9 | Daniel Tabbush, Banking in Asia

My guest today is Daniel Tabbush (@TabbushReport). Daniel is the founder of the Tabbush Report, a research publication analysing Asia-Pacific banks. Prior to launching the Tabbush Report, he was the Head of Asian Bank research at CLSA for most of his career, overseeing coverage of 80 banks and 10 analysts.

In this conversation, we dive deep into the Asian Financial Crisis, and the banking sector with ASEAN.
I hope you enjoy my conversation with Daniel Tabbush.

Show Notes:

[00:00:31] – [First question] – What was the Asian Financial Crisis like?
[00:03:42] – What really stood out during the AFC?
[00:05:49] – On how Malaysia handled the AFC
[00:07:31] – How did bank behaviour change after?
[00:09:57] – Could this all happen again?
[00:11:27] – Some potential problems of today’s banking behaviour
[00:13:32] – The current Macro environment
[00:16:20] – Negative interest rates and their long-term impact
[00:17:21] – Central bank policy
[00:19:15] – Currency debasement and the future value of fiat money
[00:20:52] – How does low credit and banking penetration in SEA affect valuing banking stocks
[00:22:51] – Analyzing ASEAN banks compared to developed nation banks
[00:25:33] – Do Neo banks and FinTech affect traditional banks in ASEAN going forward?
[00:26:48] – Risks and warnings when valuing banks
[00:30:02] – Preconditions for a multi bagger bank stock?
[00:31:26] – Any specific risks in regards to smaller banks?
[00:33:04] – Particular ASEAN banks that Daniel likes currently
[00:36:20] – Geopolitical risks in HK and China and the follow on effects
[00:38:49] – Making the jump into doing his own research and consultancy
[00:41:07] – Most undervalued life experience?
[00:44:34] – Plans for the future? Most curious about going forward?

Connect with Daniel:

Listen to this episode on Apple PodcastsSpotify, Stitcher, CastboxGoogle Podcasts, or on your favourite podcast platform.


Kalani Scarrott (00:31): My guest today is Daniel Tabbush. Daniel is the founder of the Tabbush Report, a research publication analyzing Asia Pacific banks. Prior to launching the Tabbush Report, he was the head of Asian bank research at CLSA for most of his career, overseeing coverage of 80 banks and 10 analysts. In this conversation, we go deep into the Asian financial crisis, and the banking sector within ASEAN. I hope you enjoy my conversation with Daniel Tabbush.

Daniel, thanks so much for being here today. But I think a place I’d love to start is maybe your personal experience with ASEAN banks during the Asian financial crisis, and maybe just explain what it was like for you during that time, I guess.

Daniel Tabbush (01:12): That was a very interesting time. Because previous to that, I was in Thailand, by the way, which really was the epicenter of it all. Previous to that, for several years, it was all very strong credit growth, very strong margins. There was zero analysis on non-performing loans or provision expenses. It was all very, very new to consider it.

What was possibly the most interesting thing, I would say, is analyzing small finance companies, or talking intimately with the property analyst, understanding all the unhedged dollar debt burden of those companies, and then linking that to some of the smaller and medium sized banks. The point being, you didn’t actually get a good view for what was about to happen by looking at the biggest three or four banks, it was all at the fringes.

At a certain stage, it was clear what was going to happen, to a degree. I don’t think anybody knew the actual magnitude. We started estimating losses, and negative growth numbers, and it was considered wild, it was considered outlandish at the time. But of course, everything came in much worse than that in the first year.

I would say that is definitely one of the other lessons besides looking at fringe financial institutions or even corporates to get an idea of what’s happening. You can actually have losses. You can have things, which banks are definitely not telling you is going to happen because they don’t know, banks did not know what was going to happen.

I’m probably now on the fourth thing, you do not want to rely on IR teams of banks. It doesn’t mean they’re not helpful and giving you information that they know, but they weren’t clear what was going to happen. But those are some of the first things that come to mind with what we learned with the financial crisis. It really changed everything, because then everybody’s looking at the NPL, the bad loan cycle, everybody’s looking at provisions, and that becomes much more important to analyzing banks.

Kalani Scarrott (03:42): That’s great. I encourage the rambling. Were there any crazy or most notable things that you remember seeing during the Asian financial crisis? What really stood out, do you think?

