Between the financial crash of 2008 and the Eurozone debt crisis, big Western banks have turned into pretty dodgy investments.
I'm talking about the banks that were "too big to fail."
These days the profits of these fine institutions are largely dependent on not writing off too many bad loans or incurring huge fines and lawsuits from various past misdeeds.
But that's not the only reason not to like them. Western economies are barely alive, making new lending a highly competitive and marginally profitable business, even before the loan write-offs arrive.
What's more, the investment banking businesses just adds risk from overpaid, over-testosteroned traders, making matters worse.
However, all is not lost. There is one region where the banks are actually safe to buy.
It's in Asia where economic growth remains robust, interest rates remain reasonable, and banking remains a business to invest in. Unfortunately, many U.S. investors are not aware of the opportunities Asian banks provide.
The Case for Asian Banks
Of course, it is important to note that not all Asian banks are equal. There are exceptions.
For instance, Chinese banks have been used to prop up failing state enterprises and dodgy real estate deals sponsored by Party bigwigs, so you just can't trust their balance sheets. At some point, there will have to be massive loan write-offs and probably a taxpayer bailout – and bank shareholders are unlikely to be well treated in that event.
That goes for Japan as well. Japanese banks look unattractive because of their excessive holdings of Japanese government bonds. Japan has a public debt of 230% of GDP and the new Shinzo Abe government is going to expand it further with a stimulus program of public works.
In the short run, this will make Japanese equities attractive. In the long run it will cause problems for Japanese banks, which should therefore be avoided.
Indian banks also have a year of turmoil to look forward to, with a losing economy, a vastly excessive budget deficit and elections due in May 2014. Those elections could produce a new and better government, but investors would be wise to wait for them to do so.
However, outside those countries, South Korea, Thailand, Malaysia, Taiwan and Singapore all have attractive growth prospects in 2013.
That's because all of them have interest rates that are at least close to the rate of inflation and banks that don't have huge legacy problems. As a result, all of them should participate in their country's growth.
As you know, interest rates well below inflation are a problem because they lead to rash speculative lending and eventually to systemic 2008-type problems.By and large, Asian banks have avoided this problem.
Four Banks to Buy Right Now
So which Asian banks should you buy?
Here are four banks to consider that are located in my favorite growth havens. Some of them are traded only OTC, but they are all widely held in their home countries, with multi-billion-dollar market capitalizations, so liquidity should not be a problem.
The list includes:
South Korea- KB Financial Group (NYSE:KB): The parent of Kookmin Bank, Korea's largest, KB is currently trading at less than 9 times trailing earnings, 6.5 times forward earnings and a 35% discount to net asset value.
It also has a 1.7% dividend yield. In the big picture, Korea is expected by the Economist magazine forecasters to grow at 3.4% in 2013; its short-term interest rate is just below 3%.
KB is a BUY
Malaysia – Malayan Banking Berhad (OTC: MLYBY): This bank trades at 13 times earnings, has a 2.3% yield and is 1.9 times book, with earnings expected to increase by 10% in 2013. Malaysia itself is expected to grow by 4.5% in 2013 and its short-term interest rates, at 3.1%, are above inflation of around 2%.
MLYBY is a BUY
Taiwan – Bank of China Limited (OTC:BACHY): This one trades at 6.1 times historic earnings and is 6% above book value, with a 5% yield. Earnings are expected to increase about 4% in 2013. Taiwan is, however, expected to have only 2.7% growth in 2013 and its short-term interest rate is below inflation at 1%.
Even still, BACHY is a BUY.
Singapore: DBS Group Holdings Limited (OTC:DBSDY) This is the largest bank in Singapore, with a concentration in wealth management, in which Singapore is a world leader. It trades at 10.6 times earnings and a 17% premium to book value, with a 1.8% yield. Earnings are expected to increase 1%-2% in 2013. Singapore itself is expected to grow at 2.9% in 2013, but its interest rates are close to zero.
DBSDY is a BUY.
Of course no bank is perfect, but a selection of these Asian banks is likely to do well for investors in 2013, and provide diversification from banking system problems at home.
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