of the aggregate banking assets, HSBC plc
respectively, as of 1 January 2011. This result +44 20 7992 3714
quality has stabilised with some modest signs of pavel.simacek@hsbcib.com
improvement, the level of capital has edged back represented a real turnaround over the situation
Ksenia Mishankina
into positive territory and profitability is also on one year before when the total banking capital Analyst
HSBC plc
the rise. But while the worst seems to be over, was negative.
+44 20 7992 3703
ksenia.mishankina@hsbcib.com
there are still many challenges ahead, the key ones An adequate capital buffer is a crucial
being a fragile domestic operating environment precondition for restoring the health and stability
and the unfavourable conditions prevailing in to the Kazakh banking system. Even though
global financial markets. significant improvement has already been
Growth rates are likely to remain constrained by achieved, the highly risky operating environment
the difficult economic environment in the near to may require still more robust capital levels.
medium term. In addition, banks are now focusing Banking system asset growth has been lagging
more on quality rather than on balance sheet size. behind the economy. The consolidated assets of the
The government of Kazakhstan, prompted by the banking sector increased by 4.2% y-o-y to
recent financial crisis, has adopted a number of KZT12,038.1bn (USD83.0bn) as of 1 January 2011
measures aimed at stabilising its domestic while GDP expanded by 7% in real terms in 2010.
banking system. The state interventions coupled However, the lending operations remained
with an increasingly positive macroeconomic burdened by asset quality problems and the weak
story have started to bear fruit. operating environment. The aggregate loan
Most importantly the capitalisation of the banking portfolio contracted by 5.9% or KZT572.8bn
system, insolvent during the crisis, has returned (USD3.95bn) during 2010. Loans accounted for
into positive territory. Tier 1 capital amounted to 75.3% of total assets of the sector as of 1 January
KZT1,424.9bn (USD9.82n) while Tier 2 capital 2011, down from 83.4% a year before. The
stood at KZT456.3bn (USD3.15bn) as of 1 scarcity of funding and very limited, if any, access
January 2011. to international resources are likely to hamper the
104
EM Banks abc
March 2011
ability of banks to resume active lending The aggregate net income for the banking sector,
operations and constrain their growth in the near excluding Alliance Bank, Temirbank and BTA
to medium-term. Bank, which completed restructuring, amounted to
KZT1,426.7bn (USD9.83bn) as of 1 January 2011, a
The whole concept of funding banking operations
material improvement on the massive loss of
in Kazakhstan has been shattered by the financial
KZT2,834.2bn (USD19.4bn) reported in 2009. The
crisis. The banks – historically heavily dependent
banking system of Kazakhstan seems to be on its
on external borrowings – were suddenly cut off
way to restoring profitability and overcoming the
from international capital markets. The resulting
devastating impact of the global financial crisis.
scarcity of international funding led to substantial
shifts in the funding mix and triggered a fierce However, caution is needed when interpreting the
competition for deposits. The external debt of profitability data. The banks have restructured a
banks was reduced by some USD29bn during the significant portion of their loan books hit by the
crisis and the aggregate banking assets shrank. crisis and granted the borrowers repayment
holidays of up to three years. A portion of these
During 2010, the total liabilities of the sector
restructured exposures may never become
dropped 14.5% to KZT10,715.4bn (USD73.86bn).
performing, while the interest income on them is
This contraction could not be offset even by a
still being accrued by lenders thus inflating the
12.5% growth in corporate deposits and 16.2% in
real bottom line profitability and capital.
retail deposits. The shortfall was covered by the
government with state loans advancing by 22.9%
during 2010.
Kazakhstan – key data on the banking sector

Macro framework 2009 2010e 2011e Key banking industry indicators 2008 2009 2010 LTM
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 0.4
Gross 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
105
EM Banks abc
March 2011
Alliance Bank
Still on life support Kazakhstan
 Alliance Bank has yet to demonstrate the viability of its current business model. Rating Outlook Rating Outlook
 The level of capitalisation remains low with IFRS total capital still negative.
 The bank may face problems in recovering some troubled loans. Credit rating profile FC government bond ratings
Fitch Fitch BBB- Positive
Credit profile outlook (initiate at Underweight) Senior unsecured B- Stable Moody's Baa2 Stable
Sub-debt CC S&P BBB Stable
Alliance Bank is currently majority owned by the state through Samruk-Kazyna Moody’s
National Welfare Fund (SK). This quasi-sovereign ownership is the key to its Senior unsecured Caa2 Dev Major shareholders (as of Jan 2011)
creditworthiness. However, SK has declared its intention to sell its stake in Alliance Bank-deposit B3 Samruk-Kazyna National
Bank. The bank’s stand-alone credit profile is rather weak. The uncertainty Sub-debt (dom) Caa3 Welfare Fund 67%
surrounding the future ownership structure and weak fundamentals support our Financial strength E
Underweight view. Risks to our view include a sale to a strong strategic investor. S&P
Senior unsecured B- Stable Bloomberg
HSBC FI Research view Sub-debt CCC ALLIBK
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 Key dollar-denominated bonds
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
outstanding (m)
consisting of debt denominated in foreign currencies. An inability to refinance
maturing debt coupled with a deposits outflow and alleged fraudulent activities ALLIBK 10 ½ 17 (B-/Caa2/B-) (sinkable) USD615 10 ½%
brought the bank down in April 2009. The bank has come out of debt restructuring ALLIBK Var 03/20 (B-/Caa2/B-) (sinkable) USD219 4.7% (variable)
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 Bank in brief
from FX operations. This was a significant improvement over a loss reported for the
Samruk-Kazyna National Welfare Fund is the majority shareholder of Alliance Bank
corresponding period of 2009. However, in 2011 management expects a much
with 67% of common shares. Following the default of the bank on its obligations in
lower result of around KZT36.07bn (USD24.9m).
April 2009, creditors became owners of 33% in a debt-to-equity swap. The debt
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 restructuring was completed in March 2010 and the bank received a capital
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 injection of USD3.7bn while the regulatory capital reached USD344.6m.
Alliance Bank: financial summary

Year to December (USDm) 2007 2008 2009 LTM June Year to December (%) 2007 2008 2009 LTM June
2010 2010
Interest income 1,483 1,380 577 321 Loans 32.2 -47.1 -43.8 -14.5
Interest expense -758 -837 -546 -337 Assets 26.1 -35.5 -44.0 -6.6
Net interest income 725 544 31 -15 Pre-provision profit 144.0 -75.8 na na
Other operating income 127 -197 -731 13 Net income 204.7 na na na
Operating income 853 347 -700 -2 Profitability
Operating expenses -183 -182 -136 -147 ROAA 4.1 -40.5 -51.1 40.1
Pre-provision profits 670 165 -836 -149 Pre-provision profits/average assets 7.9 2.1 -21.2 -5.4
Provisions for loan losses -208 -3,378 -1,183 -906 Net interest margins 16.4 6.6 0.5 -0.3
Non-operating profit 0 0 0 2,175 Cost-income ratio 21.4 52.4 -19.5 na
Pre-tax income 462 -3,213 -2,020 1,120 Asset quality
Taxation -105 3 0 -17 Gross NPL ratio na 15.2 52.5 72.9
Net income 348 -3,210 -2,020 1,103 Gross NPLs (USDm) na 886 2,470 3,002
Key balance sheet items Loan loss res./NPLs na 251.9 123.9 90.1
Loans 6,796 3,586 1,642 1,411 Total CAR 19.0 na na na
Total assets 9,631 6,191 2,824 2,652 Tier-1 ratio 17.0 na na na
Total equity 1,319 -1,879 -3,543 -859 Funding
Summary of FX balance sheet Loan-to-deposit ratio 338.8 229.3 158.5 122.6
Loans 3,464 1,761 870 719 Loan/assets 70.6 57.9 58.2 53.2
Deposits 369 440 121 116 FX loan-to-deposit ratio 939.9 400.5 718.1 620.0
Borrowings 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.
106
EM Banks abc
March 2011
ATF Bank
Foreign owner improves credit profile Kazakhstan
 Significant erosion of asset quality. Rating Outlook Rating Outlook
 Implementation of more efficient cost control.
 Thinning capitalisation levels. Credit rating profile FC government bond ratings
Senior unsecured BBB Watch Moody's Baa2 Stable
Credit profile outlook (Neutral)
negative
ATF Bank is owned by UniCredit Group of Italy and is being increasingly integrated Sub-debt BBB- S&P BBB Stable
into the parent organisation. The strengthening ties with a reputable international Moody’s
parent are the main factor underpinning the credit profile of ATF Bank. Despite the Senior unsecured Ba2 Stable Major shareholders (as at June 2010)
high likelihood of support from UniCredit the weak credit indicators support our Bank-deposit Ba2 UniCredit Group 99.71%
Neutral recommendation. Risk to our view is mostly driven by any changes in the Sub-debt B1
relationship with the owner. Financial strength E+
S&P NR
HSBC FI Research view Senior unsecured Bloomberg
Sub-debt ATFBP
ATF Bank’s profitability came under significant pressure during H1 2010, when the Financial strength
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), Key dollar-denominated bonds
14 times the H1 2009 figure. Description (Ratings: Fitch/Moody’s/S&P) Coupon
Amount
The bank is exposed to the troubled real estate and construction sectors, which outstanding (m)
represented 14.7% and 5% respectively of the loan book as at 30 June 2010. The
ATFBP 9 05/11/16 (BBB/Ba2/NR) USD350 9%
exposure to those sectors could further constrain performance and erode the capital
ATFBP 9 ¼ 02/14 (BBB/Ba2/NR) USD297 9 ¼%
base. ATF Bank has been lessening its reliance on external public markets funding
ATFBP 9 ¼ 04/12 (BBB/Ba2/NR) USD200 9 ¼%
and in October 2010 repaid a USD200m Eurobond.
Total equity fell to KZT48.6bn (USD330m) in H1 2010 and funded 4.4% of total
Bank in brief
assets at the end of the period. The level of capitalisation seems to be thin and
additionally depressed by negative bottom-line results. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 services to both retail and corporate clients in Kazakhstan, Russia, and Kyrgyzstan,
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 but its main focus is the domestic market.
ATF Bank: financial summary

Year to December (USDm) 2007 2008 2009 LTM June Year to December (USDm) 2007 2008 2009 LTM June
2010 2010
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 na
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 2,187
Key balance sheet items Loan Loss Res./NPLs na 331.1% 114.8% 59.1%
Loans 6,498 6,611 5,249 4,896 Total CAR 14.1% 16.5% 12.1% na
Total assets 8,169 8,435 7,087 7,499 Tier-1 ratio 9.2% 11.0% 8.2% na
Total 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% na
Borrowings na na 2,562 na
107
EM Banks abc
March 2011
BTA Bank
Climbing back after falling off a cliff Kazakhstan
 Bank’s profitability is likely to suffer from a high level of problematic assets. Rating Outlook Rating Outlook
 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 rating profile FC government bond ratings
Credit profile outlook (initiate at Underweight) Senior unsecured B- Stable Moody's Baa2 Stable
Sub-debt CC S&P BBB Stable
BTA Bank has turned from a privately owned into a quasi-sovereign institution held Moody’s
by the Samruk-Kazyna National Welfare Fund (SK). The relationship with SK is the Senior unsecured NA Major shareholders (as at March 2011)
bank’s main credit driver. However, the bank is struggling to recover from its recent Bank-deposit Caa3 RUR Samruk-Kazyna 81.5%
failure, the credit fundamentals remain weak further undermined by very high NPLs, Sub-debt NA
as a result of which we establish an Underweight recommendation. The downside Financial strength E
risks to our recommendation include inability to clean up its loan portfolio while on a S&P
sale to a strong strategic investor would represent a significant upside risk. Senior unsecured B- Stable Bloomberg
Sub-debt NA BTAS
BTA Bank defaulted on its liabilities in April 2009 and has since restructured its Key dollar-denominated bonds
obligations, a process it completed in September 2010. Since then, the bank has Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
worked hard to restore its business and its credibility. The profitability of the bank is outstanding (m)
likely to remain under pressure, although release of provisions might improve it.
BTAS Var 07/20 (restructured, NR) USD5,211 Variable
In February 2011, the bank filed another claim, amounting to USD1.2bn, against its
BTAS 10 ¾ 07/18 (B-/NR/NR) USD2,082 10 ¾%
former chairman, Mukhtar Ablyazov, bringing the total claims against him to
BTAS7.2 07/01/25 (CC/NR/NR) (sinkable) USD497 7.2%
USD3.3bn. It is questionable whether any of the claims can be successful.
Bank in brief
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 BTA Bank is the third largest bank in Kazakhstan. After a massive default on its
reports is Sberbank. We would view a significant participation of the Russian obligations, the bank was effectively nationalised, with Samruk-Kazyna, the National
banking giant in the ownership structure as positive for the credit profile and Welfare Fund, taking an 81.5% stake. During the restructuring, debt was reduced to
potential upside risk to our view. USD4.2bn from USD16.65bn and its maturity was substantially extended.
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703
BTA Bank: financial summary

2010 2010
Interest income 2,640 3,295 1,609 1,079 Loans 77.1 -32.1 -35.6 -28.1
Interest expense -1,463 -1,732 -1,744 -1,666 Assets 47.7 -28.4 -10.3 -11.6
Net interest income 1,177 1,563 -135 -587 Pre-provision profit 88.2 -21.4 nm nm
Other operating income 454 -64 -2,057 -162 Net income 65.6 nm nm nm
Operating income 1,631 1,499 -2,192 -749 Profitability
Operating expenses -463 -564 -410 -459 ROAA 2.5 -45.2 -53.5 -30.5
Pre-provision profits 1,168 935 -2,603 -1,208 Pre-provision profits/Average assets 5.6 4.3 -18.5 -9.7
Provisions for loan losses -592 -10,616 -4,945 -3,016 Net interest margins 5.9 6.2 -0.6 -2.8
Non-operating profit 32 -194 9 421 Cost-income ratio 28.4 37.6 -18.7 -61.2
Pre-tax income 608 -9,875 -7,539 -3,804 Asset quality
Taxation -80 1 -4 17 Gross NPL ratio 0.8 49.3 77 na
Net income 528 -9,874 -7,543 -3,787 Gross NPLs (USDbn) 165 11,560 16,409 na
Key balance sheet items Loan Loss Res./NPLs [is this correct?] 689.2 87.1 87.2 na
Loans 19,743 13,378 7,014 5,079 Total CAR 17.6 na na na
Total assets 25,424 18,153 13,267 11,812 Tier-1 ratio 16.9 na na na
Total 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 43.0
108
EM Banks abc
March 2011
Development Bank of Kazakhstan