Daniel Tabbush (03:50): Yes, so many things. Probably the most important is capital. Banks had to raise capital, and oftentimes, banks would say it’s for business expansion. It was almost like a boilerplate reasoning. But we knew it wasn’t for that, it was to fill a hole in the balance sheet, which was not yet visible to the analyst community. What became very, very clear, and I would think most institutional fund managers, most analysts from that time they know, you don’t buy into the first capital raising of a bank, maybe the second maybe the third, but there’s generally a series of these that come through, depending on the magnitude of the hole in the balance sheet, depending on the magnitude of the NPL cycle.

You could have banks raising capital one day, and then a week later, or a month later, suddenly revealing huge amounts of NPLS which weren’t disclosed during the capital raising. We have direct experience with that. The other thing to understand is clearing. Crystallization of losses and clearing of assets. Everybody had their asset management company. Their IBRA, their Danaharta, whatever you want to call it, those bad loans were not transferred or sold at the actual value, they were sold at inflated values, because the banks could not afford it otherwise, they would have to crystallize the difference in the value.

Maybe that’s not a problem, maybe that’s okay. A lot of these countries were and are emerging markets. You can stagger in, phase in, those required provisions. Thailand did that over some years. But we have to understand that these things are not completely binary. It could take time, it could be done in a way that allows the crisis to be digestible.

Kalani Scarrott (05:49): You mentioned Danaharta, and to focus and get pretty specific on Malaysia, I’d love to hear your thoughts maybe on how the Malaysian government handled it. Obviously, through Danaharta and shifting bad loans off the balance sheet and the capital controls. What are your thoughts on how Malaysia handled the Asian financial crisis?

Daniel Tabbush (06:05): Well, there’s probably two camps to that. Even if a country could help mitigate the severity of the banking crisis, and or the economic crisis, once you institute capital controls, it’s there. Everybody will remember. Portfolio managers will remember, FDI flows will remember. You could just look at the FX reserves growth from then until now across Asia. The lowest growth is in Malaysia.

I think when you do that, you’re giving something away from perpetuity for the moment, to help the current moment. Maybe it felt good, and maybe it looked good. I know the stated NPL ratios didn’t get so high over there compared to say, Thailand. But a puritanical Austrian economist might say, Thailand cleared a lot better, it was not perfect. Or maybe Korea cleared a lot better.

But I think capital controls, instituting capital controls can have a generational negative impact on the macro economy, in terms of investment, in terms of perception, in terms of risk.

Kalani Scarrott (07:31): After the fallout of the Asian financial crisis, did Asian banks behavior change, do you think going forward? If so, maybe how?

Daniel Tabbush (07:39): Oh, yeah, hugely. So conservative, don’t want to lend, want to build reserves, even though they don’t have a lot of NPLS. I don’t mean the day after, but in general. Very worried, overly worried, overly conservative. Want to have very low loan to value ratios. Very difficult to get a good deposit rate, even before the current crisis.

Yes, and this was part of the research analysis for some analysts, how they overdid it, how they became so… Bangkok Bank is a great example, so overly conservative that you’re wondering, does it even make sense at a certain stage 10 years afterwards? Maybe by dumb luck, it does, because of the 2008 crisis. Then you start one, an analysts will start to think, okay, I don’t want those banks that have such a clear memory of the crisis, I would rather have a bank which has less of an institutional memory, or didn’t have so many problems, because they’re going to be able to take advantage of inflation, of reflation, of an upturn.

I think you’ll see that probably maybe best with Bangkok Bank, maybe versus some of the smaller banks. A lot of smaller banks in Thailand used to be finance companies, but they survived. Yes, that’s definitely the case, and I would say, maybe in lending practices, in terms of corporates versus consumer, it becomes much more clear that there’s very chunky risk in one or two large company names. But when you have pooled retail lending, it’s the law of large numbers. It’s not that risky on an individual name basis.

It’s always been that way in OECD countries and developed market making that you gradually move toward consumer banking, and the bond market takes care of the corporate banking. But I think that, that speeded it up for a lot of banks in ASEAN, get away from large corporates, especially these guys borrowing unhedged US dollar, right as we go into a floating exchange rate regime.

Kalani Scarrott (09:57): I know history doesn’t repeat itself, but it often does rhyme. Could the Asian financial crisis happen again, and what do you think would be the signs to look out for?

