InvestorPlace Asia

Yes, Virginia, There Are Banks Making All-Time Highs (Seriously)

Ivan Martchev, July 9, 2010

While Robert and I are a little too old to believe in Santa, we do believe that "buy and hold" is not dead. There are sectors and markets that are driven by a virtuous savings and investment cycle. The highest concentration of such investment stories is in Asia. While China has received a lot of negative headlines of late (that have conveniently failed to note that many Chinese H-Share ADRs have seen substantial gains in 2010), India has been missing from the radar screen.

There is something right going on in India.

I recommended HDFC Bank (NYSE: HDB) for the first time in March 2002 at a price of $14.42 and the stock has never looked back since. The Indian economy as a whole is experiencing accelerating growth, but with much less government intervention than in China. China grows faster than India and has better infrastructure -- this is key -- but it also has a lot of government intervention in the banking system. And this was a big help in 2009, when it was necessary to support the Chinese economy.

In general, forced loans tend to result in more loan losses than those made on merit. The Chinese banking system is reforming -- one reason why Agricultural Bank is going public as we speak -- and I am confident that in the future such forced lending won't be necessary. There has never been an issue with forced lending in India, which is why the banks are healthy. In fact, HDFC Bank just hit an all-time high of $156.

The questions on most investors' minds right now: Is it too late to buy? The answer: No.

A Lot Going Right in India

In a bull market you buy the dips, in a bear market you sell the rallies. The secular bull market in India is alive and well, so any dips in HDFC Bank are buying opportunities.

Now, 2008 was not a "dip" -- that was a crash. I saw what was happening with the U.S. banking system in 2006 and begun recommending short sales of subprime mortgage lenders and homebuilders at the time. Some of my shorts -- Accredited Home Lenders and Countrywide -- no longer have active ticker symbols...

Since I was so negative of U.S. banks, I sold out of HDB near $55 in 2006 as I believed that the coming Wall Street mess would hit emerging markets, despite their superior fundamentals. Then I had to watch the stock nearly triple in the next 18 months (in December 2007 it was quite overvalued) and then in another 12 months I saw it decline to $42.

I seriously doubt that that any such buying opportunity like we saw in 2008 is coming in India anytime soon. If we have a more serious slowdown in the West in the second half of 2010, you might get a bigger correction, but the action in Indian equities so far is extremely positive. HDB dipped 15 percent in February (see chart above), and even though the S&P 500 is has now taken out those February lows, HDB is making all-time highs. This is what a real bull market looks like (focus on the upper part of the chart, the lower part shows the very opposite of a bull market).

The other Indian bank, ICICI Bank (NYSE: IBN), has underperformed in 2010. While it is also a good bank, is is not trading at all-time highs as it had a huge secondary share sale in 2008 before the crash; the new stockholders now act as a natural deterrent.

Both banks look a little expensive, but they are not really. HDB trades at 33 times trailing earnings due to 47% year-on-year earnings growth. IBN trades at about 20 times trailing earnings, while latest quarterly earnings growth was 79%. HDB has been a more consistent and less volatile earnings story over time, which is why it tends to trade at higher multiples. This is why HDB looks crazy-expensive at 4.8 times book value, while IBN trades at 2.8 times book.

If the Indian economy accelerates to 9% to 10% GDP growth like China, those two banks will be moonshots. Another triple in five years is not out of the question. The only caveat is that the Western developed markets have to hold together reasonably well. I think a lot of money will be made in emerging markets.

Global Bank ADRs	SYMBOL	YTD %CHG	COUNTRY
Corpbanca	BCA	24.08%	Chile
Banco de Chile	BCH	18.74%	Chile
Bancolombia - Pref	CIB	16.41%	Colombia
Banco Santander Chile	SAN	12.66%	Chile
HDFC Bank	HDB	12.11%	India
Shinhan Financial	SHG	5.16%	Korea
Banco Macro	BMA	4.00%	Argentina
Grupo Financiero Galicia	GGAL	3.13%	Argentina
BBVA Banco Frances	BFR	2.07%	Argentina
Woori Finance	WF	-0.42%	Korea
ICICI Bank	IBN	-2.28%	India
Banco Bradesco	BBD	-7.70%	Brazil
Itau Unibanco Holding	ITUB	-8.76%	Brazil
Banco Santander Brasil	BSBR	-15.14%	Brazil
Westpac Banking	WBK	-15.50%	Australia
KB Financial	KB	-20.24%	Korea

As you can see by the table above, most of the best-performing global banks listed in the U.S. are from emerging markets. The Chilean banks are also trading at all-time highs due to the spectacular performance of the Chilean economy.

I have to remind you though not to confuse Santander (NYSE: STD) with Banco Santander Chile (NYSE: BCH) and Banco Santander Brazil (NYSE: BSBR). Santander has locally-incorporated publicly-traded subsidiaries which are independent companies that are not affected by the problems of the parent. The same goes for BBVA subsidiaries.

Short STD/long SAN has been a pair trade that has worked great in 2010, and I think it will keep working for a while.

To see which Chinese banks we believe have potential for the rest of 2010, join China Strategy today!

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