Special mission and status Kazakhstan
 Funding options are limited, as Development Bank of Kazakhstan (DBK) is not Rating Outlook Rating Outlook
allowed to collect deposits
 DBK focuses on a few large projects with substantial repayment periods Credit rating profile FC government bond ratings
 Political pressures may influence business decisions Fitch Fitch BBB- Positive
Senior unsecured BBB- Stable Moody's Baa2 Stable
Sub-debt NA S&P BBB Stable
Credit profile outlook (Overweight from Neutral)
Moody’s
Due to its government ownership and development mission, DBK’s credit risk is Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011)
closely aligned with that of Kazakhstan and will move in line with it. The current Bank-deposit Baa3 Samruk-Kazyna National 100%
favourable macroeconomic story supports the recovery and government finances Sub-debt NA Welfare Fund
thus also strengthening the credit profile and importance of DKB. Consequently we Financial strength NA
change our recommendation from Neutral to Overweight. Risks to our view include S&P
adverse developments in the local economy and weak commodity prices. Senior unsecured BBB Stable Bloomberg
Sub-debt NA DBKAZ
Its development mission shapes DBK’s strategy and its credit profile. In 2010 the Key dollar-denominated bonds
bank participated in 10 strategic government projects with a total value of USD4bn. Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
According to preliminary data, DBK’s 2010 net income stood at KZT2.8bn outstanding (m)
(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 DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD500 5 ½%
due to lower provisioning requirements. DBK reported consolidated IFRS assets of DBKAZ 5 ½ 12/15 (BBB-/Baa3/BBB) USD277 5 ½%
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 Bank in brief
improvement on the same period of 2009 when it recorded a loss of KZT11.9bn
(USD79.9m). 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 accordance with the law on the Development Bank of Kazakhstan in 2001 and
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 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 Year to December (%) 2007 2008 2009 LTM Sept
2010 2010
Interest income 110 233 283 351 Loans 54.1 143.4 7.3 56.9
Interest expense –42 –107 –126 –173 Assets 54.9 36.2 124.9 9.3
Net interest income 68 127 157 178 Pre-provision profit 0.0 184.8 106.9 -3.1
Other operating income –10 5 41 15 Net income –17.7 –27.0 na na
Operating expenses –21 –25 –19 –19 ROAA 1.3 0.7 –6.4 -3.2
Pre-provision profits 37 107 180 175 Pre-provision profits/average assets 2.0 3.9 4.3 2.9
Provisions for loan losses –6 –85 –497 –366 Net interest margins 5.5 6.5 5.1 3.7
Non-operating profit 0 0 0 0 Cost-income ratio 36.4 18.9 9.4 9.6
Pre-tax income 31 22 –317 –192 Asset quality
Taxation –7 –4 50 31 Gross NPL ratio na 0.1 6.6 5.4
Net income 24 18 –267 –160 Gross NPLs (USDm) na 1 126 147
Key balance sheet items Loan loss res./NPLs na 7601 426 406
Deposits 16 5 304 112 Capital structure
Loans 640 1,553 1,357 2,140 Total CAR na na na na
Total assets 2,301 3,126 5,726 6,289 Tier-1 ratio na na na na
Total equity 837 797 1,813 1,862 Funding
Summary of FX balance sheet Loan-to-deposit ratio 4045 29707 446 1917
Loans 606 1,505 1,296 na Loan/assets 27.8 49.7 23.7 34.0
Deposits 16 4 304 na FX loan-to-deposit ratio 3847 35475 426 na
Borrowings 425 1,150 2,898 na
Bonds 344 345 346 na
109
EM Banks abc
March 2011
Eurasian Development Bank

Promoting regional integration Kazakstan
 The key driver of credit quality for Eurasian Development Bank (EDB) is its Rating Outlook Rating Outlook
relationships with shareholding member states – these appear secure due to
the bank’s development mission, high political profile and direct government Credit rating profile FC government bond ratings (Russia)
ties. Fitch Fitch BBB- Positive
 EDB is a relative newcomer to the lending market with untested credit skills. Senior unsecured BBB Positive Moody's Baa2 Stable
Moody’s
Credit profile outlook (Overweight)
Senior unsecured A3 Stable Major shareholders (as of Jan 2011)
EDB’s ownership – two-thirds by Russia and the rest by Kazakhstan and smaller Bank-deposit NA Russian Federation 67%
states in the region – and the privileges it enjoys in these countries, represent the Sub-debt NA Kazakhstan 33%
main props to its credit profile. EDB high political profile, its regional importance and Financial strength NA
support of member states with growing economies support our Overweight view. S&P
Risks to our view include major changes in political sentiment towards the bank. Senior unsecured BBB Stable Bloomberg
Sub-debt NA EURDEV
EDB’s total assets amounted to USD2.5bn as of H1 2010, up only 1% on 2009. The Key dollar-denominated bonds
bank is not a very active lender with loans to customers accounting for mere 27.4% Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
of total assets as of H1 2010. A net profit for H1 2010 stood at USD7.3m, down from outstanding (m)
USD30.2m in H1 2009. Profitability came under pressure due to growing expenses
related to newly raised debt. EURDEV7 3/8 09/14 (BBB/A3/BBB+) USD500 7 3/8%
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 Bank in brief
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 EDB is a regional development bank with a mandate to promote economic
by the bank to result in a production of goods with a total annual value of USD3.6bn integration and development of its member states, Russia, Kazakhstan, Tajikistan,
and to stimulate production in related supplier sectors of the economy. Armenia and Belarus, where the bank is exempt from taxes and the supervision of
local regulatory bodies.
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714
Eurasian Development Bank: financial summary

2010 2010
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 –45.1
Other operating income 10 –12 11 12 Net income 297.4 3.3 –1.9 –57.5
Operating expenses –16 –26 –30 –35 ROAA 3.8 2.4 1.8 0.7
Provisions for loan losses –1 –1 –5 –8 Net interest margins 5.7 5.3 3.5 2.6
Non-operating profit - - - - Cost-income ratio 28.3 38.5 39.8 58.5
Taxation - - - - Gross NPL ratio na na na na
Net income 39 41 40 17 Gross NPLs (USDm) na na na na
Key balance sheet items Loan loss res./NPLs na na na na
Deposits 0 0 0 0 Capital structure
Loans 165 436 609 690 Total CAR na na na na
Total equity 854 1,531 1,634 1,655 Funding
Loans 165 436 528 612 Loan/assets 12.5 21.7 24.4 27.4
Borrowings 407 474 48 57 FX loan-to-deposit ratio nm nm nm nm
Bonds 0 0 675 670
110
EM Banks abc
March 2011
Halyk Bank
The worst seems to be over Kazahstan
 Still weak asset quality is threatened by real estate exposure. Rating Outlook Rating Outlook
 Deposit concentration is concerning, with the bank’s 10 largest customer deposits
accounting for 47% of the total. Credit rating profile FC government bond ratings
Credit profile outlook (Neutral, downgrade from Overweight) Senior unsecured B+ Stable Moody's Baa2 Stable
Halyk Bank’s creditworthiness remains under pressure due to the still challenging Moody’s
operating environment and fragile economic recovery. This, coupled with the low, Senior unsecured Ba3 Stable Major shareholders (as of Jan 2011)
albeit stabilising, quality of the loan book prompts us to change our fundamental Bank-deposit Ba2 Holding Group Almex 54.37%
view to Neutral from Overweight. Risks to our view include: significant swings in Sub-debt NA Samruk-Kazyna 20.91%
asset quality and profitability. A substantial diversification in the funding structure Financial strength D- GDR holders 20.04%
would put upward pressure on our view. S&P
Senior unsecured B+ Stable Bloomberg
HSBC FI Research view Sub-debt NA HSBKKZ
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, Key dollar-denominated bonds
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. Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
Halyk Bank keeps its balance sheet liquid, with around 34.5% of assets invested in outstanding (m)
cash and highly liquid instruments at the end of the first nine months of 2010. This
HSBKKZ7 ¼ 05/17 (B+/Ba3/B+) USD638 7 1/4%
cushion should be sufficient to meet unexpected swings in business or outflow of
HSBKKZ7 ¼ 01/21 (B+/Ba3/B+) USD500 7 1/4%
funds. Another safety buffer is represented by capital with the total capital ratio
HSBKKZ9 1/4 10/13 (B+/Ba3/B+) USD490 9 1/4%
amounting to 22.5% and the Tier 1 standing at 18.4%.
HSBKKZ7 3/4 05/13 (B+/Ba3/B+) USD270 7 3/4%
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 Bank in a capsule
9M 2009. This improvement was mainly driven by falling provisions, potentially Halyk Bank boasts a strong retail franchise and a dense territorial coverage,
signalling asset deterioration has now bottomed out. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 in Russia, Kyrgyzstan and Georgia. In addition to standard banking services, it is
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 also active in pensions, insurance, leasing, brokerage and asset management.
Halyk Bank: financial summary

2010 2010
Interest income 1,082 1,601 1,313 1,215 Loans 74.5 14.2 -4.6 -3.4
Operating income 917 1,111 1,032 974 Profitability
Non-operating profit 0 -60 0 0 Cost-income ratio 35.6 36.9 31.9 39.2
Taxation -87 -13 -22 -50 Gross NPL ratio na 6.40 16.7 17.5
Net income 331 121 107 221 Gross NPLs (USDm) na 690 1,508 1,585
Key balance sheet items Loan loss res./NPLs na 137.9 92.5 103.9
Loans 8,630 9,831 7,637 7,410 Total CAR 12.9 13.4 20.6 22.5
Total assets 13,233 13,662 13,634 13,976 Tier-1 ratio 10.6 9.9 16.9 18.4
Total equity 1,336 1,581 1,893 2,094 Funding
Loans 3,476 4,510 3,969 3,611 Loan/assets 65.2 72.0 56.0 53.0
Deposits 3,213 3,322 4,747 4,282 FX loan-to-deposit ratio 108.2 135.8 83.6 84.3
Borrowings 1,423 1,690 236 184
Bonds 1,203 1,656 1,406 1,435
111
EM Banks abc
March 2011
Kazkommertsbank
Big may not mean crisis proof Kazakhstan
 The bank is still burdened with many problematic exposures. Rating Outlook Rating Outlook
 Concentration on both sides of its balance sheet represents a challenge.
 Tight liquidity results in a negative liquidity gap in the shortest maturity bracket.
Senior unsecured B- Stable Moody's Baa2 Stable
Credit profile outlook (Neutral, downgrade from Overweight) Sub-debt CC S&P BBB Stable
KKB is one of the largest private banks in the CIS and the market leader by total Moody’s
assets in Kazakhstan. As of January 2011, KKB had accumulated on its books Senior unsecured B2 Negative Major shareholders (as of Jan 2011)
20.19% of the country’s aggregate banking assets. However, credit volumes stayed Bank-deposit Ba3 Central Asian Investment Co. 23.83%
flat in H1 2010, reflecting a still difficult economic situation and a scarcity of funding. Sub-debt Caa1 Mr. N.S. Subkhanberdin 9.32%
Therefore we downgrade KKB to Neutral from Overweight. Risks to our view include Financial strength E+ Alnar Capital Holding 28.76%
significant changes in the operating environment or credit profile, which is strongly S&P Samruk-Kazyna 21.26%
influenced by the asset quality. Senior unsecured B Stable Bloomberg
Sub-debt CCC+ KKB
KKB has been focusing on asset quality and liquidity management. The former Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
remains a challenge, with some 22.3% of gross loans more than three months outstanding (m)
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 KKB7 ½ 04/16/13 (B-/B2/B) USD443 8 ½%
20.3% of gross loans, up from 19.0% during the same period. KKB7 ½ 11/29/16 (B-/B2/B) USD356 7 ½%
Capitalisation remained almost flat during the first nine months of 2010 with the BIS KKB8 11/03/15 (B-/B2/B) USD270 8%
total capital ratios and Tier 1 ratios easing modestly to 20.6% and 16.0%, KKB8 04/07/14 (B-/B2/B) USD255 7 7/8%
respectively, from 20.1% and 15.9% at the end of 2009. Bank in brief
KKB booked a profit of KZT15.72bn (USD108.3m) in the first nine months of 2010,
KKB is the largest bank in Kazakhstan. It is majority held by private investors;
up from KZT14.60bn (USD98.0m) in 9M 2009. The bank is also gradually repaying
however, Samruk-Kazyna National Welfare Fund (SK) acquired a minority stake
government funds received during the crisis to restore itself to non-state ownership.
during the crisis in an effort to stabilise the financial sector. SK currently owns
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 21.26% though it is in the process of reviewing its holdings, many of which will be
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 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

2010 2010
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 –40
Other operating income 270 16 397 157 Net income 108 –65 –6 6
Provisions for loan losses –607 –1,268 –1,313 –686 Net interest margins 6.1 8.0 7.8 4.8
Non-operating profit 12 –28 31 1 Cost-income ratio 17.6 16.9 12.2 20.6
Taxation –130 72 –86 –80 Gross NPL ratio 2.1 6.0 21.3 22.3
Net income 471 168 129 137 Gross NPLs (USDm) 437 1,208 3,827 4,093
Key balance sheet items Loan loss res./NPLs 266.6 198.1 89.0 90.9
Loans 19,631 17,744 14,562 14,634 Total CAR 15.2 17.7 20.1 20.6
Borrowings 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.
112
EM Banks abc
March 2011
113
EM Banks abc
March 2011
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
State-led growth we expect volume growth to outpace margin Olga Fedotova

Analyst
decline, allowing banks to post earnings growth. HSBC Bank plc
Qatar is pushing hard for infrastructure development,
+44 20 7992 3707
especially since winning the 2022 World Cup bid. Qatar does not have any large specialised olga.fedotova@hsbcib.com
Investment proposals are being chalked out and the government lending institutions so commercial Aybek Islamov*
Analyst (Equity Research0
country has ample resources for a booster package. banks have historically been the intermediary of HSBC Bank plc
The country’s finance minister has said that the state choice. The only specialised government- + 44 20 7992 3624
aybek.islamov@hsbcib.com
is planning to allocate 40% of budgeted expenditure promoted development bank, Qatar Development
*Employed by a non-US affiliate
to infrastructure development in 2011 against 30% in Bank, has a lean balance sheet (end-2009 asset of HSBC Securities (USA) Inc,
2010. Our equity research team expects this and is not registered/qualified
size: QAR3.2bn or USD0.9bn) compared with pursuant to FINRA regulations.
investment trend to continue and projects a 13% large domestic commercial banking peers like
compounded annual growth rate in lending between Qatar National Bank (end-2010 asset size:
2009 and 2012. This compares with the MENA QAR223bn or USD61.2bn). Commercial banks
average of 10% during the same period and will therefore have a clear advantage on balance sheet
likely stimulate loan growth in Qatari banks. strength and will likely lead the lending franchise
in the medium term.
The lending pattern in the country has undergone
a structural shift in the past few years. According Qatari banks’ capitalisation levels are similar to
to the Qatari central bank, private sector credit those of peers in the region, with Tier 1 ratios at
comprised only 65% of total domestic credit at the around 11%. Loan-to-deposit ratios, however, are
end of 2010 compared with 73% at the end of on the high side in Qatar (>100%, with the
2008. The trend has been fairly unidirectional to notable exception of Qatar National Bank),
date and this will likely continue to be the case suggesting generally aggressive lending. This risk
given the strong pipeline of ongoing and is partially offset by a sound depositor base.
upcoming projects. Our equity research team Overall deposits increased at double-digit rates (in
forecasts a public sector financing requirement of percentage point terms) in the last three years.
USD64bn between 2011 and 2014 based on Furthermore, the share of private deposits in total
ongoing projects. Such loans would usually yield deposits increased from 62% in 2008 to 74% at
rates lower than prevailing commercial levels, end-2010 – in contrast to the UAE, where public
which would squeeze banks’ margins. However, sector deposits form a larger chunk. This
114
EM Banks abc
March 2011
reinforces the local economy and banking system, Given the recent turmoil in the region it is worth
and helps Qatari banks access the wholesale noting that Qatar has a fairly strong democratic
market with ease and efficiency. The five-year representative government. The legislative
paper of the two leaders in the banking sector authority is vested in the Advisory Council (two-
yields less than 4%. thirds elected by public voting), while the
executive authority is vested in the Emir assisted
The region has a history of supporting local banks
by the Council of Ministers as specified by the
through recapitalisation, de-risking of books and,
constitution. There is an independent judiciary
recently, the issuance of central bank bonds.
system and court judgments are pronounced in the
However, recent legislation to segregate Islamic
name of the Emir.
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.
Qatar– key data on the banking sector

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
115
EM Banks abc
March 2011
Commercial Bank of Qatar