Daniel Tabbush (10:07): Yes, it can. But we’re talking about an incredibly well capitalized banking system now. You’ve got some banks in Indonesia with off the charts, absurd capital ratios. Maybe it’s tier one ratios you want to look at, or over 20%, or total capital ratios, over 25. These are risk weighted. Even if you look at unrisk weighted, just equity to asset ratio is very, very high, two or three times what they were pre ’97.

The other component of that crisis was really the unhedged dollar borrowing for local currency lending. These two things make it a little bit difficult. But let’s take Household International, let’s take Countrywide, let’s take IndyMac, this was a subprime loan crisis in the US, it wasn’t what we’re talking about now. That was just rampant growth, to low quality borrowers with two years of teaser rates, and then boom, you jack up two, three, four times to much higher rates in a worsening economy.

That’s another way that you can see some problems. It’s really all about unrestrained growth and going down the risk ladder in terms of corporate or clients.

Kalani Scarrott (11:27): You’ve mentioned some of the risks going forward, and I know it’s obviously hard to predict a crisis, but what do you think are some of the potential problems that come out of these risks long term? How could this play out, do you think?

Daniel Tabbush (11:37): Well, I think it is playing out. I think it is playing out now. The banks are building too much capital. The Basel Accord, the latest version, all these global systemically important banks, Tisco, BNI, AMMB, these are not important banks in the scheme of things in the world. Yet, I don’t want to say they’re totally acting like it, but their capital levels suggest they feel that they are. Or maybe it’s just that they just don’t see any risks that they’re comfortable with.

But that goes to the same point, they’re still too conservative. One point that we haven’t talked about, which is all related here is, and this is a good long term, positive potential impact, risk-based pricing. And that’s what they have to do more of, they have to say, okay, I’m going to go down the credit quality spectrum for corporate and consumer clients, and I’m going to charge another 50 bits, another 50 or another 100.

If you could do that, fine, you’re being paid for it. No problem with that. This could force it. We were actually hoping that the latest iteration of Basel III would have forced that upon banks. It doesn’t seem to have done so. But loan to deposit ratios are very low because of where we are in the world. Capital levels are very high, they still have institutional memory of ’97 and 2008. It’s not easy to see how they’re going to get around that, unless you get very, very strong demand. You get strongly reflationary environment, which we could be, actually at the very beginning of.

Kalani Scarrott (13:32): As it probably relates to ASEAN banks, how do you feel about the current macro environment? Maybe perhaps more specifically concerning the subjects of central bank policy, interest rates, the pandemic, obviously, and obviously, there’s increasingly intertwined relationships between central banks and government. But how do you feel about this whole situation, going forward?

Daniel Tabbush (13:51): Well, I think banks are the ultimate leverage to where we are now, to economies, to reflation. We’ve got incredibly low rates, so there’s a push and a pull on credit. There’s pent up demand for investment, there’s pent up consumer demand for certain kinds of consumer loans. Imagine all the spending that hasn’t occurred on travel that people still want to have come through.

Like I said before, all of this has driven loan to deposit ratios down, capital ratios way too high. We know that there was restrictions on dividends in pretty much every country, let’s just say, that’s just been lifted by the MAS and has with other countries. You have that coming through, which will help. But it’s an incredible environment, positive environment for banks.

If we had to guess, I would say the Fed, the BOJ, ECB, everybody would rather err on the side of inflation. Because people will remember Japan at that period. I remember, just about 20 years ago when they raised rates too quickly, and it didn’t work out. This is all very different, because this was a man-made crisis, shutting everything down, we decided shut everything down.

I think that, that is the risk, it’s a very positive risk for banks. Of course, what we didn’t talk about just now is credit costs, very low reversals for many, and they could be very low for a long, long time. It doesn’t just have to be Q1 of this year, or Q2, it could be all year. It can be first half of next year, because there’s just so much liquidity. Interest costs are so low for corporates. It’s very positive for banks.

What has happened for two years for most banks, is there’s been a lot of pressure on asset yield, let’s just call it loan yields. But what if that finishes now? The repricing of all those loans is already done at low rates, and then you start to get a turn with volume, with benign credit costs, and maybe a little bit of better risk-based pricing, because they learn, that’s very, very positive for banks.

Kalani Scarrott (16:20): More broadly, you mentioned Japan, and maybe around interest rates, what are your thoughts on negative interest rates and maybe their long-term impact on banks, globally?

