Domestic demand, instead of exports, will drive economic growth in the second half of 2017 — a shift that bodes well for Southeast Asian countries, Credit Suisse said as it turned more optimistic on the region's banking sector.
The bank said in a report this week that the export boost from China has peaked and demand from other major economies is unlikely to fill that gap. In addition, several indicators such as the CRB metal price index and industrial production also point to a slowdown, according to Credit Suisse.
"Our economists believe that the tailwinds to exports are fading, which will result in export growth moderating from mid-teens rate to mid-single digit for the rest of the year," it said.
"Moderation in export growth from 'great' to 'good' could result in greater differentiation in the growth outlook across economies. Our economists expect domestic demand growth to improve, partly offsetting weaker exports, at least in ASEAN (Association of Southeast Asian Nations)."
Such a macro backdrop has led to Credit Suisse preferring Southeast Asian banks in the second half of 2017, deviating from its stance of favoring North Asian banks earlier in the year.
The bank, which already liked Singapore and Indonesia, also added Malaysia to its list. Malaysia's economy, it said, will benefit from government spending ahead of a general election and the laggard impact of commodity price increases.
Malaysian banks, which have delivered negative earnings growth for four straight years, are expected to finally turn the corner this year, the report pointed out.
"The banks' earnings in the remaining part of 2017 could be boosted by potential pick-up in non-interest income as capital market activity picks-up, loan growth acceleration, and further asset quality relief that could translate to lower credit costs," said Credit Suisse, picking CIMB as its top choice.
Credit Suisse also pointed to trading opportunities in Thailand later this year, especially if the country's banks could confirm that formation of bad loans have peaked in their 2018 guidance due in November. That, along with declining credit costs, may get markets excited.
China banks losing steam
Credit Suisse, which favored North Asian financials in the first half of this year, dropped its "tactical positive call" on China banks after tightened regulations broke the rally in bank stocks.
And there are no clear signs that the Chinese government will relax any of the regulations, the bank said. At the same time, the world's second-largest economy is also facing a "mild deceleration," it added.
"The positive case for banks rests on an easing cycle, especially in regulatory activism. Although it may have peaked, there is no clarity about a relaxation. We also don't have any visibility on government behavior post-19th Party Congress," it said.