Qatar
Key events and risks to monitor Credit profile (continued)
 NIM has increased by 30bps in 2010 compared to 2009. With an increasing Rating Outlook Rating Outlook
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 Credit rating profile FC government bond ratings
sector business increases. Fitch Fitch Stable
Senior unsecured A Stable Moody's Aa2 Stable
Sub-debt na S&P AA Stable
Credit profile Moody’s
Senior unsecured A1 Negative Major shareholders (December 2010)
Commercial Bank of Qatar (CBQ) could face earnings pressure as its share of
Bank-deposit A1 QIA 16.7%
business with public sector entities increases. Continued capital injection from the Sub-debt A2
state is credit supportive but was probably not needed. Further injection headroom
Financial strength C-
is narrow (it is the government’s intention to cap its holding at 20%), but rating
S&P
agencies expect support will probably be forthcoming if it is needed.
CBQ maintained earnings through the last two years underpinned by robust NIM. Sub-debt BBB+
However, the group witnessed weakness in capitalisation as the bank started Financial strength na
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
at its domestic peer Qatar National Bank. (USDm)
The group has an aggressive dividend distribution policy; it announced a 97% COMQAT Float 11 (A/A1/A-) 500 L+40bps
dividend payout (QAR 7/share, USD1.92) for the year 2010. COMQAT 5 11/18/14 (A/A1/A-) 1000 5%
We do not have a fundamental credit recommendation. COMQAT 7 1/2 11/19 (NR/A2/BBB+) 600 7.5%
Analysts Olga Fedotova +44 20 7992 3707 olga.fedotova@hsbcib.com

Aybek Islamov +44 20 7992 3624 aybek.islamov@hsbcib.com
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 5.8
Interest expense –435 –400 –333 Assets 35.4 -6.8 9.1
Net interest income 355 457 488 Pre-provision profit 44.0 0.0 –12.1
Other operating income 259 187 215 Net income 22.4 –10.5 7.3
Operating income 761 764 703 Profitability
Operating expenses –206 –209 –216 ROA 3.2 2.6 2.7
Pre-provision profits 555 555 487 Pre-provision profits/average assets - - -
Provisions for loan losses –16 –127 –45 Net interest margins 2.8 3.1 3.4
Non-operating profit - - - Cost-income ratio 27.1 27.3 30.7
Taxation - - - 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 99.3
Loans 9,396 8,975 9,490 Capital structure
Deposits 8,847 7,221 9,143 Total CAR 13.6 18.9 18.5
Interest bearing assets 14,910 13,965 15,526 Tier-1 ratio 13.1 17.2 16.6
Total 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.
116
EM Banks abc
March 2011
117
EM Banks abc
March 2011
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
Russia’s banking system avoided major divestments possible. A 10% equity stake in VTB Pavel Simacek, CFA
Analyst
bankruptcies during the crisis and is returning to was sold to private investors in February 2010. HSBC Bank plc
“business as usual” at an increasing speed. The +44 (0) 207992 3714
The Russian economy has started to grow again with pavel.simacek@hsbcib.com
Russian government and the Central Bank of
GDP projected to add 4.8% in 2011. This positive Ksenia Mishankina
Russia (the CBR) rushed to the rescue when Analyst
macroeconomic story should support the growth HSBC Bank plc
things turned really ugly in 2009. This timely state
rates of the banking sector. After a very difficult +44 20 7992 3703
intervention, along with large volumes of ksenia.mishankina@hsbcib.com
2009 the total banking assets expanded by 14.9% in
government emergency money pumped into the
2010 to reach RUB33,804.6bn (USD1,108.8bn) as
domestic banking sector and capital markets,
of year-end, driven mostly by lending activities with
helped avert major financial failures.
total loans advancing by 12.6%. If the
Russia’s banking system remains highly macroeconomic environment remains favourable,
concentrated. In a country where over 1,000 banks which appears the most likely scenario, loan
compete for market share, the top five creditors, all portfolio growth should range between 15-20%
directly or indirectly owned by the government, annually in the near to medium-term.
control close to half of all banking assets. The
Russia’s banks managed to keep the quality of
government has been saved the trouble of
their loan books at manageable levels throughout
nationalising the largest domestic financial
the crisis. Overdue loans accounted for some
institutions in bailouts as it never privatised them.
5.65% of gross loans as of 1 January 2011, down
The state-owned banks have started, with a
from 6.24% a year before. Asset quality is on the
minimum of delay, to channel emergency funds into
climb, with some banks starting to boost their
the economy and also to other financial institutions.
bottom lines with provision write-backs already
These timely support measures have limited the
this year. However, the uncertain pattern of
damage caused by the crisis to Russia’s economy
provision releases may cause temporary volatility
and its banking system and contributed to a
in bottom lines.
relatively early start to the recovery.
The Russian banks maintain a high level of capital
Nonetheless, the Russian government intends to
surplus, substantially in excess of the CBR’s
partially or fully privatise some 900 companies,
minimum capital requirements. The total CBR
including banks, in the near future. The state
capitalisation ratio of the sector reached 18.0% at
stakes in VTB, Sberbank and Rosselkhozbank are
the end of 2010 while the regulatory benchmark is
to be reduced to 50% plus one share with further
118
EM Banks abc
March 2011
10.0%. A higher level of equity may help the The aggregate net income for the sector in 2010
banks weather possible business downturn and is was RUB573.38bn (USD18.8bn), up almost
important in a potentially volatile and commodity threefold from the previous year’s RUB205.11bn
dependent operating environment of Russia. (USD6.82bn). All the main profitability indicators
also headed higher, with return on equity rising to
Capitalisation concerns have encouraged the CBR
12.12% in 2010, up from 4.44% in 2009 and
to also gradually hike its minimum capital
return on assets advancing to 1.70% from 0.70%.
requirements. Effective from 1 January 2010 the
This recovery in profitability should continue in
minimum amount of equity for a bank was
2011 as core banking operations keep benefiting
RUB90m (USD2.95m), but from the start of
from the reviving economy.
2012, with this will rise to RUB180m
(USD5.4m). This higher capital hurdle may The role of the banking system in the economy has
represent a real challenge for small institutions, been gradually increasing, with total banking assets
and with discussions taking place to raise it equivalent to 75.9% of Russia’s GDP by the end of
further to RUB300m (USD10.5m from 2015), 2010, a slight increase on the 75.27% seen a year
consolidation in the sector may accelerate. 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 217% 181% 186%
loans
Current account balance (% GDP) 4.0 5.1 2.8 Gross loans/customer deposits 1.32 1.16 1.01
Gross 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%
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.
119
EM Banks abc
March 2011
Alfa Bank
Russia’s largest privately owned bank Russia
 Alfa bank faces high levels of problematic assets, although these are declining. Rating Outlook Rating Outlook
 Significant single client concentrations exist on both sides of its balance sheet.
 Possible exposure to related parties. Credit rating profile FC government bond ratings
Fitch Fitch BBB Positive
Senior unsecured BB Stable Moody's Baa1 Stable
Credit profile outlook (Overweight, upgrade from Neutral)
Sub-debt BB- S&P BBB Stable
Alfa Bank is working in a challenging operating environment, but seems well Moody’s
positioned to reap the benefits of the Russian’s continuing economic recovery. We Senior unsecured Ba1 Stable Major shareholders (as of Jan 2011)
upgrade from Neutral to Overweight on the back of the bank’s improving financial Bank-deposit Ba1 M. Fridman 36.47%
performance, as a result of which we expect it to remain one of Russia’s best- Sub-debt Ba2 G. Khan 23.27%
performing financial institutions. Risks to our view include a deterioration in asset Financial strength D A. Kuzmichev 18.12%
quality and negative trend in profitability. S&P P. Aven 13.76%
Senior unsecured B+ Bloomberg
HSBC FI Research view Sub-debt B- ALFARU
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 Key dollar-denominated bonds
contracting by 5.1% to USD13.0bn. This adverse development in the funding Description (Ratings: Fitch/Moody’s/S&P) Coupon
Amount
structure was mostly attributable to a 25% drop in the account of one client. Alfa
outstanding (m)
Bank’s top 10 deposits accounted for 27.5% of the total, a big concentration risk.
ALFARU7 7/8 09/17 (BB/Ba1/B+) USD1,000 7 7/8
Loans overdue by more than one day dropped to 12.1% in H1 2010, down from 21.2%
ALFARU8 03/18/15 (BB/Ba1/B+) USD600 8
at the end of 2009. The bank reported a net income of USD296m in H1 2010, up from
ALFARU 8.2 06/12 (BB/Ba1/B+) USD500 8.2
USD6m in H1 2009. The main drivers of profit were a higher net interest income
ALFARU9 ¼ 06/13 (BB/Ba1/B+) USD400 9 1/4
(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 Bank in brief
22.1%, up from 20.2% at end 2009 with the Tier 1 ratio rising to 14.7% from 13.1%.
Founded in 1990, Alfa Bank is Russia’s sixth-largest financial institution, controlling
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 some 2.6% of the country’s banking assets and is also its biggest privately owned
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 bank.
Alfa Bank: financial summary

2010 2010
Interest income 1,706 2,824 2,519 2,273 Loans 61.7 17.2 -25.2 1.8
Interest expense –790 –1,406 –1,403 –1,088 Assets 49.2 19.2 -20.0 4.3
Net interest income 916 1,418 1,116 1,185 Pre-provision profit 58.5 146.3 -49.6 23.5
Other operating income 373 891 385 544 Net income 33.2 -9.3 -66.5 376.6
Pre-provision profits 607 1,496 754 931 Pre-provision profits/average assets 3.2 6.0 3.1 4.2
Provisions for loan losses –231 –1,009 –584 –363 Net interest margins 5.6 6.6 5.1 5.8
Non-operating profit –47 –86 –46 –40 Cost-income ratio 52.9 35.2 49.8 46.2
Taxation –75 –171 –47 –161 Gross NPL ratio 0.4 1.1 18.9 na
Net income 253 230 77 367 Gross NPLs (USDm) 62 202 2,824 na
Key balance sheet items Loan loss res./NPLs 610.4 589.8 53.3 na
Loans 15,330 17,970 13,449 13,695 Total CAR 11.8 9.2 20.2 22.1
Borrowings 4,809 3,696 1,440 1,857
Bonds 1,336 2,099 1,255 1,516
120
EM Banks abc
March 2011
Bank of Moscow
On its way to join forces with VTB Russia
 The bank is pending acquisition by VTB, Russia’s second largest bank. Rating Outlook Rating Outlook
 A large part of the Bank of Moscow (BOM) business franchise depends on good
relationship with Moscow’s government Credit rating profile FC government bond ratings
 Significant risk concentration in the City of Moscow region Fitch Fitch BBB Positive
Senior unsecured BBB- Watch neg Moody's Baa1 Stable
Credit profile outlook (initiate at Overweight) Sub-debt na S&P BBB Stable
Moody’s
BOM’s control is being transferred to VTB, and its current credit standing very much Senior unsecured Baa2 Negative Major shareholders (as of Mar 2011)
depends on this tie. An acquisition by government-owned VTB would strengthen Bank-deposit Baa2 VTB 46.48%
BOM’s credit profile, lifting the bank from sub-Sovereign control to direct Sovereign Sub-debt Baa3 Stolichnaya Insurance Group 17.32%
ownership. This, coupled with an improving performance, drives our Overweight Financial strength D A.F. Borodin/L.F. Alaluev 20.4%
recommendation on the bank. Risks to our view include integration risks following S&P NR GCM Opportunities Fund 6.41%
VTB’s acquisition. Senior unsecured Bloomberg
Sub-debt BKMOSC
HSBC FI Research view Key dollar-denominated bonds
BOM is one of Russia’s five biggest banks with total assets amounting to Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
RUB958.1bn (USD31.4bn) as at 30 September 2010. The balance sheet grew outstanding (m)
16.1% during the first nine months of 2010, primarily fuelled by an expansion in
BKMOSC 6.699 15 (BBB-/Baa2/NR) USD750 6.699%
lending activities with loans increasing by 14.3%. About 54.3% of BOM’s loan book
BKMOSC 7.335 13 (BBB-/Baa2/NR) USD500 7.335%
is concentrated in the City of Moscow region.
BKMOSC Var 05/17 (BB+/Baa3/NR) USD400 6.807%
Net profit in the first nine months of 2010 amounted to RUB8.84bn (USD290.8m), a BKMOSC Var 11/15 (BB+/Baa3/NR) USD300 5.967%
significant increase from the RUB497.83m (USD16.5m) reported a year previously,
largely due to falling interest expenses and provisioning charges. Net interest Bank in brief
income after provisions climbed to RUB14.48bn (USD476.3m), up 5.8 times from BOM was established in 1995 and since then has had close ties with the
RUB2.5bn (USD82.7m) in the same period. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 private individuals in 60 regions of Russia and operates a network of close to 400
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 outlets.
Bank of Moscow: financial summary

2010 2010
Interest expense –800 –1,335 –1,606 -1,311 Assets 38.3 51.7 3.0 16.1
Net interest income 746 1,141 985 1,326 Pre-provision profit 55.0 16.5 106.1 20.1
Operating income 975 1,223 1,458 1,773 Profitability
Operating expenses –435 –575 –413 -447 ROAA 2.2 1.0 0.1 1.0
Pre-provision profits 540 647 1,046 1,326 Pre-provision profits/average assets 3.0 2.4 4.1 4.5
Provisions for loan losses –96 –380 –1,002 -948 Net interest margins 4.8 4.7 4.1 4.7
Non-operating profit 71 64 –5 18 Cost-income ratio 44.6 47.1 28.3 25.2
Taxation –123 –51 –17 -94 Gross NPL ratio 0.7 1.3 3.9 4.1
Net income 393 280 23 301 Gross NPLs (USDm) 101 157 758 902
Key balance sheet items Loan loss res./NPLs 181.5% 278.4 190.3 211.3
Loans 14,293 17,569 17,796 20,007 Total CAR 14.8 13.9 18.9 20.4
Summary of FX balance sheet Loan-to-deposit ratio 100.3% 127.1 124.9 112.2
Loans 4,238 6,152 5,918 na Loan/assets 66.6 64.5 64.8 63.8
Deposits 2,421 4,034 4,368 na FX loan-to-deposit ratio 175.0 152.5 135.5 na
Borrowings 2,405 4,922 4,390 na
Bonds 1,841 2,085 1,834 na
121
EM Banks abc
March 2011
Gazprombank
Universal bank grown from gas roots Russia
 The bank’s relationship with Gazprom and the Russian government underpins Rating Outlook Rating Outlook
its credit profile
 However, this leaves it vulnerable to political pressure. Credit rating profile FC government bond ratings
 Profitability rose in H1 2010 despite dwindling pre-provision net interest income. Fitch NR Fitch BBB Positive
Senior unsecured Moody's Baa1 Stable
Sub-debt S&P BBB Stable
Credit profile outlook (Initiate with Overweight) Moody’s
Senior unsecured Baa3 Stable Major shareholders (as of Jan 2011)
Gazprombank is controlled by Gazprom, the world’s largest gas producer, which Bank-deposit Baa3 Gazprom 41.73%
directly owns 41.73%, while its pension fund Gazfond owns a 50%+1 share. Hence Sub-debt NR Gazfond 50%+1
Gazprombank’s creditworthiness is closely aligned with that of its parent, and also Financial strength E+
dependent on its close ties with the Russian government. The economic prospects S&P
of the gas industry and Russia look positive and support our Overweight view. Risks Senior unsecured BB Positive Bloomberg
to our view include: weakening economy and loss of parent support. Sub-debt B+ GPBRU
Gazprombank’s balance sheet remained almost flat in H1 2010 at RUB1,747.5bn outstanding (m)
(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 GPBRU 6 ¼ 12/14 (NR/Baa3/BB) USD1,000 6 1/4
(USD908m) as of 30 June 2010, down 9.6% in absolute terms from RUB31.32bn GPBRU 6 ¼ 09/15 (NR/Baa3/BB) USD948 6 1/2
(USD1.04bn) at the end of 2009. The gas industry accounted for only 12.6% of GPBRU7.933 06/13 (NR/Baa3/BB) USD443 7.933%
Gazprombank’s gross loan portfolio, with exposure to Gazprom Group at 7%. These GPBRU 7.97 06/11 (NR/Ba1/B+) USD300 7.97%
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 Bank in brief
BIS capital ratio and Tier 1 ratio climbing to 16.6% and 10.8%, respectively from
Gazprombank was set up in 1990 by the gas industry giant Gazprom, initially to
14.8% and 9.7%.
service its parent and other companies in the industry. However, the bank has
expanded its customer base to sectors including oil and petrochemicals and
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 metallurgy, servicing some 45,000 corporations and three million private individuals.
Gazprombank: financial summary