Daniel Tabbush (16:29): I think it’s a problem, and I don’t think interest rates should remain negative long term, globally or anywhere. Japan is a structurally unusual market, where nominal rates have been, and of course, they remain low, but they have been so low for so long, you create huge opportunity for malinvestment. Companies, sectors, industries, which just shouldn’t be there, they’re allowed to be there because of policy. You just make it so cheap, that it doesn’t matter.

No, I think you create a lot of distortions within systems by allowing money to be free, too much money to be too free for too long, and negative is just to the nth degree.

Kalani Scarrott (17:21): I’d love to hear just maybe your take on central bank policies of USA, China or Japan, considering their high systemic indebtedness currently. Maybe just take this wherever you want it, and I’d love to hear your thoughts.

Daniel Tabbush (17:33): Well, I think that they will keep rates very low for as long as politically possible. I think that’s the extent of it. Some of these things will have a lag because of employment, because of spending. But we could have some very, very strong numbers. But let’s forget about later this year, we don’t want to argue. Early next year, very strong numbers.

What’s that mean? Are they going to all of a sudden raise rates by 50 basis points? I’d be very surprised. It’s possible. They might say, oh, it’s the end of tapering, instead of raising rates, or the purchases go down. Whatever they do to affect the supply of free money. They will do it, eventually. I don’t think they will be quick to do it, and I think we will be in a period which let’s say is starting now or starting three to six months ago, where you have everything working in favor of the banks.

Besides, let’s take it to the end of next year. So what if rates go up a bit? Okay, stock markets may not react very positively, but we’re talking about corporate indebtedness, after three years, let’s say of free money, and all of that building momentum in a lot of economies, I don’t think that nominal 50 basis point rise is that big of a deal. We didn’t even talk about the real rates, but we’re still probably talking about a negative real rate environment.

Kalani Scarrott (19:15): Maybe similarly related, but you’ve mentioned previously that you are a little bit concerned about currency debasement and the future value of fiat money. Could you just maybe elaborate on that, maybe why you’re concerned and even, can you hedge that fear, or how do you act on it?

Daniel Tabbush (19:29): Well, the concern is that, in the old days, money’s backed by gold, and then it’s not and this whole idea of fiat money having no real backing is a concern as a father, and it’s a generational concern for kids and grandkids. If we look at the value, how much it costs to buy any staple product 100 years ago versus now, in a world where central banks don’t care, they don’t care about increasing the supply of money. They would rather deal with those concerns in the future than have some unpleasant pain today.

I think probably the only way to hedge that is with real assets. Property. With something that’s substantial. I don’t understand gold. I don’t know why it’s so valuable. No idea. But property seems to be something where there’s a real rent, a real economic rent, a real value, a true and physical scarcity, and it is what it is. That seems, to me, the only real hedge that someone can have, and not really worrying, and have a way to understand it.

Kalani Scarrott (20:52): No, I love that. And yeah, super interesting. To move on to maybe banking metrics and ASEAN banks, to focus on ASEAN banks, specifically, how does the low credit and banking penetration in some Southeast Asian countries, how does that affect when you value banking stocks there?

Daniel Tabbush (21:08): In theory, it should have an important impact because it means growth prospects are much higher in say, Philippines because credit penetration is much lower than in Singapore. That has implications for pricing power. Vietnam, very, very high margins and rising margins, by the way. Whereas in Japan, it’s completely the opposite. In Singapore and Hong Kong, it’s very different.

That will then go to margins and profitability. Now, one thing that we looked at extensively in the past, and I have to admit, I have not done it recently, is total market capitalization to assets has a fairly good correlation with ROA across countries. Not necessarily across all of Asia, but there’s still an okay fit across all of Asia.

I know everybody loves to look at ROE and price to book, okay, you can adjust for your cost of capital, and that’s fine. But this seems to be better, and I always think it feels better, because the leverage is not involved in the equation whatsoever. Underleveraged, overleveraged bank that affects ROE. ROA that’s just how much you make against your assets. All banking is, is making a return on your assets, which includes credit costs.

I would say, as those banks, I’m bringing it back to your question, as those banks operate in a less penetrated market, you can charge more, you can grow more. In theory, that has a better impact on ROA. In theory, that can help total market capitalization.

