Non-U.S. Banks Stock Update - Mar. 2010 - Industry Outlook

Starting as a credit issue in the subprime segment of the U.S. mortgage market, the worst financial crisis since the Great Depression has now spread to almost the entire global financial services industry. However, we believe that the worst of the global financial crisis is behind us.

Although non-U.S. banks are still dealing with liquidity and confidence challenges, governments have taken several steps to alleviate the sector, as banks are the lifeblood of the economy.

Though the industry is in the process of adopting tougher measures to help prevent a recurrence of the global financial crisis and restore public confidence, there remain lingering concerns. However, we believe it would be a perfect time to get involved with non-U.S. bank stocks for long-term investments, as valuations are now comparatively cheaper.

Investors with short-term targets should not go for non-U.S. stocks at this point as the near-term fundamental outlook remains weak -- asset quality is expected to continue to deteriorate as individuals and companies default on loans, and revenue growth should remain stretched as loan growth falters and investment banking faces a dearth of new business despite the economic recovery.

Increasing unemployment and sluggish business conditions worldwide are expected to dampen demand for credit, though banks are now capable of lending more. Moreover, these factors will also hurt asset quality and increase losses on the existing "good" loan portfolios. Combined with top-line pressure due to a sluggish economic recovery, non-U.S. banks face a discouraging outlook in the near- to mid-term.

Although the upturn in the banking sector through the remainder of 2010 will vary from country to country, depending on industry circumstances, we believe that banks in stable emerging economies, such as Chile, Brazil or India, may be more attractive investments -- similar to what we expect for certain regional banks in the U.S.

However, the recent debt crisis has threatened the Greek economy and the stability of the European Union's monetary policies. This could again create a new global financial crisis, challenging the world banking system. Though the European Union is bailing out the country in some way to assure creditors that it will not default on its debt, there is no guarantee that the country will be safe as affluent domestic and foreign investors will not stop withdrawing their money from Greek banks, from which they have already pulled out billions.

To be sure, banks in emerging economies will face asset quality issues. However, they are not confronted with other significant problems that many of the larger banks face in continental Europe and the United Kingdom, such as toxic securities, dilution from capital raising and dividend cuts/omissions.