2010 2010
Interest expense –1,601 –1,903 –3,376 -2,860 Assets 21.8 95.3 -6.0 0.4
Net interest income 937 1,151 1,088 939 Pre-provision profit –30.3 na na –42.4
Other operating income 976 –3,907 2,530 1,830 Net income –15.7 na na 14.0
Operating 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 3.8
Pre-provision profits 674 –3,774 2,751 1,663 Pre-provision profits/average assets 1.9 –6.7 4.9 2.9
Provisions for loan losses –71 –1,263 –1,224 -131 Net interest margins 5.0 4.0 3.7 2.7
Non-operating profit 1,454 1,981 961 1,512 Cost-income ratio 64.8 –36.9 23.9 39.9
Pre-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 3.3
Net income 1,313 –2,743 1,851 2,215 Gross NPLs (USDm) 166 334 1,043 908
Loans 16,309 21,429 24,947 25,666 Total CAR 19.9 9.2 14.8 16.6
Borrowings 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.
122
EM Banks abc
March 2011
Russian Agricultural Bank

Fortunes dependent on agribusiness Russia
 The bank’s 100% state ownership makes it susceptible to political pressures. Rating Outlook Rating Outlook
 It is operating in the highly volatile agricultural industry.
 Asset quality may come under pressure given significant sector concentration. Credit rating profile FC government bond ratings
Fitch Fitch
Credit profile outlook (initiate with Neutral) Senior unsecured BBB Stable Moody's
Sub-debt NR S&P
The state-owned Russian Agricultural Bank (RAB) has a clearly defined role in the Moody’s
implementation of the government’s economic policy, and as such any privatisation Senior unsecured Baa1 Stable Major shareholders (as at Jan 2011)
looks very unlikely. We see its credit profile as being closely linked to that of the Bank-deposit Baa1 Government through 100%
Russian government with a resulting close alignment of spreads. However, the bank Sub-debt Baa2 The Federal Agency of
is involved in the highly volatile agricultural business, hence we establish a Neutral Financial strength E+ Federal Property Management
recommendation. Risks to our view include: any distancing from the owner. The S&P NR
upside risk relates to the upgrade of Russia by rating agencies. Senior unsecured Bloomberg
Sub-debt RSHB
HSBC FI Research view Financial strength
RAB’s total assets amounted to RUB861.4bn (USD27.6bn) as of 30 June 2010, up Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
in its loan portfolio. This keeps the loan book largely concentrated in one sector of outstanding (m)
the economy, with any diversification highly unlikely. RAB’s fortunes will therefore be
very much dependent on developments in Russian agribusiness. RSHB 9 06/11/14 (BBB/Baa1/NR) USD1,000 9%
RSHB 7 ¾ 05/18 (BBB/Baa1/NR) USD980 7 ¾%
The bank reported net income of RUB163m (USD5.2m) for H1 2010, a large drop RSHB 7 1/8 01/14 (BBB/Baa1/NR) USD720 7 1/8%
from RUB336m (USD10.8m) reported in H1 2009. This bottom line contraction was RSHB 7.175 05/13 (BBB/Baa1/NR) USD647 7.175%
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 Bank in brief
2010, up from 4.9% on 31 December 2009. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 banking balance sheet of the country. The bank was set up to work with agricultural
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 businesses to which commercial banks are traditionally reluctant to lend.
Russian Agricultural Bank: financial summary

2010 2010
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 –68.9
Operating income 765 1,171 1,099 1,423 Profitability
Operating expenses –414 –654 –630 -719 ROAA 1.6 0.4 0.0 0.0
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
Taxation –58 –52 –19 -15 Gross NPL ratio 1.0 2.3 4.3 na
Net income 170 83 8 3 Gross NPLs (USDm) 123 369 870 na
Key balance sheet items Loan loss res./NPLs 235% 153 114 na
Loans 11,853 15,383 19,279 20,906 Total CAR 13.6 16.0 20.7 20.3
Loans na na na na Loan/assets 81.8 63.4 70.4 75.7
Deposits na na na na FX loan-to-deposit ratio na na na na
Borrowings na na na na
Bonds na na na na
123
EM Banks abc
March 2011
Sberbank
Unmatched market heavyweight Russia
 Sberbank’s relationship with the government is the key to its creditworthiness. Rating Outlook Rating Outlook
 Its NPLs remain relatively high but at >140% are well provisioned.
 International expansion and investment banking ambitions may be a challenge. Credit rating profile FC government bond ratings
Credit profile outlook (Overweight) Senior unsecured BBB Stable Moody's Baa1 Stable
Sub-debt NR S&P BBB Stable
Sberbank can be considered a close proxy for Russian Sovereign risk. The state is Moody’s
a controlling shareholder with a 57.6% stake, while the bank’s systemic importance Senior unsecured A3 Stable Major shareholders (as of April 2011)
is enhanced by its unmatched retail franchise with 48% of retail deposits on its Bank-deposit Baa1 Central Bank of Russia 57.58%
books. Therefore we maintain our Overweight recommendation. Risks to our view Sub-debt Baa1 Foreign Legal Entities 32.12%
include: a significant deterioration in market shares and depleting capitalisation. Financial strength D+
S&P NR
Sub-debt SBERRU
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
10.6 times on the RUB10.3bn (USD0.3bn) reported in 9M 2009. This significant outstanding (m)
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 SBERRU 5.499 15 (BBB/A3/NR) USD1,500 5.499%
8.6% of gross loans as of 30 September 2010, slightly up from 8.5% at the 2009YE. SBERRU 5.4 03/17 (BBB/A3/NR) USD1,250 5.4%
SBERRU5.93 11/11 (BBB/A3/NR) USD750 5.93%
Sberbank remains well capitalised with its total capital ratio under Basel at 16.9% as SBERRU 6.468 13 (BBB/A3/NR) USD500 6.468%
of 30 September 2010. The Tier 1 ratio rose to 11.6% from 11.5% during the same SBERRU6.48 05/13 (BBB/A3/NR) USD500 6.48%
period. The minimum regulatory capital requirements are 11% and 8% for total
capital and Tier 1 capital, respectively. The growing investment banking ambitions Bank in brief
could translate into an acquisition of an established market player; the target
recently most discussed in the press has been Troika Dialog. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 massive branch network spanning nine time zones and consisting of some 19,000
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 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 Year to December (%) 2007 2008 2009 LTM Sep
2010 2010
Net interest income 10,160 15,200 15,837 16,223 Pre-provision profit 28.1 48.7 88.6 -6.0
Other operating income 4,035 3,477 5,292 6,301 Net income 28.6 -8.2 -75.0 407.2
Operating expenses -7,869 -9,269 -7,223 -8,719 ROAA 2.5 1.7 0.4 1.6
Pre-provision profits 6,326 9,408 13,906 13,805 Pre-provision profits/average assets 3.7 4.0 6.4 5.5
Non-operating profit 0 -252 -638 -597 Cost-income ratio 55.4 49.6 34.2 38.7
Pre-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 8.60
Net income 4,280 3,929 769 4,116 Gross NPLs (USDm) 2,454 3,221 15,454 16,606
Loans 159,409 172,701 161,945 168,539 Total CAR 14.50 18.90 18.10 16.90
Borrowings 5,733 7,664 4,789 10,126
Bonds 188 38 239 241
124
EM Banks abc
March 2011
Vnesheconombank
Government agent with a goal Russia
 Relationship with the government is the key credit driver as the government Rating Outlook Rating Outlook
uses VEB as a tool in implementing its economic policies
 Participation in long-term potentially risky development projects is a concern. Credit rating profile FC government bond ratings
Senior unsecured BBB Stable Moody's Baa1 Stable
Credit profile outlook (initiating with Overweight) Sub-debt NA S&P BBB Stable
Moody’s
VEB is wholly owned by the government, so its creditworthiness is likely to mirror
Senior unsecured NA Major shareholders (as at Jan 2011)
the developments in that of the Sovereign. Owing to extraordinary government
Bank-deposit Baa1 Stable Government 100%
support and its crucial role to the Russian economy we establish our Overweight Sub-debt NA
recommendation. Risks to our view include: falling economic importance of the bank
Financial strength E+
and a weakening relationship with the government.
S&P
Senior unsecured BBB Stable Bloomberg
HSBC FI Research view Sub-debt NA VEBBNK
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 Key dollar-denominated bonds
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, Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
resulting in a significant level of concentration in its loan book. outstanding (m)
The profitability is not a priority as VEB’s core purpose is non-commercial, to VEBBNK 6.902 20 (BBB/NR/BBB) USD1,600 6.902%
support the development of Russian infrastructure, high technology industries and VEBBNK 6.8 11/25 (BBB/NR/BBB) USD1,000 6.8%
medium-sized enterprises. Other aims include an increase in the efficiency of VEBBNK5.45 11/27 (BBB/Baa1/BBB) USD600 5.45%
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 Bank in brief
(USD584.7m) in H1 2009. Profitability received a boost from provisions falling to VEB does not have a banking licence and its operations are governed by a special
RUB13.34bn (USD426.8m) from RUB42.96bn (USD1.38bn) in the same period. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 empowered to reconcile, settle and also restructure the debt obligations of the
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 Russian Federation.
Vnesheconombank: financial summary

2010 2010
Interest income 920 1,745 4,373 4,827 Loans 32.0 218.2 16.2 3.4
Interest expense –633 –846 –2,736 -2,835 Assets 69.5 196.6 17.9 1.9
Net interest income 287 898 1,636 1,993 Pre-provision profit –46.3 na na –6.9
Other operating income 309 –1,616 3,118 2,755 Net income 15.7 na na –10.3
Operating income 596 –718 4,754 4,747 Profitability
Operating expenses –372 –408 –709 -794 ROAA 2.1 –7.4 2.1 1.8
Pre-provision profits 224 –1,126 4,045 3,954 Pre-provision profits/average assets 1.3 –2.5 7.2 6.1
Provisions for loan losses 6 –2,108 –3,660 -2,809 Net interest margins 2.2 2.6 3.2 3.2
Non-operating profit 27 5 835 64 Cost-income ratio 62.4 –56.8 14.9 16.7
Pre-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 8.2
Net income 370 –3,267 1,207 1,136 Gross NPLs (USDm) 231 11,800 76,211 82,098
Loans 9,269 24,679 28,085 27,942 Total CAR 44.3 14.7 19.1 na
Loan/assets 41.1 44.1 56.8 44.1
FX loan-to-deposit ratio na na na na
125
EM Banks abc
March 2011
VTB
High acquisition appetite Russia
 VTB’s majority government ownership makes it susceptible to political pressure. Rating Outlook Rating Outlook
 The bank’s aggressive acquisitions policy creates integration risks.
Credit profile outlook (Neutral) Fitch Fitch BBB Positive
Senior unsecured BBB Stable Moody's Baa1 Stable
VTB’s credit profile is closely linked to that of the Russian government, owner of Sub-debt NA S&P BBB Stable
75.5% of its equity. State support has been forthcoming in the past, and remains Moody’s
strong in our opinion. Risks to our view include possible new debt issues in 2011. Senior unsecured Baa1 Stable Major shareholders (as at March 2011)
The proceeds would be used for funding the aggressive expansion/acquisition Bank-deposit Baa1 Russian Federation 75.50%
plans, which include the acquisition of Transcredit bank and a likely purchase of
Sub-debt Baa2 GDRs 17.26%
Bank of Moscow. Also any problems with integrating the acquisitions could exert
Financial strength D- Ordinary shares 7.24%
negative pressure on the bank and our view. The upside risks include a significant
S&P
improvement in credit metrics on the back of expansion in market shares.
Senior unsecured BBB Watch Bloomberg
HSBC FI Research view Negative
Sub-debt NA VTB
While the Russian government has recently sold a 10% stake of its holding in the Key dollar-denominated bonds
bank, it remains majority owner, and so the sale is unlikely to have a material impact
on the credit profile of VTB. Description (Ratings: Fitch/Moody’s/S&P) Amount outstanding (m) Coupon
An improving operating environment has contributed to a strong jump in profitability. VTB6 7/8 05/29/18 (BBB/Baa1/BBB) USD1,706 6 7/8%
VTB reported a net profit of RUB38.8bn (USD1.3bn) for the first nine months of VTB 6.465 03/15 (BBB/Baa1/BBB) USD1,250 6.465%
2010, a major turnaround when compared with a loss of RUB45.5bn (USD1.5bn) VTB 6.609 10/12 (BBB/Baa1/BBB) USD1,054 6.609%
reported for the corresponding period of 2009. VTB 6.551 10/20 (BBB/Baa1/BBB) USD1,000 6.551%
VTB6 6.315 02/18 (BBB/Baa1/BBB) USD750 6.315%
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 Bank in brief
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. VTB is Russia’s second-largest bank and is primarily focused on corporate business
As a result NIM improved to 5.2% in the first nine months of 2010. 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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 the third-largest branch network (after Sberbank and Russian Agricultural Bank) with
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 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