Kalani Scarrott (22:51): You touched on ROA there. Is there any other particular financial metrics that stand out to you when analyzing ASEAN banks, maybe how you assess them differently maybe compared to developed nations?

Daniel Tabbush (23:02): Oh, yeah, so many. I think one of the best ones now is probably what very few people are looking at, which is term deposits as a percentage of total. We always focus on the other point, the cost of deposits to total. VCA is so great in the world, right? But if there are banks with loads of term deposits right now, think about what it means. You’ve got rates have gone to zero. But a lot of those term deposits might be three, six or 12 months. There’s going to be a big step down in funding costs for a lot of these banks. Whereas all their loans are variable rate anyway, no real change.

You’re seeing AMMB is one, Tisco is another, a security bank in the Philippines is another, where you could see… And margins are improving, which is unusual in a global context, the funding costs delta could be a big surprise to people. Because there are still a lot of banks in Asia, where term deposits are very, very high as a percentage of total. Their delta could be actually much better than a bank, which has done so well in current and savings accounts for so long, like VCA, or even HSBC for that matter.

There’s a lot of interplay here with things, because loan to deposit ratios, if you’ve got a high LDR, that means you’re leveraging your deposit base, and in theory, you’re having a better margin and a better ROA. But to us, what is sometimes more interesting is the delta. If your LVR is 60%, but it’s going to 70%, you might have a really good profit profile over the next one or two years compared to a bank, which is consistently at 90% LVR. There’s no delta.

Where you’re getting loan volume, that can help, assuming it’s offsetting deposit volume. Some of the banks in Vietnam come to mind, because there are almost no banks anywhere where you’ll see 30%, 40% or 50% increase in loans over the past two years, except in Vietnam. All of a sudden, you’ve got a banking system, not overly penetrated, not hugely under penetrated, but it’s okay, still, still young, they’re starting this today, with a lot more loans than they had two years ago. Relative to Singapore banks, Hong Kong banks and other banks, a lot more loans, compared to those banks over that two year period. They’ve got a lot more to earn against.

Kalani Scarrott (25:33): We’ve touched on the low credit and banking penetration in Southeast Asia. How do you see maybe Neo banks and FinTech affecting traditional banks within the ASEAN region, going forward? Are Neo banks and FinTech better positioned to take advantage of unbanked population, or how do you see it playing out, maybe?

Daniel Tabbush (25:51): I don’t think it’s an issue. I think it’s like Y2K, I don’t think it’s an issue. Banks will buy them, that’s it, they’ll buy them. Whatever happens, it’ll go into the bank. It might mean lower delivery costs, it might mean better fee income, it might mean all these banks are just taking out all these FinTechs, all these virtual banks or whatever you want to call them.

Now, I’m talking about the next several years, I’m talking about the next 100 years. I think banking is a business that’s been very well established for many, many, many years. I don’t think it goes away because of these startup companies. Rather, all the major banks and even probably the minor banks, they all get some venture capital, or they buy into this or they try to do it themselves, they do it together with someone. I think that’s how it’ll work.

Kalani Scarrott (26:48): Yeah. That’s super interesting. To move on to maybe risks of valuing banks. Now, ignoring NPLs and bad loan provisions, are there any other warnings that you look out for? Anything, maybe off the balance sheet that concerns you when analyzing and valuing a bank?

Daniel Tabbush (27:02): Yeah, definitely. Specifically, like you just said, off balance sheet growth, off balance sheet impairments, total off balance sheet commitments, compared to your equity base compared to your loan base. HSBC, for instance, very, very high. A lot of banks which could be comparable to that bank in the region, much, much lower in Singapore and Hong Kong.

Okay, the other one’s a little more esoteric, and you might not even have this data for every bank. But what I would do, and what we’ve done in the past is you look at the interest income on loans, divided by loans, and you get average, and you get the actual loan yield. Compare that to the stated loan rate, there’s a difference here. Stated loan rate might be 12%, your actual loan yield might be 10. I’m obviously living in the past.

That’s a positive gap, 200 basis points. Now, what if my next quarterly financial statements show that the actual loan yield is only nine, and then it goes to eight, and then it goes to seven? My stated loan rate isn’t changing, the yield gap is rising. That’s a worry. This was probably the single best indicator for us on the risks facing Thai banks. It was a sharply higher yield gap, and we weren’t seeing the numbers.

