JPMorgan says markets are underestimating the upside of Asian banks

After two years of flat growth in earnings, 2017 is the year Asian banks will see a turnaround in earnings per share and credit quality, an analyst from JPMorgan said Monday as he singled out lenders in the Philippines as those with the best prospects.

Speaking on CNBC's "Capital Connection," Harsh Modi, JPMorgan's co-head of Asia financials equity research, said dividend per share across banks in Asia could grow by 7 to 8 percent this year.

"There are two drivers. One is asset quality is starting to stabilize so credit costs are starting to come off, which is a very big positive," he said.

"Also as the activity data on export, domestic manufacturing picks up, we're starting to get a pick-up in operating profit growth. Margin growth, loan growth are coming back so it's across the board. And it's very likely that we may be underestimating the upside here."

Modi said Philippine banks are the best positioned in Southeast Asia to benefit from the rise in global interest rates. He noted that the country's "de facto" rate, the term deposit rates, have gone up and that should boost margins at the banks.

Indonesian banks, which have shown resilience thus far, should also see the end of growth in non-performing loans, he said.

Modi said he is more cautious on the outlook for Singaporean banks, which are among the largest in Southeast Asia. This is because the effect of higher interest rates in the United Stateshas not been fully passed on to Singapore's domestic rates.

"Generally, when Singapore dollar rates go up, then Singapore banks make money. That has not happened yet in a meaningful manner," he said, adding that he is not sure the prospects of the city state's lenders would change if the U.S. Federal Reservecontinue to raise rates.

Early this month, the Fed raised the target for its funds rate by 25 basis points to a range of 0.75 percent to 1 percent.