2010 2010
Interest expense -2,831 -5,290 -6,978 -5,621 Assets 76.7 35.8 -2.3 3.9
Net interest income 2,556 4,566 4,795 5,797 Pre-provision profit 29.7 43.5 11.4 24.5
Other operating income 1685 1,403 441 1,028 Net income 29.2 -87.8 na na
Operating expenses -2,011 -2,769 -2,442 -3,153 ROAA 2.1 0.2 -1.5 0.7
Pre-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 9.5
Net income 1,514 185 -1,878 822 Gross NPLs (USDm) 698 1,629 6,556 8,374
Loans 58,549 86,917 76,907 82,797 Total CAR 16.3 17.3 20.7 18.8
Loans na na na na Loan/sssets 63.2 69.1 64.0 67.4
Deposits na na na na FX loan-to-deposit ratio na na na na
Borrowings na na na na
Bonds 12,220 12,996 10,006 11,386
126
EM Banks abc
March 2011
127
EM Banks abc
March 2011
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
Stability paves way for growth in 2011. However, growth will be driven mainly Olga Fedotova
Analyst
by increased government spending while private HSBC Bank plc
The first half of 2010 was tough for Saudi banks,
consumption is not likely to change significantly. +44 20 7992 3707
which faced declining loan portfolios and olga.fedotova@hsbcib.com
shrinking net interest margins. The trend changed Inflation is still a concern, with CPI inflation Aybek Islamov*
Analyst (Equity Research0
for the better in the second half and revenues averaging more than 5% over the past three years, HSBC Bank plc
stabilised. Private sector was still slow on but according to HSBC’s economist that should + 44 20 7992 3624
aybek.islamov@hsbcib.com
recovery and the banks remained cautious, but not limit the government’s expansionary fiscal
*Employed by a non-US affiliate
there was loan growth of 3% compared to a 1% and monetary policy. Further, the latest PMI of HSBC Securities (USA) Inc,
contraction in 2009. Two years of a near-stagnant and is not registered/qualified
numbers indicate that Saudi firms are able to pass pursuant to FINRA regulations.
market and rising oil prices suggest, to us, strong through increased costs, and so they should be
loan growth in 2011. able to maintain their profitability.
The Saudi government’s five-year capital Saudi banks are well regulated. For commercial
investment plan (SAR1.4trn, USD364bn) is now banks the loan-to-deposit ratio is capped at 85%.
in its third year. The banks’ relatively weak The actual ratio fell to 78% in 2009 from 88% in
capital position has limited their participation in 2008 due to the decline in loan portfolios, but
this scheme. Further, despite having most of the improved modestly to 80% in 2010. However the
structural catalysts in place Saudi economy has regulation limits the potential for credit growth.
failed to take off in the past two years perhaps due
During 2010, bank credit to the private sector
to a low level of government intervention. We,
increased 4.5% to SAR735bn (USD196bn) while
however, expect a gain in the growth momentum
credit to public sector enterprise increased by 8%
and investments to be increasingly channelled
but was still low at SAR32.3bn (USD8.6bn). Risk
through banks which should improve loan growth.
aversion was apparent from the 45% surge in
The Saudi GDP real growth rate declined to banks’ investments in low risk T-Bills to
nearly zero in 2009 amid the credit crisis but SAR120.1bn (USD 32bn). Banks, therefore, have
HSBC’s economist expects it to recover to 3.8%
128
EM Banks abc
March 2011
the potential to redirect investments to higher Saudi banks accelerated provisioning in Q3 2010
yielding assets as risk appetite increases. and our equity team expects the provisioning
cycle to reach its peak in H1 2011. Further, bank
HSBC’s estimates point to 11% growth in private
management teams indicate the loan loss reserves
consumption in 2011 which supports our case that
to gross loans ratio for our covered banks increase
credit growth is likely to be driven by private
to 3.7% in 2011 from 2.5% in 2008. This is quite
lending. Further, after high loan disbursements by
comfortable in our view considering Saudi banks’
government agencies in the recent past, the loans-to-
limited exposure to private real estate and
equity ratio went up to 120% in 2009 from 91% in
construction sectors.
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 Arabia – key data on the banking sector

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%
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 194% 92% N.A
loans
Current account balance (% GDP) 27.1 6.1 15.5 Gross Loans/Customer deposits 88% 78% 80%
Total Deposit growth (%) 18% 11% 4%
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%
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
129
EM Banks abc
March 2011
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
Rationalisation required Real estate exposures will likely continue to grow, Olga Fedotova
Analyst
considering the large supply pipeline, particularly HSBC Bank plc
Local banks in the UAE have invested heavily in +44 20 7992 3707
in commercial real estate (CRE). HSBC’s equity
real-estate-related activities, with direct lending to olga.fedotova@hsbcib.com
team expects commercial real estate supply in the
construction sector accounting for 13% of their Aybek Islamov*
UAE to increase by more than 50% in the medium Analyst (Equity Research)
books. Total exposure to real estate sector has HSBC Bank plc
term. Most of these projects will probably have + 44 20 7992 3624
remained stable after growing until 2009 while
committed loan facilities with disbursals linked to aybek.islamov@hsbcib.com
growth in loan books came from small business
the stage of completion. Banks’ exposure to CRE *Employed by a non-US affiliate
loans. Such substantial exposure to the of HSBC Securities (USA) Inc,
projects is therefore likely to increase. and is not registered/qualified
construction sector is concerning given recent pursuant to FINRA regulations.
restructurings and bailouts. The restructuring of Delinquency levels have steadily increased in the
Dubai’s master developer Nakheel, for example, country since the end of 2008 and most of the
involved extension on USD12bn of bank loans. banks reported NPL ratios between 3% and 5% at
Abu Dhabi’s master developer Aldar, also only the end of Q3 2010. Loan growth beyond the
recently avoided a liquidity squeeze though a 1.7% rate achieved in 9M 2010 will be tough,
state-backed financial revamping. Even now, the therefore, factoring in the increased provisioning
Dubai government is in active discussion with requirement. Abu Dhabi’s supportive stance
regional and international lenders to restructure towards its controlled banks is a strong credit
debt at other state-owned/related entities including positive, however. The emirate injected
Dubai Holdings and Dubai Group. While the USD4.4bn of Tier 1 capital into five of its banks
scope of these ongoing negotiations has not yet early 2009. Dubai’s government, meanwhile, has
been disclosed, they are likely to be smaller scale been fairly quiet on that front.
than for Nakheel. Nonetheless, given the financial
sector’s exposure, they remain a concern.
130
EM Banks abc
March 2011
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%
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 121% 94% N.A
loans
Current account balance (% GDP) 8.8 3.4 10.0 Gross loans/customer deposits 101% 98% 93%
Total deposit growth 27% 8% 7%
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%
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
131
EM Banks abc
March 2011
Abu Dhabi Commercial Bank

United Arab Emirates
 NPLs for this bank had climbed to 11% of outstanding loans at the end of end Rating Outlook Rating Outlook
2010, one of the poorest among large MENA banks. However, S&P believes
that ADCB’s creditworthiness should remain sufficiently resilient to the difficult Credit rating profile FC government bond ratings
economic environment. Fitch Fitch AA Stable
 Capitalisation, however, is still decent with Tier 1 ratio at 12% at end 2010. Senior unsecured na na Moody's Aa2 Stable
Sub-debt na S&P AA Stable
Moody’s
Credit profile Senior unsecured A1 Negative Major shareholders (December 2010)
Bank-deposit A1 ADIC 65%
Abu Dhabi Commercial Bank (ADCB) plans to consolidate its balance sheet and Sub-debt A2
focus on improving its credit strength this year. The group’s operating performance
Financial strength D+
will likely remain subdued meanwhile. Its credit profile, however, is bolstered by the
S&P
implied backing of the Emirate of Abu Dhabi.
ADCB has a strong franchise in the local market but its asset exposure is quite Sub-debt BBB+ ADCB UH
concentrated within the UAE. Its NPL level jumped sharply in 2010 to AED18.2bn Financial strength
(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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
(USD550m) of impairment in 2010. ADCB has been proactive in disclosing risky (USDm)
exposures and cautious thereafter.
ADCB Float 05/16 (NR/A2/BBB+) 361 L+60bps
Profitability before impairments was sound through Q3 2010, but large impairments ADCB 4 3/4 10/14 (NR/A1/A-) 1,000 4.75%
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.
Bank in brief
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 ADCB is the third-largest bank in the UAE, with a market share of 12% in loans and
operating environment. 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
We do not have a fundamental credit recommendation. leveraging its core assets.
ADCB: financial summary

Interest income 1,620 1,880 1,949 Loans 44.6 8.8 6.8
Interest expense 944 987 955 Assets 39.7 7.9 11.2
Net interest income 676 893 1,002 Pre-provision profit 2.6 13.2 13.5
Other operating income 268 269 260 Net income –37.8 –154.9 157.3
Operating income 1,196 1,303 1,453 Profitability
Operating expenses –416 –419 –448 ROA 1.0 –0.4 0.2
Pre-provision profits 781 884 1,004 Pre-provision profits/average assets 2.3 2.1 2.2
Non-operating profit –202 –214 –117 Cost-income ratio 34.7 32.2 30.8
Taxation –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 44.1
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.
132
EM Banks abc
March 2011
Emirates NBD
 Has seen a sharp rise in NPL ratio Rating Outlook Rating Outlook
 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 rating profile FC government bond ratings
Fitch Fitch
Senior unsecured A+ Stable Moody's
Credit profile Sub-debt A S&P
Moody’s
Emirates NBD (ENBD) continues to face margin pressures due to relatively higher
Senior unsecured A3 Stable Major shareholders (December 2010)
cost of funding. Fitch highlights the bank’s high level of exposure to Dubai property
Bank-deposit na Investment Corporation of 55.65%
market and government-related entities. The rating agency believes that lending Dubai
growth and improvements in profitability will be difficult to achieve in 2010 and 2011.
Sub-debt Baa1
ENBD is one of the primary bankers of the government of Dubai and therefore Financial strength D+
experienced rapid loan growth (CAGR of 38%) between 2001 and 2008. Over that S&P
period, however, it lacked focus on developing a matching funding profile. Despite a Senior unsecured NR Bloomberg
10% reduction in loans in the first nine months of 2010 and a 6% increase in Sub-debt ENBD UH
deposits during the same period, the loans-to-deposit ratio stood at 101%, which Financial strength
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%. Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
(USDm)
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, EBIUH Float 01/12 (NR/A3/NR) 500 L+27bp
Fitch considers there to be an extremely high probability of support for the bank if EBIUH Float 04/12 (NR/A3/NR) 141 L+450bp
ever required. EBIUH Float 10/16 (NR/A3/NR) 363 L+70bp
We do not have a fundamental credit recommendation. EBIUH Float 12/16 (NR/A3/NR) 444 L+60bp

Aybek Islamov +44 20 7992 3624 aybek.islamov@hsbcib.com 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

Interest income 3,040 3,262 3,075 Loans 23.7 2.7 –8.2
Interest expense –1,566 –1,418 –1,341 Assets 11.3 –0.3 1.6
Net interest income 1,474 1,844 1,734 Pre-provision profit 67.9 42.1 –7.9
Other operating income 828 1,112 914 Net income 32.8 –9.1 –30.1
Operating expenses –1,365 –1,958 -1,799 ROA 1.3 1.2 0.8
Pre-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 2.5
Non-operating profit 66 –70 -205 Cost-income ratio 38.5 32.9 31.4
Taxation - -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
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.
133
EM Banks abc
March 2011
National Bank of Abu Dhabi

 NPLs have been on the rise through 2010. Rating Outlook Rating Outlook
 Deposits base needs to improve given increasing growth-related lending
mandate from the state. Credit rating profile FC government bond ratings
Fitch Fitch AA Stable
Senior unsecured AA- Stable Moody's Aa2 Stable
Credit profile Sub-debt na S&P AA Stable
Moody’s
National Bank of Abu Dhabi (NBAD) continues to enjoy strong support from Abu
Senior unsecured Aa3 Stable Major shareholders (December 2010)
Dhabi. The group will likely focus on lending growth this year after a modest 3.9%
Bank-deposit Aa3 ADIC 70.5%
loan growth in 2010. Sub-debt na
NBAD managed its funding profile on a tight leash in 2010 as loan growth was Financial strength C
largely funded by increasing depositor base. Access to quality wholesale funding S&P
was very limited in the region as a whole and hence loan growth was constrained. Senior unsecured A+ Stable Bloomberg
This situation moderated in Q2 and reversed in Q3 with noticeable improvement in Sub-debt na NBAD UH
deposits. The loans-to-deposit ratio at the end of 2010 was almost 3pp better y-o-y Financial strength na
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. Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
(USDm)
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 NBADUH 4 1/4 03/15 (AA-/Aa3/A+) 750 4.25%
estimates NBAD’s problem loans will pick up by YE2010 around 2.0-2.5% while NBADUH 4 1/2 09/14 (AA-/Aa3/A+) 850 4.5%
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. Bank in brief
We do not have a fundamental credit recommendation. 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
Analysts Olga Fedotova +44 20 7992 3707 olga.fedotova@hsbcib.com 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 3.9
Interest expense 1,029 628 580 Assets 18.1 19.6 7.4
Net interest income 983 1,246 1,367 Pre-provision profit 45.8 18.2 10.9
Other operating income 308 309 348 Net income 20.5 –3.9 18.7
Operating expenses –407 –517 –569 ROA 2.0 1.6 1.7
Pre-provision profits 1,038 1,226 1,329 Pre-provision profits/average assets 2.5 2.5 2.4
Non-operating profit - - - Cost-income ratio 28.2 29.7 30.5
Taxation –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 144.6 157.6 112.8
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.
134
EM Banks abc
March 2011
135
EM Banks abc
March 2011
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
We expect growth rates in the Ukrainian banking and slowly start improving. The task of restoring Pavel Simacek, CFA
Analyst
system to remain subdued in the coming two years. the quality of assets in the absence of any clearly HSBC Bank Plc
If the economic story becomes more favourable, defined mechanisms for their disposal may prove +44 20 7992 3714
pavel.simacek@hsbcib.com
lending growth is likely to turn slightly positive in difficult and prolonged.
Ksenia Mishankina
2011 and surpass the GDP growth rate a year later. Analyst
Asset quality worsened in 2010 despite slow loan HSBC Bank plc
The main risk to this scenario lies in a fragile
growth and sluggish demand for credit. This +44 20 7992 3703
economic environment, as any disruption would ksenia.mishankina@hsbcib.com
seems to have been caused by a depressed
limit the banks’ recovery prospects.
economic environment and lagging improvements
The Ukrainian banking system is struggling to in loan underwriting standards. The aggregate
overcome the devastating impact of the global loan portfolio increased by mere 1% during 2010,
financial crisis. A steep decline in economic reaching UAH755.03bn (USD96.1bn) as at 1
activity coupled with the devaluation of the local January 2011. This growth was driven by
currency exacerbated the stress in the corporate corporate lending, which rose 7%, whereas retail
sector and radically worsened the repayment loans contracted by 16.2%. The expansion rate in
ability of a large pool of borrowers. This made it lending operations is unlikely to pick up in the
difficult for Ukrainian banks to defend their near future in our view: the already highly
franchise and contain mounting losses from leveraged balance sheets of Ukrainian
lending operations. corporations cannot support additional debt while
retail has insufficient purchasing power.
After slumping in 2009, aggregate banking assets
expanded 7.0% in 2010, closing the year at The first line of defence against worsening asset
UAH942.1bn (USD117bn). However, with loan quality has been the formation of provision
arrears standing at 11.2% as at 1 January 2011, up buffers. According to data from the Central Bank
from 9.4% a year earlier, the recovery seems to be of Ukraine, provisions stood at 15% of gross loans
a long way off. According to our estimates while the level of provision coverage was 133%
impaired loans combined with restructured as at 1 January 2011. The existing provisions
exposures could total up to 40% of gross loans. appear sufficient to absorb expected losses.
Despite the worsening trend in 2010 we expect
Banks’ regulatory capital stood at UAH160.9bn
the level of problem assets to stabilise in H1 2011
(USD20.5bn) as at 1 January 2011. Regulatory
136
EM Banks abc
March 2011
capital funded 17.08% of total assets, up from However, lessons learned from the recent crisis
15.43% a year earlier. However, this capitalisation suggest that Ukrainian retail depositors tend to be
improvement was to a large degree attributable to a nervous crowd who are prepared to pull their
emergency equity injections from existing mostly funds out of the banking sector at the first sign of
foreign shareholders and the government. Capital trouble. Bank deposits shrank by some 20% as
formation related to retained earnings has yet to depositors withdrew their money during the peak
be restored. of the crisis in late 2008 and early 2009. This
sudden outflow of funds prompted the National
The Ukrainian banks generated an aggregate loss
Bank of Ukraine to introduce a temporary
of UAH13.03bn (USD1.7bn) in 2010. Although
moratorium on early withdrawals of deposits.
this was not an encouraging result it was still an
improvement over the loss of UAH38.5bn The diversification of their funding base is one of
(USD4.8bn) reported in 2009. the important tasks facing Ukrainian banks, and
they are increasingly turning to local and
The high level of impaired loans is the main drag
international capital markets. However, the
on the bottom-line performance of Ukrainian
universe of Ukrainian banks issuing Eurobonds is
banks. Until this issue is resolved we do not
likely to expand at a slow pace as very few can
envisage much potential for increasing the
meet the criteria necessary for tapping
profitability of the banking system.
international bond markets. Furthermore
Total deposits stood at UAH414.77bn Ukrainian demand for loans denominated in
(USD52.8bn) as at 1 January 2011, up 27.5% foreign currency is very weak and this further
from UAH325.21bn (USD40.9bn) a year earlier. constrains the international borrowing appetite of
Retail deposits accounted for some 65.2% of the domestic banks.
total – and such resources should, in theory,
enhance the stability of the funding base.
Ukraine – key data on the banking sector