I think we all know that disclosure of NPLS in ’95. ’96, ’97 wasn’t wonderful, or quick. It’s probably gotten better. But even now, with all the forbearance, we don’t even know what the true numbers are. But that is a very, very good way of understanding potential risks. It’s not at all easy to get the data. Then going to the off-balance sheet, a lot of notes to financial statements, you might have memo data on ECL, that’s the new term for provision expenses, expected credit losses.

Australian banks have great data on probability of default, loss given default, all through the different loan books. But it’s a lot of work to go through and to see, oh, are PDs rising, are LGDs rising? It might not yet be showing up, but then you have a lead indicator of worsening risk. SMP has a division of research called credit analytics, where they actually track PDs and LGDs. Then any bank analysts would love to get their hands on that data to then estimate out expected credit losses.

But in the memo of some financial statements, China Merchants Bank comes to mind, huge impairments for the off-balance sheet, like seven times increase in the past year. You know something’s wrong. It just so happens that their total ECL didn’t really rise much, but the off-balance sheet looks like a real, real problem.

Kalani Scarrott (30:02): Maybe to move on to something a bit more positive. But what do you think are the preconditions for a multi-bagger bank stock? Is there a common theme, do you think?

Daniel Tabbush (30:12): I don’t think there is a common theme. Size, let’s say something small, something that big brokers don’t look at, they’re going to miss it. If you’re small, you can grow very fast. You were talking about FinTech, AfterPay Touch. that comes to mind in Australia. But anything really, really small, you already have a base effect positive against DBS, or whatever it is, Bangkok Bank or BCA. You can grow more quickly.

The funny thing is, I don’t think a very low valuation, traditional or non-traditional is a criteria. I’m not a real fan of HDFC Bank, I am a real fan of BCA. Neither have been cheap, as long as anybody can remember. But I don’t think they’ve been bad bank stocks for people. They’re big, but I think smaller ones, you also have, besides the base effect from growth that bigger banks don’t have, you have takeover possibilities, you have consolidation possibilities.

Kalani Scarrott (31:26): That’s super interesting, though. But you mentioned small banks, are there any specific risks that you run into when analyzing smaller banks? I guess whether it’s, I don’t know, maybe not as regimented compliance, or just maybe the access to the market? What do you think are some specific risks of smaller banks that don’t ever get ahead of themselves?

Daniel Tabbush (31:43): I actually don’t think there’s an inherently greater risk, holding all else equal. I do think that the analysis is easier. They’re usually more forthcoming in how they discuss matters with you. I think, by definition, there’s less people looking at them, so there’s more potential surprises there than for HSBC and Standard Chartered.

But the last thing that you said Kalani is getting ahead of themselves. I don’t think that’s unique to them. But like you’re suggesting, because they’re small, they might just grow too fast, because they’re small, for too long. If they’re doing that at the wrong time in the cycle, that may not be good, or if they’re not properly assessing the risks, that may not be good. But why shouldn’t a tiny bank with a million dollars of loans be able to grow 20% a year without any problem? Maybe it can, and then should in theory, most typical analysis might look at PD and growth or whatever, that could be pretty expensive over five years of discounting earnings, compared to someone growing at 10% a year or, in these days, 5% a year in terms of credit.

Kalani Scarrott (33:04): With reference to some of the metrics we’ve mentioned, are there any particular ASEAN stocks you like at the moment? What do you like the most now, and maybe why?

Daniel Tabbush (33:12): Well, there’s a lot, I would say that we like thematically because of the leverage, because of the story that we’re talking about. One thing that we didn’t touch upon, but it’s obvious is dividend yields, low interest rates. It makes a lot of these banks with a good dividend yield that much more interesting. But remember, these are banks. So, they’re already benefiting from all those things that we mentioned in theory over the next one or two years. Plus, you’ve got maybe a 5%, 6%, 7% dividend yield.

I know this call is not focused on Australia, but a lot of those banks come to mind initially as they always have, but in a zero-rate world, more so, when they’re reinstating dividends, more so. When credit costs are going to zero, even more. In ASEAN, specific Tisco and TCAP, these are two banks or banking groups in Thailand at about, I guess, 7% or 8% dividend yields. That’s unbelievable.

