Here's why ASEAN banks are still likely to outperform despite economic headwinds

Singapore, Indonesia to be stellar performers.

It has been noted that while most of the ASEAN region is seeing an economic slowdown, it is believed that some of the ASEAN banking sectors have the potential to outperform because of the change in the direction of interest rates.

According to a research note from Nomura, specifically, it believes Singapore and Indonesia banks will benefit from the interest rates changes.

For instance, Nomura believes that Singapore banks, which are trading close to their mean valuations, can rerate further, as increases in short-term interest rates become more pronounced.

They benefit from higher short-term interest rates as their assets get repriced faster and by a bigger magnitude compared to their liabilities.

Meanwhile, in Indonesia, Nomura believes the recent 25bp cut in interest rates will be followed by a further 50bp reduction in the coming months. While lower rates will squeeze the net interest margins (NIM) of BCA, Mandiri and BNI, Nomura believes this would be more than offset of by the higher loan growth and lower credit cost.

Here's more from Nomura:

In addition, we believe the banks will benefit from Indonesia’s ambitious infrastructure programme. We estimate close to 67% of the USD500bn projected spending will be outside of the budget and the banks are in a strong position to finance this spending.

We estimate this could add 7 percentage points (pp) to loan growth and 11% to earnings. Our top picks are BRI followed by Bank Mandiri and Danamon.

Malaysia banks, we believe, are facing cyclical headwinds in the form of slower economic growth and NIM pressure. The GDP growth is expected to fall to 4.7% in 2015 from 5.8% in 2014, because of lower commodity prices and fiscal consolidation.

Meanwhile we project loan growth to slow to 7-8% this year versus 9% in 2014 and expect NIMs to remain under pressure as banks chase retail deposits. Our top picks are Maybank and CIMB.

In Thailand we see no near-term catalysts. Headwinds in the form of political uncertainty, weak consumption due to high household debt and low public and private investment continues. We think investors need to be selective and our preferred picks are KTB and KBank.