Macro framework 2009 2010 2011e Key Banking Industry indicators 2008 2009 2010 LTM
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 247.0 141.9 133.1
loans
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 27.5
Gross 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
137
EM Banks abc
March 2011
Alfa Bank Ukraine

Alfa Group Consortium’s Ukraine arm Ukraine
 Profitability is poor due to substantial loan loss provisions, though these are declining. Rating Outlook Rating Outlook
 Recent data point to a continuing deterioration of asset quality.
 The bank’s high dependence on wholesale funding creates a refinancing risk. Credit rating profile FC government bond ratings
Fitch NR Fitch B Stable
Senior unsecured Moody's B2 Stable
Credit profile outlook (Initiate with Neutral) Sub-debt S&P B+ Stable
Moody’s NR
We establish a Neutral recommendation on Alfa Bank Ukraine (ABU). Its operating Senior unsecured Major shareholders (as at Jan 2011)
environment continues to be weak and asset quality remains under pressure, but Bank-deposit AHB Ukraine Ltt, Cyprus 80.1%
ABU’s shareholder, AGC, has provided continuous support to the bank during the Sub-debt OJSC ‘Alfa-Bank’, Russia 19.9%
crisis including the latest capital injection of USD116.4m in February ‘11. Risks to Financial strength Ultimately owned by 3 private
our view include a radical improvement in asset quality or explicit S&P individuals named in “Bank in
support/guarantees from the owner. brief” below
Senior unsecured CCC+ Positive Bloomberg
HSBC FI Research view Sub-debt na ALFAUA
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 Key dollar-denominated bonds
bottom line result for the reporting period.
Additionally, NPLs reached 22% at the end of 2009 driven by high exposure to outstanding (m)
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 ALFAUA 13 07/12 (NR/NR/CCC+) (sinkable) USD630 13%
portfolio at the end of 2009.
The bank successfully repaid the first USD105m tranche of its 2012 Eurobond in Bank in brief
October 2010 and should have no problems meeting 2011 repayments. A cash ABU is Ukraine’s No.10 bank with total assets of USD3bn as of H1 2010. It is
cushion of USD440m as of H1 2010 comfortably covers USD315m in sinkable fund owned by privately held Alfa Group Consortium (AGC), one of the largest banking
payments of the 2012 Eurobond and a USD25m local bond, both due in 2011. groups in Russia controlled by leading businessmen Mikhail Fridman, German
Khan and Alexei Kuzmichev. ABU is focussed on corporate banking with corporate
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 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
Interest income 241 637 617 517 Loans 137.5 38.6 -23.2 -6.1
Interest expense -126 -300 -363 -346 Assets 110.0 44.9 -18.9 -3.0
Net interest income 116 337 254 171 Pre-provision profit 111.0 539.0 -31.2 -49.3
Other operating income 27 152 80 51 Net income 647.9 200.2 na na
Operating expenses -92 -169 -114 -111 ROAA 0.6 1.1 -6.6 -8.1
Pre-tax income 17 42 -306 -322 Asset quality
Taxation -5 -7 81 78 Gross NPL ratio 0.5 3.4 22.3 na
Net income 12 36 -226 -244 Gross NPLs (USDm) 12 116 681 na
Key balance sheet items Loan loss res./NPLs 33.9% 48.1 105.3 na
Deposits 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 10.3
Total assets 2,598 3,765 3,053 2,962 Tier-1 ratio NA NA NA NA
Total equity 313 447 215 198 Funding
Loan/assets 87.0 83.2 78.8 76.3
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.
138
EM Banks abc
March 2011
Privatbank
Benefiting from its leading position Ukraine
 Privatbank provides a relatively limited level of public disclosure. Rating Outlook Rating Outlook
 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 rating profile FC government bond ratings
Fitch Fitch B Stable
Credit profile outlook (Initiate with Neutral) Senior unsecured B Stable Moody's B2 Stable
Sub-debt NA S&P B+ Stable
Privatbank’s credit profile benefits from a strong domestic franchise and solid Moody’s
financial performance. A strong market share of the retail sector boosts its systemic Senior unsecured B1 Stable Major shareholders (as at Jan 2011)
importance. However, weak operating environment constrains further upside in Bank-deposit B3 G. Bogolyubov 49.027%
Privatbank’s performance. As a result we establish our Neutral recommendation. Sub-debt B1 I Kolomoyskiy 49.154%
Risks to our view include material changes in macroeconomic conditions. Financial strength D-
S&P NR
Sub-debt PRBANK
Privatbank’s total assets amounted to UAH104bn (USD13.2bn) at the end of H1 Financial strength
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 Key dollar-denominated bonds
(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
outstanding (m)
the same period in 2009. The falling provision charge represents a positive sign
suggesting that the asset quality problems may be abating. PRBANK8 02/06/12 (B/B1/NR) USD500 8%
The funding mix is heavily skewed towards deposits. Customer accounts supported PRBANK9 09/15 (B/B1/NR) USD200 9 3/8%
68.6% of the balance sheet at the end of H1 2010, down from 73.5% a year before. PRBANK 02/16 (NR/B1/NR) USD150 5.799%
Even though the proportion of customer deposits declined, in absolute terms they Bank in brief
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. Privatbank is owned by businessmen individuals Gennady Bogolyubov and Igor
Kolomoyskiy with 49.027% and 49.154% stakes, respectively. It is the largest bank
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 in Ukraine with a 10.5% share of total assets, 17.0% of retail deposits and more
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 than 3,200 braches and outlets and around 7,000 ATMs.
Privatbank: financial summary

2010 2010
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 –2
Other operating income 269 1,073 647 631 Net income 82 77 –33 2
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
Taxation –78 –105 –89 –79 Gross NPL ratio 3 5 12 11
Net income 223 378 165 168 Gross NPLs (USDm) 308 449 1,144 991
Key balance sheet items Loan loss res./NPLs 181% 225 137 160
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
Loan-to-deposit ratio 120% 119 117 103
Loan/assets 77 78 74 71
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.
139
EM Banks abc
March 2011
Ukreximbank
A good proxy for Sovereign risk Ukraine
 Ukreximbank’s quasi-Sovereign status supports its credit standing. Rating Outlook Rating Outlook
 NPLs are still growing , although more slowly than at the height of the crisis.
 Substantial funding reliance on NBU and interbank sources. Fitch Fitch B Stable
Senior unsecured B Stable Moody's B2 Stable
Sub-debt CCC S&P B+ Stable
Credit profile outlook (initiate with Neutral)
Moody’s
We establish a Neutral recommendation since Ukreximbank enjoys support from its Senior unsecured B1 Stable Major shareholders (as of Jan 2011)
owner, the Ukrainian government, which injected USD800m in fresh equity in H1 Bank-deposit B3 Government 100%
2010, but government finances remain fragile. Additionally, the bank’s liquidity Sub-debt B1
appears adequate and sufficient to cover liabilities maturing in 2011. Risks to our Financial strength D-
view include any changes in the relationship with the state, swings in asset quality S&P NR
and profitability. Senior unsecured Bloomberg
Sub-debt EXIMUK
HSBC FI Research view Financial strength
Earnings picked up in H1 2010, but the bank’s asset quality is likely to remain under Key dollar-denominated bonds
pressure in the near term. The core business remains fairly stable with profitability Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
receiving a boost from falling mark-to-market losses and provision releases in H1 2010. outstanding (m)
Continuous government injections helped the bank bring its Tier 1 capital ratio to EXIMUK8 3/8 04/15 (B/B1/NR) USD750 8 3/8%
28.5% at the end of H1 2010, well above Basel requirements. However EXIMUK7.65 09/11 (B/B1/NR) USD500 7.65%
Ukreximbank’s asset quality significantly deteriorated in this time, with NPLs EXIMUK 6.8 10/12 (B/B1/NR) USD250 6.8%
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 Bank in brief
the weak economic environment in Ukraine.
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
Analysts Pavel Simacek, CFA pavel.simacek@hsbcib.com +44 20 7992 3714 important since it supports Ukrainian exports and services foreign credit lines
Ksenia Mishankina ksenia.mishankina@hsbcib.com +44 20 7992 3703 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

2010 2010
Interest income 507 770 816 828 Loans 61.8 68.1 17.5 -3.4
Net income 110 23 3 4 Gross NPLs (USDm) 306 310 2,930 4,117
Key balance sheet items Loan loss res./NPLs 239% 709 171 153
Loans 4,316 4,548 5,344 5,255 Total CAR 13.0 11.0 25.5 35.1
Total 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
140
EM Banks abc
March 2011
LatAm banks
141
EM Banks abc
March 2011
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
2011: a year with caveats payments, thanks to the simultaneous rise in Olga Fedotova
Credit Analyst
incomes, the extension of payment terms and the HSBC Bank plc
Review and outlook +44 20 7992 3707
decline in interest rates. Consequently, despite the
The Brazilian economy remains buoyant, olga.fedotova@hsbcib.com
fast growth in credit, default rates have remained
particularly on the demand side, due to significant Victor Galliano
relatively steady. At the end of January 2011, default Analyst (Equities)
growth in income, higher employment and the rates reached 3.6% for corporates and 5.7% for HSBC Securities (USA), Inc.
+1 212 525 5253
ready availability of credit. individuals, the lowest rates in eight years. victor.galliano@us.hsbc.com
The ratio of debt to disposable income continues to Mariel Santiago

All that said, Brazil’s strong economic Analyst (Equities)
grow, and with the emerging middle class, this trend fundaments, solid domestic demand and healthy HSBC Securities (USA), Inc.
+1 212 525 5418
has potential to continue. According to data from financial system should continue to bolster credit mariel.x.santiago@us.hsbc.com
Bradesco, class C – the middle income category in growth in 2011. We expect loan growth for the
Brazil – accounted for 53.4% of the population in banking system of 15% in 2011, driven by SMEs
July 2010, as against 38.7% in January 2004. and consumer credit expansion, in line with the
This growth in the middle income group is a result view of the Central Bank, Banco Central do Brasil
of lower income consumer groups becoming (BCB). This is likely to be accompanied by some
wealthier, such as classes D and E, which together pressures on spreads from changing loan mix and
accounted for 36.2% of the Brazilian population competition. In terms of asset quality, in the near
in July 2010, down from 53.8% in January 2004. term the fast loan growth should gradually
increase the NPL ratio, but lower provisions and
The growth in demand for credit can be attributed healthy coverage should help to limit any major
to the health of the Brazilian economy, which compression of bank earnings.
posted both a rise in consumer confidence and a
significant fall in unemployment in 2010, the Political and regulatory environment
latter dropping to 5.3% in December 2010 versus The major near-term concern is accelerating
6.8% a year before. inflation in Brazil. BCB has recently taken
measures to halt the rise of inflation including
Moreover, the growth in household debt has not
raising reserve requirements and capital ratios and
significantly changed the proportion of monthly
increasing borrowing costs.
income that goes towards amortisations and interest
142
EM Banks abc
March 2011
In December 2010, the Central Bank announced Government support

an increase in reserve requirements on term BNDES, the state development bank, continues to
deposits to 20% from 15% and on cash deposits to play an active role in Brazilian banking with a
12% from 8%. The bank also raised capital 21% share of total system credit at the end of
requirements on long-term loans to individual January 2011.
consumers to 150% from 100%. Its objective is to
tighten liquidity conditions and slow the pace of Looking into 2011 and beyond, BNDES will
consumer credit growth. The BCB says these two probably make infrastructure lending its core
measures should drain BRL61bn (USD36bn) of priority, reducing its emphasis on corporate credit,
liquidity from the sector, equivalent to around 5% where it currently provides cheap credit for large-
of the total stock of the Brazilian banking system, and medium-sized companies. As BNDES shifts
and add 20% to reserve requirements. its focus to infrastructure credit, this should
reduce the ‘crowding out’ in the corporate market
There is nonetheless one positive development in on the commercial banks, especially in working
the form of the total removal of the 15% reserve capital and acquisition of capital goods credit.
requirement on Letras Financieras, the domestic
bonds that can be issued by banks with a Industry main trends
minimum tenor of two years. Furthermore, the Brazil’s credit growth has been recovering strongly
BCB announced the phasing out of the DPGE, a 50%
form of government-guaranteed funding for mid- 40%
caps, beginning January 2012 and due to be 30%
wound up by January 2016. 20%
10%
These measures should weigh on overall credit
0%
growth in 2011, led by more conservative credit
Jan-06
Jan-08
Jan-05
Jul-05
Jul-06
Jan-07
Jul-07
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
expansion in the financial sector. In addition, the

increase in interest rates could also be a challenge YoY C hange indiv id uals YoY C hange c orporates
Total lending
in maintaining retail credit demand and lower
Source: BCB
consumer delinquencies. HSBC economists
forecast that the BCB will raise benchmark rates Brazil’s private credit growth has been recovering
by further 75bps in 2011 from the current Selic strongly since February 2010, accelerating to 20%
rate of 11.75% to 12.50%, combined with further y-o-y at the end of 2010 after dipping to 10% at
potential macro-prudential measures. 2009-end. According to data published by the
Further measures to curb the real’s appreciation BCB on 24 February 2011, total system credit
are widely believed to be under consideration, registered healthy growth of 20.3% y-o-y in
such as taxing foreign investments in domestic January 2011 and credit as a percentage of GPD
securities more heavily via an increase in the IOF reached to 46.5%. On a m-o-m basis, total lending
tax, in an effort to cool demand for the currency. declined by 0.9% driven by a decrease in
consumer loans due to the effects of macro-
prudential measures.
143
EM Banks abc
March 2011
Public and private sector banks credit, y-o-y Credit to individuals and corporates vs NPLs
50% 1,200 10%
40% 1,000
8%
800
30% 6%
Thousands
600
20% 400 4%
10% 200 2%
0% - 0%
Jul-06
Jan-07
Jan-08
Jan-05
Jul-05
Jan-06
Jul -07
Jul-08
Jan -09
Jul-09
Jan-10
Jul-10
Jan-11
-10%
Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul- 10 Oct-10 Jan-11 Individuals Corporates Total Ind+Corp
Private domestic banks Public banks -BNDES NPL Corp + Ind NPL Corporates (RHS)
Foreign banks Total loans NPL Individuals
Source: BCB Source: BCB
Foreign and private domestic banks drove loan Looking at asset quality, the NPL ratio for the
growth during 2010. In December 2010, credit for overall system (those more than 90 days overdue)
private domestic banks (eg Bradesco, Itaú Unibanco) rose to 3.2% in January 2011 from 4.3% a year ago.
grew 22% y-o-y, up from 8.5% at 2009-end and for In January, NPL for individuals remained steady m-
private foreign banks (eg Santander Brasil) grew o-m at 5.7%. Similarly, the NPL ratio for corporate
15% y-o-y vs. 0.2% at 2009-end. In contrast, public credit was unchanged from December at 3.6%. In
sector banks like Banco do Brasil grew their terms of arrears, individual saw a sharp increase to
portfolios by 17% y-o-y in December 2010, down 5.9% from 5.3% in December and corporates
from 29% in 2009. In January 2011, private remained steady at 1.9% from December. Given the
domestic banks accelerated slightly by 22.3% y-o-y, rapid increase in consumer loans, we think this ratio
foreign banks recorded a slowdown in credit growth could lead to a higher NPL ratio later in the year,
of 14.3% y-o-y and public sector banks, continued to even though we believe the solid economic
expand by 17.8%. fundamentals in Brazil should mitigate the increase
in delinquencies. In January the unemployment rate
BNDES credit growth has continued to slow,
was 6.1%, down from 7.2% a year ago.
falling to 24.6% in January 2011 from 26.4% in
The NPL ratio for foreign banks increased 20bps
December 2010. The bank’s loan growth has been
m-o-m to 4.3% from 4.1% in January. Similarly
decelerating in previous months and its share of
the NPL ratio for public-domestic banks increased
credit ex-infrastructure is likely to continue to
decline as the government tightens its funding
sources and BNDES focuses more on Public and private sector banks default rates
infrastructure credit. 8.0
7.0
A positive offset to the implementation of macro- 6.0
5.0
prudential measures in January 2011 was the
4.0
210bps increase in spreads to 25.6% from 23.5% 3.0
in December. The increase in spreads was driven 2.0
1.0
mostly by lending rates in the consumer segment -
Sep- 02
Sep-03
Sep-04
Sep-05
Sep-06
May-07
Sep-07
May-08
Sep-08
Sep-09
Sep-10
May-03
May-02
Jan-04
May-04
Jan-05
May-05
Jan-06
May-06
Jan-07
Jan-09
May-09
Jan-10
May-10
Jan-11
Jan-03
Jan-08
Jan-02
rising 320bps m-o-m. Corporate lending rates also