That is one thing that comes to mind. There are other names that come to mind in ASEAN, for other reasons that we talked about. I think I mentioned some of the names already. Security Bank is one where fixed deposits are going down, margins should improve. The loan book is changing for the positive. It’s actually probably under analyzed, market capitalization much, much lower than the big two banks.

Vietnam there’s Maritime, Vietnam Commercial, there’s a couple of other interesting ones, but that one, just off the charts, fabulous growth in every respect, and it doesn’t look as though there has to be any crisis in particular for this bank. It’s small, it’s leveraging itself, it’s charging a lot more, it’s getting better and better margins. Internally generated capital is improving strongly.

Bank Negara Indonesia is another interesting one, which, for some of the similar points that we’re talking about. AMMB, to a degree as well. I guess I should mention that, within ASEAN, all the Singapore banks have exposure to China and Hong Kong, where there’s a lot more credit risk today than there was two months ago. Remember, we had all the protests in ’19. We forgot about that, maybe. But with what we’ve seen with Bank of East Asia, what we’ve seen with China Merchants, it’s very clear, and a lot of it hasn’t even come through in first half numbers yet.

But Singapore’s banks, of course, they’re at the heart of ASEAN, but UOB is far less exposed, in terms of growth rate into greater China, and total loans as a percentage of loans into greater China. There’s a nice way to differentiate between that and the other two.

Kalani Scarrott (36:20): I love that you brought up Hong Kong and China. With the geopolitical risk, do you think there’s going to be some follow-on effects, maybe with the capital flight out of Hong Kong and the property prices, maybe affecting banks? But how do you see maybe some of the follow-on effects from those sorts of risks and how banks have different exposures to that?

Daniel Tabbush (36:36): Well, it’s such a good story for Singapore, because it’s the ultimate repository, I guess, for capital flight, for people leaving, for businesses that may want to leave, for whatever reason. We know the population growth is sharply negative for the past two data points in Hong Kong. It’s nominally negative. In Singapore, it’s a whole different story. But it’s a tiny place, Singapore. You don’t have to have much to go there to increase collateral values. We’re talking about collateral. Collateral for bank loans, we’re talking about asset reflation, we’re talking about the ability to lend because there’s more collateral.

In theory, there’s more business, there’s more demand. I would say, all of this is… Well, it’s negative at the margin for Hong Kong, it’s positive at the margin and hugely so for Singapore property, for Singapore reflation. You can even say for Singapore banks.

Going back to what I just mentioned, for UOB, it is by far the most exposed to Singapore. By definition, it’s the least exposed to Greater China. Again, it’s like a double way of leveraging that positive outlook. I’m not sure how negatively DBS and OCBC will or could get impacted from risk metrics worsening in China and Hong Kong. Maybe the improvements in Singapore can help to offset that to a degree. But there is a very big difference between these three banks, which is unusual. No one ever thinks there’s a difference between these three banks, and OCBC has done a huge amount of new credit to greater China over the past two years. More than half of its loan book increase, more than half of the increase in its loan book over two years, is what bankers would call unseasoned, it’s new. Whereas for UOB, maybe 20%.

You could add to that one more bank, HSBC, pretty much all of its growth is China and Hong Kong, especially if you take the wholesale loan book into account. Probably not the best timing.

Kalani Scarrott (38:49): Maybe to make the jump to more personal, and my closing round of questions, but why did you make the jump from the stock broking industry and covering banks to now doing the Tabbush Report, research and consultancy? Could you walk me through that process and what your thoughts were?

Daniel Tabbush (39:03): Very easy, it’s about health, it’s about the work-life balance. It’s not easy to stay in the stock broking world for many, many, many years. I feel, at least in how it has been, I don’t know maybe it’s much easier now, and maintain a good quality of health. At the same time, if one has a family, you might want to have more time with your family but you don’t. I don’t know, I did want to with young kids.

That was very, very easy for me to consider. I also appreciate and value the ability to write what I want, when I want, how I want. It’s not that easy to do all the time. But once you’re independent, I could focus on BTPS, I could focus on a sharia small consumer lender only to women in Indonesia. No way can you do that as a big broker, but that’s a very interesting story, or BTPN, any of these small ones.

That’s really the reason to do that. I wrote a lot about this in the book that I wrote after leaving the industry. It’s a book called Quit and Run. But I did write a lot about it, and that felt good. It was cathartic. It was a good feeling.

