India, Indonesia can save you from US ills

MUMBAI: India and Indonesia are the two best places to hide from America’s slowdown, considering the robust domestic demand in these two countries. This was indicated in Citi’s research report on Asia-Pacific Banks 2008 Outlook.

The report said between the two markets, there are more risks to Indonesia’s growth story than to India’s. Their loan growth and investment trends look strong as well as sustainable.

This view has clearly become an investor consensus over the past year, taking the valuation of the banking sector in both counties to fairly rich levels. Between the two markets, Citi is of the view that there are more risks to Indonesia’s growth story than to India’s in the near term.

Explaining its rationale, Citi said Indonesia’s banking regulator Bank Indonesia has conducted a series of rate cuts over the past 12 months (to 8.25%), but even as Citi’s economists are expecting another 25 basis points easing to 8% in 2008, there are already suggestions that Bank Indonesia will defer this on concerns of rising oil and food prices.

In India, the Reserve Bank of India (RBI) is likely come to the end of its rate tightening cycle, and now there is a room to cut key policy rates (7.75%) since inflation stays remarkably benign. Banks may see some easing of margin pressures endured in the past year.

The report pointed out India, Singapore and Hong Kong would benefit from robust loan growth plus stable or lower rates supporting margins.

Oil and inflation concerns may temper growth in Indonesia, while Malaysia’s growth may hinge on government’s investment spend. On Thailand, Citi does not expect the banking regulator to soften rates further, while Taiwan seems to be tightening its rates on inflation worries and the Chinese regulator is looking at capping near-term loan growth.

On China, Citi said its banking regulator had hiked its reserve requirements 13 times in 2007, and it stands ready to tighten further since many Chinese banks have reached the loan to deposit ratio cap of 75%.

Citi expects banks’ overall loan growth to slow significantly in the first half of 2008. However, the bank said it would prefer large banks with strong deposit franchises. For Hong Kong, Citi expects the overall margins to improve faster for larger banks with good deposit bases.