increased January leading to an expansion of
Public Default Private Domestic Default
110bps in corporate spreads. Foreign Default
Source: BCB
144
EM Banks abc
March 2011
to 2.1% from 2.0% in December. We believe this Opportunities

is a result of a change in mix with greater  Healthy NPL coverage and relatively lower
concentration in SME and consumer lending. For provisions should help limit any major
private domestic banks, the NPL ratio remained contraction of margins.
steady m-o-m in January at 4%. This ratio is
 Strong economic fundamentals and low
slightly below the pre-crisis average for the
unemployment should continue to support
domestic sector.
credit growth and maintain consumer
Challenges and opportunities delinquencies at historically low levels.
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.
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 2,115
GDP per capita (USD) 8.487 10.745 12,521 Liquid assets/total assets n/a n/a n/a
CPI, average (% y-o-y) 4.9 4.9 6.0 Loans/total assets (USDbn) (%) 32.4 35.1 35.9
Policy rate, end-year (%) 8.75 10.75 12.50 Retail loans/gross loans (%) 42.3 43.7 42.4
Trade balance (USDbn) 25.3 15.2 -6.2 Impaired loans/gross loans (%) 7.8 8.9 7.3
Current account balance (USDbn) -24.3 -50.6 -81.1 Reserve coverage of impaired 68.5 77.3 76.8
loans (%)
Current account balance (% GDP) -1.5 -2.4 -3.3 Gross loans/customer deposits (%) 77.8 86.0 102.7
Gross external debt (USDbn) 198 260 310 Capital/total assets (%) 15.7 18.4 18.4
Private 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 61.4
Gross public external debt (% GDP) 3.5 3 2.6 ROA 1.9 1.6 1.1
International reserves (USDbn) 239 290 313 Net interest margin 5.7 6.6 4.3
Cost of risk 7.7 10.7 8.0
Banking 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 93.9
Retail loans/GDP (%) 15.3 14.0 n/a State-controlled banks 29.7 28.7 32.6
Total deposits/GDP (%) 44.2 38.0 n/a Foreign-owned banks 47.6 21.8 24.0
Source: BCB, estimates HSBC Economics
145
EM Banks abc
March 2011
Banco do Brasil
Key events and risks to monitor Brazil
 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 Credit profile (continued)
time and demand deposits for funding. Rating Outlook Rating Outlook
 Overseas expansion is part of Banco do Brasil’s (BB’s) strategy for 2011.
Credit profile Senior unsecured BBB+ Positive Moody's Baa3 Positive
Sub-debt NA S&P BBB+ Stable
BB is one of the strongest banks in the EM universe, benefitting from hefty liquidity Moody’s
on the back of a vast deposit base, healthy margins and a healthy capital base. The Senior unsecured Baa2 Positive Major shareholders (December 2010)
bank has low dependence on external funding and we believe has a high likelihood Bank-deposit Baa3 Federal government 53.2%
of government support. Sub-debt Baa2 Positive Previ 10.4%
BB reported net income of BRL3, 704m in Q4 2010, beating consensus estimates Financial strength C+ Free float 30.4%
by 35.5% mainly due to higher-than-expected non-interest income that included the S&P
reassessment of PREVI pension assets and liabilities. Excluding one-offs, net Senior unsecured BBB- Stable Bloomberg
income was up 21% y-o-y. Sub-debt NA BANBRA
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% Key international bonds
q-o-q and 19.5% y-o-y.
Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
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- BANBRA 8 ½ 09/14 (subordinated) USD300 8.5%
risk, lower-spread segment. Net interest income stood at BRL9,523m. BANBRA 4 ½ 01/15 USD950 4.5%
BANBRA 4 ½ 01/16 (callable) EUR750 4.5%
Provision for loan losses fell 27.5% q-on-q. BANBRA 6 01/20 USD500 6%
We do not have a fundamental credit recommendation on the issuer. BANBRA 5 3/8 01/21 USD660 5 3/8%
Bank in brief
Analysts Olga Fedotova olga.fedotova@hsbcib.com +44 20 7992 3707
Victor Galliano Victor.galliano@us.hsbc.com +1 212 525 5253 BB is the largest public financial institution in Brazil, majority owned by the federal
Mariel Santiago Mariel.x.santiago@us.hsbc.com +1 212 525 5418 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
Interest expense 16,168 23,421 26,616 25,887 Deposits 23.11 14.63 7.61 7.63
Other operating income 5,702 8,132 9,430 9,684 Net Income 22.91 19.97 18.04 18.23
Operating expenses 10,740 14,338 17,197 16,451 ROAA 1.58 1.37 1.22 1.26
Provisions for loan losses 5,827 6,332 8,838 9,345 Net interest margins 6.92 6.24 6.09 6.58
Provision for taxes 1,994 3,335 3,175 3,354 Cost-income ratio 48.4 48.3 48.1 46.1
Net income 5,085 5,929 6,446 6,511 Asset quality
Balance sheet summary Gross NPL ratio 3.7 2.7 2.8 3.0
Customer deposits 186,842 213,668 234,059 232,775 Gross NPLs (USDm) 5,449 7,241 9,254 9,918
Loans 161,772 209,626 254,163 271,837 Loan loss res./NPLs 157.64 164.20 152.09 144.44
Total 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/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.
146
EM Banks abc
March 2011
BNDES
Brazil
 Capital base includes a significant component of hybrid debt/capital issues Rating Outlook Rating Outlook
 High disbursements should continue in 2011 after record year in 2010 due to
increased demand in the infrastructure (energy and transportation) segment Credit rating profile FC government bond ratings
 The concentration of lending to the 10 largest borrowers remains high and is Fitch Fitch BBB- Positive
growing, having risen to 36.2% at H1 from 34% at the end of 2008 Senior unsecured BBB- Positive Moody's Baa3 Positive
Sub-debt NA S&P BBB- Stable
Senior unsecured Baa2 Stable Major shareholders (December 2010)
BNDES disbursements reached BRL168.4bn (USD102bn) in 2010, a 23% increase on Bank-deposit Baa3 Federal Government 100%
2009. Industry accounted for 47% of total disbursements, followed by infrastructure, Sub-debt
with a 31% share, and trade and services at 16%. In addition, the bank ended 2010 Financial strength na
with a record volume in credit operations mainly lending to micro-, small- and S&P
medium-sized companies, as well as individuals, revealing greater access and a Senior unsecured BBB- Stable Bloomberg
wider reach. BNDES recorded net profit of BRL3.6bn (USD2.05bn) in H1 2010, Sub-debt NA BNDES
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), Key international bonds
equal to 20.5% of total credit in Brazil in June 2010. The default ratio, which is Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
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 BNDES 9 5/8 12/11 (NR/A3/NR) USD300 9 5/8%
total granted credits were graded at risk levels AA-C. The BIS ratio was 17.1% in H1 BNDES 4 1/8 09/17 (NR/Baa2/BBB-) EUR750 4 1/8%
2010, well above the 11% requirement. BNDES is likely to continue to provide credit BNDES 6.369 06/18 (NR/Baa2/BBB-) USD1,000 6.369%
to foster infrastructure investment and economic development, and to continue to BNDES 6 1/2 06/19 (BBB-/Baa2/BBB-) USD1,000 6 1/2%
rely on the Brazilian Treasury and, increasingly, the capital markets, for its funding. BNDES 5 1/2 07/20 (WD/Baa2/BBB-) USD1,000 5 1/2%
We do not have a fundamental credit recommendation on the issuer. Bank in brief
Analysts Olga Fedotova olga.fedotova@hsbcib.com +44 20 7992 3707 BNDES is the federal-government-owned development bank of Brazil and the main
Victor Galliano victor.galliano@us.hsbc.com +1 212 525 5253 vehicle for financing long-term investments in the Brazilian economy. Since its
Mariel Santiago mariel.x.santiago@us.hsbc.com +1 212 525 5418 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 31.34
Interest expense 3,978 2,759 13,938 2,320 Deposits n/a 8.63 37.32 37.93
Net interest income 2,227 2,467 2,106 2,917 Pre-provision profit n/a 20.23 –23.17 31.30
Other operating income 1,457 2,271 2,668 1,814 Net Income n/a 15.52 –27.36 26.77
Operating expenses 593 734 1,053 622 ROAA n/a 3.86 2.27 2.09
Pre-provision profits 3,403 4,570 3,723 4,498 Pre-provision profits/average assets n/a 4.69 2.92 2.78
Provisions for loan losses –484 –710 –242 3 Net interest margins n/a 3.86 2.27 2.09
Provision for taxes 972 1,368 1,072 1,121 Cost-income ratio 15.26 13.90 26.57 13.84
Deposits 12,262 14,950 11,170 13,168 Gross NPLs (USDm) 3,098 3,323 1,723 3,857
Loans 68,751 92,518 93,320 162,609 Loan loss Res./NPLs 65.58 71.81 114.31 69.13
Total CAR 26.70 17.80 17.60 17.12
Equity/assets 12.30 9.11 7.15 6.47
Funding
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.
147
EM Banks abc
March 2011
Bradesco
Brazil
 Heavy investment in IT and branch expansion. Rating Outlook Rating Outlook
 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 rating profile FC government bond ratings
Senior unsecured BBB Positive Moody's Baa3 Positive
Credit profile Sub-debt BBB- S&P BBB- Stable
Moody’s
As one of the two largest private banks in Brazil and Latin America, Bradesco’s Senior unsecured Baa2 (P) Stable Major shareholders (December 2010)
credit profile benefits from a high level of state support and good access to local Bank-deposit Baa3 Fundacao Bradesco 48.4%
deposits due to its vast branch network and strong brand recognition. Sub-debt Baa2 Espirito Santo of Portugal 7.9%
Financial strength B- UFJ Bank of Japan 2.9%
Bradesco booked net income of BRL10bn (USD5.5bn) in 2010, an increase of 25%
S&P Free float 21.7%
y-o-y. The insurance business played an important role, growing 18% y-o-y and
Senior unsecured BBB Stable Bloomberg
accounting for 30% of earnings. Net interest income excluding trading gains was
Sub-debt N/R BRADES
BRL31.5bn (USD19.6bn), 11% higher y-o-y and mainly driven by the growth in loan
Financial strength N/R
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 Key US dollar denominated bonds
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, Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
resulting from higher recoveries and decline in delinquencies. The bank is investing
BRADES 5.9 01/21 (BBB-/Baa2/NR) USD1,100 5.9%
heavily in infrastructure and technology resulting in an increase in operating
BRADES6 ¾ 09/19 (BBB-/Baa2/NR) USD750 6 3/4%
expenditures of 22% y-o-y. The delinquency ratio (+60 days overdue loans) has
BRADES 5.9 01/21 (BBB-/NR/NR) USD500 5.9%
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 Bank in brief
in Q4 2010.
Bradesco, founded in 1943 is one of the largest private banks in Brazil with more
We do not have a fundamental credit recommendation on the issuer. 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
Analysts Olga Fedotova olga.fedotova@hsbcib.com +44 20 7992 3707 December 2009, Bradesco had a market share of 24% of insurance premiums and
Victor Galliano victor.galliano@us.hsbc.com +1 212 525 5253 36% of private pension investment portfolios. The bank is the third-largest
Mariel Santiago mariel.x.santiago@us.hsbc.com +1 212 525 5418 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 expense 12,251 15,696 18,308 19,077 Deposits 11.40 23.01 7.63 6.24
Other operating income 5,734 6,456 7,673 7,606 Net Income 5.14 20.05 16.99 6.78
Customer deposits 97,633 117,585 128,176 124,381 Gross NPLs (USDm) 7,050 7,039 8,418 9,463
Loans 90,260 118,710 141,204 148,146 Loan loss res./NPLs 137.21 148.43 140.62 129.37
Total CAR 17.90 15.55 13.17 13.09
Equity/assets 8.25 7.63 8.01 8.47
Funding
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.
148
EM Banks abc
March 2011
Itaú Unibanco
Brazil
 The bank’s overseas presence generates international liquidity, but its broad Rating Outlook Rating Outlook
deposit base could well put pressure on funding costs.
 Asset quality could improve further, but needs to remain a focus of attention due Credit rating profile FC government bond ratings
to strong expansion in SMEs and consumer credit. Fitch Fitch BBB- Positive
 Slower loan growth and margin compression in 2011 could weigh on earnings. Senior unsecured BBB Positive Moody's Baa3 Positive
Sub-debt NA S&P BBB- Stable
Senior unsecured Baa2 Stable Major shareholders ( December 2010)
Constrained by the sovereign ceiling, the bank is one of the highest rated credits in Bank-deposit Baa3 Itaú, SA 20.0%
the country. It stands to benefit from the improvement of the overall operating Sub-debt Itaú Unibanco Particaoes 26.0%
environment through its exposure to commercial lending and consumer credit. Financial strength B- Free float 54.0%
S&P
At the end of 2010, Itaú Unibanco reported net income of BRL13.3bn (USD8.3bn), Senior unsecured BBB Stable Bloomberg
showing 25.3% y-o-y growth and strong ROE of 23.0%. The expansion in net Sub-debt NA ITAU
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, Key dollar-denominated bonds
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 Description (Ratings: Fitch/Moody’s/S&P) Amount Coupon
increase was a result of increased volumes more than a change in interest rates. outstanding (m)
Delinquency ratios showed a significant drop to 5.1% at end of Q4 2010 from 6.6% ITAU 5 ¾ 01/21 (BBB-/Baa2/NR) USD1,000 5 3/4%
in Q4 2009. The bank’s capital ratio was 15.4% in Q4 2010, 120bps lower than Q4 ITAU6.2 04/15/20 (BBB-/Baa2/NR USD1,000 6.2%
2009. ITAU8.7 07/49-11 (NR/Baa2/NR), perpetual USD500 8.7%
We do not have a fundamental credit recommendation on the issuer.
Analysts Olga Fedotova olga.fedotova@hsbcib.com +44 20 7992 3707 Bank in brief
Victor Galliano Victor.galliano@us.hsbc.com +1 212 525 5253 Itaú Unibanco is Brazil’s largest private banking institution. It came into existence
Mariel Santiago Mariel.x.santiago@us.hsbc.com +1 212 525 5418 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 expense 13,322 17,272 20,234 23,594 Deposits -3.87 15.45 9.61 9.62
Net interest income 18,387 22,693 27,657 27,307 Pre-provision profit -4.48 0.14 22.04 14.31
Other operating income 5,618 8,141 10,406 10,571 Net Income -0.75 25.27 20.54 12.32
Balance sheet summary (USDm) Gross NPL ratio 6.62 5.05 5.10 5.20
Customer deposits 108,183 123,621 139,102 142,101 Gross NPLs (USD m) 9,342 9,229 10,735 11,434
Loans 127,199 168,247 194,428 203,002 Loan Loss Res./NPLs 149.04 156.28 148.90 147.02
Total CAR 16.68 15.52 14.43 14.92
Equity/assets 8.33 8.49 9.07 9.63
Funding
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.
149
EM Banks abc
March 2011
Votorantim
Brazil
 A high concentration in auto loans could affect asset quality and earnings, while Rating Outlook Rating Outlook
the bank’s capital ratios have steadily lagged those of larger peers.
 The higher interest rates scenario could help margin expansion, although a Credit rating profile FC government bond ratings
slowdown in auto loan growth should partly offset any recovery in margins. Fitch Fitch BBB- Positive
 The Banco do Brasil partnership should generate opportunities for revenue Senior unsecured BBB- Positive Moody's Baa3 Positive
synergy. Sub-debt NA S&P BBB- Stable
Moody’s
Senior unsecured Baa2 Stable Major shareholders (December 2010)
Credit profile Bank-deposit Baa3 Banco do Brasil 50.0%
Sub-debt Baa2 VF and Emirio Moraes 50.0%
The bank benefits from access to cheaper and longer-term funding from Banco do Financial strength C-
Brasil and a sizable market share in retail lending. S&P
Senior unsecured BB+ Stable Bloomberg
First-half net profit in 2010 was 18% higher y-o-y, mainly as a result of increased
Sub-debt NA BANVOR
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 Key dollar-denominated bonds
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%, Description (Ratings: Fitch/Moody’s/S&P) Amount (m) Coupon
while the capital ratio remained comfortable at 13.7%, supportive of further portfolio
BANVOR7 3/8 01/20 (NR/Baa2/BB+) USD1,150 7 3/8%
growth. Having been historically weaker than its peers, this ratio been fortified by
BANVOR5 1/4 06/16 (NR/Baa2/BB+) USD750 5 1/4%
issuance of Tier 2 capital contributions made by Banco do Brasil and the bank
BANVOR4 1/4 02/13 (NR/Baa2/BB+) USD500 4 1/4%
expects to have closed 2010 with a BIS of 14% after expansion during the year.
We do not have a fundamental credit recommendation on the issuer.
Bank in brief
Analysts Olga Fedotova olga.fedotova@hsbcib.com +44 20 7992 3707
Votorantim was founded in 1987 and is focused on consumer finance, mainly
Victor Galliano Victor.galliano@us.hsbc.com +1 212 525 5253
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 expense 2,837 3,718 2,615 1,205 Deposits –22 –21.3 106.9 7.9
Net interest income 1,684 1,630 2,886 857 Pre-provision profit 8.81 –30.7 119.3 –56.9
Other operating income 391 295 470 57 Net Income 14.57 –41.4 19.4 –66.4
Operating expenses 818 785 1,245 277 ROAA 1.80 1.30 1.02 1.2
Pre-provision profits 973 674 1,478 637 ROAE 21.1 14.6 11.9 12.7
Provisions for loan losses 273 301 804 231 Net interest margins n/a 5.5 6.8 6.6
Provision for taxes 221 –38 163 98 Cost-income ratio 31.0 34.3 34.1 35.6
Net income 659 386 461 155 Asset quality
Customer deposits 8,022 6,314 13,064 14,091 Gross NPLs (USDm) 440 475 1,098 843
Loans 15,113 16,344 24,388 30,670 Loan loss res./NPLs 111 113 101 106
Total CAR 15.20 13.50 13.0 13.5
Equity/assets 9.09 8.85 8.43 7.4
Funding
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.
150
EM Banks abc
March 2011
Appendix
151
EM Banks abc
March 2011
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
152
EM Banks abc
March 2011
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
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
DAH SING BANK 5.451 18/08/2017 18/08/2012 USD 150
India
ICICI Bank 6.625, callable (make 03/10/2012 USD 1,795
whole)
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
HANA BANK 6.5 09/04/2012 USD 1000
SHINHAN BANK 6 29/06/2012 USD 500
HANA BANK 5.375 12/04/2017 12/04/2012 USD 500
KOOKMIN BANK 0.51813 31/01/2012 USD 400
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
153
EM Banks abc
March 2011
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
154
EM Banks abc
March 2011
Notes
155
EM Banks abc
March 2011
Notes
156
EM Banks abc
March 2011
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 2009-12-17
Source: HSBC
157
EM Banks abc
March 2011
Recommendation History of AXIS BANK LTD