When one is doing what they are happy to do on their own, without all of this, it’s a lot nicer, I have to say. For many, many years, I was running the Asian Bank research team, across all of Asia. It’s exciting to do, it’s very interesting, you learn a lot. But you can’t always get to what you want to do so easily.

Kalani Scarrott (41:07): Great answer. I love it. To my closing round of questions, what’s been your most undervalued life experience, do you think, or what’s an undervalued life experience that university age students don’t give way to?

Daniel Tabbush (41:18): Undervalued life experience. Well, I think these kids really need to value their time while being young. Whether it’s traveling or doing what they’re doing. Maybe it’s playing sports, maybe it’s being in drama, or whatever it is. Because working world life is very, very different than university life. Maybe some of us thought it was hard and difficult in studying or doing exams, but working life, when we have these regional conference calls at 530, I had to do Japan at 530 in the morning. You got two or three, you’ve got Hong Kong, you’ve got Singapore, and then of course, you got London, then you’ve got New York. Of course, it’s not easy to keep your train of thought for research when you’re doing all these calls.

It’s a very different world. University life will become more and more golden all the time, in hindsight. But I would say also, I think it’s only partly related to what you’re talking about is the ability to communicate. I never really understood when employers ask that or say that, or people talk about that. Adults used to talk about that, but you could see it now.

The ability to communicate is hugely valuable, to say something clearly, and concisely. I think students really need to practice that, appreciate that, learn how to communicate. I know you want me to ramble, Kalani, but I often don’t, and I’ve been told that my interviews are always too short. On CNBC, or Bloomberg or wherever I am, my wife always said, “You got to talk longer. They want to hear more words.” I said, “I’ve already answered the question. That’s it.”

In stock broking, the three words that you never hear; I don’t know. Why? Why can you not know? I don’t even understand how you cannot even know something. The converse is impossible to comprehend. Kids shouldn’t think that’s so bad to be able to say, I don’t know. You don’t know, you don’t know.

Kalani Scarrott (43:43): I love that answer. Is there any way that you improve the communication specifically? Is it just putting reps in, do you think or is making a conscious effort every time you do communicate?

Daniel Tabbush (43:51): I don’t know. I don’t know if it’s my character. But seeing how questions are answered in the industry drove me crazy, and I felt that it didn’t make any sense. A client wants to know this number, you tell him that number. A client wants to know why this bank did that. You just tell them why. No need for seven rivers. No need for a long story. No need for a waffle factory. I feel that clients who I engage with year after year after year, I think they appreciated that. I don’t think all the interviewers appreciate it.

Kalani Scarrott (44:34): That’s great, because yeah, it just gets to the point. You may as well… Lastly, probably what plans or vision do you have for the next five, 10 years? What are you most curious about going forward or what’s the go?

Daniel Tabbush (44:45): Well, I suppose it’s really all about this reflationary environment. I guess we all want to know, we all want to see how things play out in China and in Hong Kong with what’s happening now. But I think it’s really all about the first bit of your timeframe that you just mentioned is reflation. Getting back on with life as normal, banks lending, going back to how we know everything to be quite normal. I think that’s a simplistic way, maybe of looking at things.

Kalani Scarrott (45:24): I love that answer, and a great way to wrap up. Where would you want listeners to find you? Obviously, we’ll have links all in the description, but anything else you want to plug?

Daniel Tabbush (45:33): Well, no, I’ve got the Twitter account, @TabbushReport, and now I have a new Substack, Tabbush Report, and my website, in case anybody wants to contact regarding subscription, consultancy or bespoke research, it’s all there.

Kalani Scarrott (45:52): Perfect. Thank you so much, Daniel, this has been an absolute pleasure today.

Daniel Tabbush (45:56): Okay, thank you Kalani. Talk soon.

Kalani Scarrott (46:00): If you enjoyed this podcast episode, be sure to check out the website, compounding podcast.com. On the website, you’ll find every episode complete with transcripts, show notes and other related resources. Either way, links to all content mentioned will be in the description below. Also, be sure to sign up for my weekly newsletter Curated By Kalani, where I share what I’ve been reading, learning and watching for that week. Same as the podcast, it’s compressed to impress, and I aim for maximum return on the time invested. Sign up at kalanis.substack.com. That’s K-A-L-A-N-I-S.substack.com. You can also connect with me on twitter @ScarrottKalani. But until next time, have a good one.