From To Date
Source: HSBC
Recommendation History of BANK OF BARODA

From To Date
Source: HSBC
Recommendation History of STATE BANK OF INDIA

From To Date
Overweight Neutral 2007-02-05
Not Rated Overweight 2006-12-18
Source: HSBC
Recommendation History of BOC HONG KONG HOLDINGS

From To Date
Source: HSBC
Recommendation History of DAH SING BANKING GROUP

From To Date
Underweight Neutral 2010-03-25
Not Rated Underweight 2009-08-13
Source: HSBC
Recommendation History of ALLIANCE BANK (KAZAKHSTAN)

From To Date
Source: HSBC
Recommendation History of ALFA BANK

From To Date
Source: HSBC
Recommendation History of EXPORT-IMPORT BANK OF CHINA

From To Date
Source: HSBC
158
EM Banks abc
March 2011
Recommendation History of WOORI FHC

From To Date
Neutral Underweight 2008-10-22
Source: HSBC
Recommendation History of BANK OF EAST ASIA

From To Date
Source: HSBC
Recommendation History of UOB

From To Date
Source: HSBC
Recommendation History of ICICI BANK

From To Date
Neutral Overweight 2008-03-31
Overweight Underweight 2007-03-05
Source: HSBC
Recommendation History of CITIC BANK INTERNATIONAL LIMIT

From To Date
Source: HSBC
Recommendation History of SBERBANK RF

From To Date
Not Rated Not Rated 2008-09-05
Source: HSBC
Recommendation History of BANGKOK BANK

From To Date
Source: HSBC
159
EM Banks abc
March 2011
Recommendation History of KOREA EXCHANGE BANK

From To Date
Source: HSBC
Recommendation History of DEVELOPMENT BANK OF KAZAKHSTAN

From To Date
Source: HSBC
Recommendation History of BANK OF INDIA

From To Date
Source: HSBC
Recommendation History of ATF BANK

From To Date
Source: HSBC
Recommendation History of KAZKOMMERTSBANK

From To Date
Source: HSBC
Recommendation History of EURASIAN DEVELOPMENT BANK

From To Date
Source: HSBC
Recommendation History of KOREA DEVELOPMENT BANK

From To Date
Source: HSBC
160
EM Banks abc
March 2011
Recommendation History of SHINHAN

From To Date
Source: HSBC
Recommendation History of HANA FGL

From To Date
Source: HSBC
Recommendation History of BANK VTB OAO

From To Date
Source: HSBC
Recommendation History of HALYK BANK

From To Date
Source: HSBC
Recommendation History of EXPORT-IMPORT BANK OF KOR

From To Date
Source: HSBC
Recommendation History of CHINA DEVELOPMENT BANK

From To Date
Source: HSBC
Recommendation History of INDUSTRIAL BANK OF KOREA

From To Date
Source: HSBC
161
EM Banks abc
March 2011
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 35
Neutral 339 58 113 33
Underweight 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, 11
ALFA BANK - - - 1, 2, 5, 6, 7, 11
ALLIANCE BANK (KAZAKHSTAN) - - - 11
ATF BANK - - - 11
AXIS BANK LTD AXBK.BO 1285.05 11-Mar-2011 1, 2, 4, 5, 7, 11
BANCO BRADESCO BBDC4.SA 30.22 11-Mar-2011 1, 2, 4, 5, 7, 11
BANCO DO BRASIL BBAS3.SA 28.01 11-Mar-2011 1, 2, 5, 6, 7, 11
BANGKOK BANK BBL.BK 158.50 11-Mar-2011 6, 7, 11
BANK OF BARODA BOB.NS 909.35 11-Mar-2011 1, 5, 6, 7, 11
BANK OF EAST ASIA 0023.HK 33.95 11-Mar-2011 1, 2, 5, 6, 7, 11
BANK OF INDIA BOI.NS 466.30 11-Mar-2011 1, 4, 5, 6, 7, 11
BANK OF MOSCOW - - - 6, 7
BANK VTB OAO VTBRq.L 6.58 11-Mar-2011 1, 2, 5, 7, 11
BOC HONG KONG HOLDINGS 2388.HK 24.85 11-Mar-2011 4, 11
CHINA DEVELOPMENT BANK - - - 1, 2, 5, 6, 7, 11
CITIC BANK INTERNATIONAL LIMIT - - - 1, 5, 6, 7
DBS GROUP DBSM.SI 14.36 11-Mar-2011 1, 5, 6, 11
DEVELOPMENT BANK OF KAZAK - - - 6, 7, 11
EURASIAN DEVELOPMENT BANK - - - 1, 5, 11
EXPORT-IMPORT BANK OF CHI - - - 1, 2, 5, 7, 11
EXPORT-IMPORT BANK OF KOR - - - 1, 2, 5, 6, 7, 11
GAZPROM BANK - - - 6, 7
HALYK BANK HSBKq.L 10.49 11-Mar-2011 2, 7, 11
HANA FGL 086790.KS 46150.00 11-Mar-2011 2, 7, 11
ICBC - - - 1, 5, 7, 11
ICICI BANK ICBK.NS 1014.55 11-Mar-2011 1, 2, 4, 5, 6, 7, 11
INDUSTRIAL BANK OF KOREA - - - 1, 2, 5, 7, 11
ITAUSA - - - 4
KAZKOMMERTSBANK KKGByq.L 7.70 11-Mar-2011 2, 6, 7, 11
KOREA DEVELOPMENT BANK - - - 1, 5, 7, 11
KOREA EXCHANGE BANK 004940.KS 9100.00 11-Mar-2011 1, 2, 5, 6, 7, 11
OCBC OCBC.SI 9.27 11-Mar-2011 1, 5, 6
RUSSIAN AGRICULTURAL BANK - - - 5, 7
SBERBANK RF SBER03.MM 3.48 11-Mar-2011 2, 7, 11
SHINHAN - - - 6, 7, 11
STATE BANK OF INDIA SBI.NS 2589.75 11-Mar-2011 1, 2, 4, 5, 6, 7, 11
UOB UOBH.SI 18.74 11-Mar-2011 5, 6, 7, 11
WOORI 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.
162
EM Banks abc
March 2011
and/or paid compensation to HSBC in respect of non-investment banking-securities related services.
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.
163
EM Banks abc
March 2011
Disclaimer
* Legal entities as at 31 January 2010 Issuer of report
'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation
HSBC Bank plc
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; 8 Canada Square
000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; London, E14 5HQ, United Kingdom
'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Telephone: +44 20 7991 8888
Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Fax: +44 20 7992 4880
Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul
Website: www.research.hsbc.com
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.
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 research
report, 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
[292244]
164
110310_28253 EM Banks (Credit) - Olga Fedotova_f:Layout 1 3/11/2011 3:51 AM Page 1
Olga Fedotova
Analyst
HSBC Bank plc
+44 20 7992 3707
Olga Fedotova is Head of Emerging Market Corporate Strategy, based in London. She joined HSBC in 2005 as a fixed income analyst responsible for
research on CIS Financials and Corporates. Olga has over twelve years’ total experience in fixed income, and before joining HSBC was an analyst covering
Russian, Kazakh and Ukrainian credits.
March 2011
Keerthi Angammana, CFA
Analyst
HSBC Bank plc
+44 20 7991 5431
keerthisri.angammana@hsbcib.com
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.
EM Banks
EM Banks
Yi Hu
Analyst
+852 2996 6539
yi.hu@hsbc.com.hk
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.
Lights back on … but not for all

Devendran Mahendran, CFA
Analyst
+852 2822 4521
devendran@hsbc.com.hk
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 spent
three years. He covers financial institutions and sovereigns in Asia. Devendran is a CFA charterholder.
Ksenia Mishankina
Analyst
HSBC Bank plc
+44 20 7992 3703

ksenia.mishankina@hsbcib.com Emerging market (EM) banks offer an attractive risk-adjusted premium over their sovereigns
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 a
graduate programme following an internship. She has a bachelor’s degree in Business Analysis from the University of Reading.
Fundamentals are improving, supported by a traditional banking business model, fast economic
Pavel Simacek, CFA growth and favourable demographics
Analyst
HSBC Bank plc
+44 20 7992 3714
pavel.simacek@hsbcib.com We prefer senior Russian quasi-sovereign debt over Asian, Brazilian and some Indian names.
Pavel Simacek is a senior credit analyst covering banks in emerging markets. Prior to joining HSBC in February 2011 he had gained a considerable
experience from analysing financial institutions and corporations operating in various countries. Pavel is a holder of the Chartered Financial Analyst
Switch to senior Indian debt from subordinated Hong Kong. Switch out of Ukranian banks
designation and a member of the CFA Institute. to Kazakh quasi-sovereigns which are the cheapest among EM names. Middle Eastern banks are
attractively priced but wait for better entry point
By Olga Fedotova and Keerthi Angammana

March 2011
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

HSBC Global Emerging Markets EM Banks JP

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

HSBC Global Emerging Markets EM Banks JP

Uploaded by

Copyright:

Available Formats

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

Lights back on … but not for all

Global Emerging Markets – Credit Strategy

By Olga Fedotova and Keerthi Angammana

Key cross-regional trade ideas

Korean Banks 88 Ukrainian banks 136

This page has been left intentionally blank

could revert to where they were in April 2009.

700 Govt Fin Energy Comm

The chart below plots the relative performance of

expensive relative to their historical performance

Both BNDES and VTB are likely to be frequent -400 -400

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

and Kazakhstan, are likely to benefit from

export revenues. VTB 18 BNDES 19 Diff

We suggest moving out of CINDBK 20 LT2 5.0 5.00

banks, however, is expansion into China, often at

hedge against rapid expansion into China and

Indian banks benefit from a stable funding base,

We conclude that Russia quasi sovereign banks

and weak profitability. Hence we initiate longer- 400

one of the cheapest EM credits providing high Beta Relative to EMBI

Kazakh banks benefit from an improving macro-

300 150 look for a better entry point.

banks, where we expect wholesale-focused Korean

Source: Reuters, Bloomberg, HSBC Calculations

Relative value charts, 7 March 2011

300 WOORIB 15 LT2

200 EIBKOR 15 WOORIB 16

AAA AA+ AA AA- A+ A A- BBB+

Source: Bloomberg, Reuters, HSBC Calculations

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

250 BNKEA 20 LT2

AAA AA+ AA AA- A+ A A- BBB+

Source: Bloomberg, Reuters, HSBC Calculations

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

250 SBERRU 15 RSHB 13

A- BBB+ BBB BBB- BB+

Source: Bloomberg, Reuters, HSBC Calculations

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

BANBRA 21 LT2 BNDES 19

A- BBB+ BBB BBB- BB+

Source: Bloomberg, Reuters, HSBC Calculations

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

BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C

Source: Bloomberg, Reuters, HSBC Calculations

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

BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC C

Source: Bloomberg, Reuters, HSBC Calculations

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

Asia LatAm MiddleEast

NBADUH 14 NBADUH 15 EIBKOR 15 ADCB 14

AAA AA+ AA AA- A+ A A- BBB+

Source: Bloomberg, Reuters, HSBC Calculations

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

AAA AA+ AA AA- A+ A A- BBB+

Source: Bloomberg, Reuters, HSBC Calculations

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

A- BBB+ BBB BBB- BB+

Source: Bloomberg, Reuters, HSBC Calculations

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

0.0 BRADES 19 sub