Banking Monthly Review : November 2008

December 2, 2008 at 4:09 am Leave a comment

• No immediate signs of weakness in October banking numbers
Despite weaker economic conditions, mirrored by the country’s 3Q08 GDP growth of 4.7%, the key lending indicators continue to show no signs of weakening. While loans approved have dropped marginally on a y-o-y basis, what is more telling is the level of loans repaid to the banking which shows no signs of weakening and thereby signalling the continued financial health of borrowers amid the difficult conditions. This will keep potential NPL rises in check, in some way. Financial institutions with a larger portion of their loan books extended to individuals will get another level of “security” for the coming two years as employee EPF contributions are “released” come January 1 next year, and will provide another avenue for borrowers to dip
into temporarily should economic conditions take a stark turn for the worse. 

• Bank Negara reduces OPR by 25bps during the month
As we had expected, Bank Negara Malaysia reduced the OPR by 25bps to 3.25%, with another move to reduce a further 25bps in its next policy meeting in January 2009 anticipated. Along with this, it also reduced the
SRR requirements from 4.0% to 3.5%, thereby “returning” some much needed funds to financial institutions to continue growing their lending activities.
• Major shareholders seen increasing equity stakes
Share prices of most banking stocks under coverage continued to weaken despite the fact that a combination of increases in equity stakes by the EPF, KWAP and PNB, and share buy-backs were actively in place. We are nevertheless positive on these moves as we believe the sharp weakening in share prices of most financial institutions are overdone.
• Recent quarterly result annoucments indicate weakness, but mostly priced-in
Almost all banking stocks under coverage suffered from weaker capital market activities, some more pronounced than others. Weaker numbers are expected in the coming few quarters, a result of the moderation of loans growth from fairly strong numbers this year and continued weakness in the capital markets for the coming 2-3 calendar quarters.
• Valuations relatively undemanding
While we continue to maintain our NEUTRAL stance on the sector as a whole, we are growing increasingly positive on the propsects of AMMB Holdings and BCHB Holdings as its share price continues to weaken and
reveal more value. Maybank’s potential impairments on its overseas acquistions continue to concern us, while risk-rewards of further investments into Public Bank and Hong Leong Bank despite their obvious
strengths leaves lesser scope for upsides.

Bank Negara released its monthly statistical bulletin for the month of October 2008 last week, giving further indications that the domestic banking system remains resolute. Loans growth continues to be strong, with a YTD increase of +10.3% while net NPL ratios have remained steadfastly at 2.4% despite weaker domestic economic activities mirrored by the 3Q08 GDP growth of 4.7% (1Q08: 7.4%, 2Q08: 6.7%). The system’s capitalization remained strong with a risk-weighted capital ratio (RWCR) and core capital ratio of 12.6% and 10.3% respectively. The RWCR was slightly lower due to a 1.7% decline in the capital base attributed to
Maybank’s purchase of Bank Internasional Indonesia.
The gradual shift in the banking system over the last few years toward more household sector loans, along with the increasing contribution of the services sector to the growth of the country and away from manufacturing gives us confidence that we will not see stuttering loans growth in the coming quarters given our expectation of 2009 GDP growth in the range of 4.1-4.3%.
There have marked improvements in the quality of loans in banks’ books given the steady decline in net NPL ratios over the years, against the backdrop of higher loans numbers in banks and economic growth. There is always the potential rise in delinquencies of loans in the coming quarters, we however do not think it will reach proportions in the 1998-2003 periods given the change in loan mix of banking books today and the removal of various legacy issues through the various sales of non-performing loans.
Of the 5 banking stocks under coverage, Public Bank, Hong Leong Bank and AMMB Holdings have the largest portion of their loans book extended to the household sector at 76%, 75% and 70% respectively. Bumiputra-Commerce has 49%, while has Maybank has 45% of its loans extended to the household sector.
Common to all the banking groups are the high percentage non-performing loans (as a % of total) in the property and working capital segments. In our recent property sector issued last Monday, 24th November 2008, we highlighted our expectation that prices of properties will not weaken significantly to levels seen in the 1999 period, and hence we do not believe that this particular segment will pose great amounts of risk to future earnings of banks. Property sales may weaken, but that will affect future loans more so than delinquency risks.
Working capital loans to businesses however could pose the greatest risk in the coming quarters as we do expect economic conditions to weaken further before recovery sets in 2H next year. Bumiputra-Commerce, Hong Leong Bank and Maybank attribute 48%, 43% and 45% of their respective non-performing loans to this particular segment. On face value, Maybank’s domestic loan book may look most worrisome given that 42% of loans are for this purpose. Non-performing loans as a % of total working capital loans however make up only 5.2%. AMMB Holdings and Bumiputra-Commerce Holdings show higher numbers, both at 9.3%, which may possibly imply that 1-in-10 of the working capital loans are non-performing. 

These are postulations we can derive from this set of numbers, and is by no means a definitive statement of the quality of the respective banks’ asset quality. In this respect, we believe the weakening of both the share prices of AMMB Holdings and Bumiputra-Commerce Holdings have been overdone. AMMB Holdings has had the benefit of a strong partnership with ANZ Pty Ltd for the last year or so, which we believe will certainly
set stronger standards for credit management. Bumiputra-Commerce Holdings, in turn, will benefit strongly from the recovery in capital market activities in the coming year given its entrenched position as market leader.


Immediate reaction to this reduction would be the assumption that net interest margins would be impacted, especially for those with a large portion of their loans on variable rates. While this may prove to be the case in the short term, the situation would “normalize” as banks will correspondingly reduce deposit rates hence maintaining spreads somewhat. There are two pluses s to mitigate the potential reduction in spreads this time round, as compared to previous times – 1) the reduction in Statutory Reserve Requirements from 4.0%
to 3.5%, thereby “returning” some funds to the banks which had been earning 0% interest and which could now be deployed for the purposes of generating income through loans growth, and 2) the relatively low loans/deposits ratios of most banks as compared to the previous crisis time of 1998 and 2001, which will give banks the opportunity to unleash the un-loaned deposits and thereby earning the spread to mitigate the short-term reduction and adjustment in interest income from the portion already loaned out.
AMMB Holdings will be the banking group least affected by this reduction given the large of its loan book on fixed rates. Hong Leong Bank on the contrary has 75% of its loans on variable rates, but has the lowest loan/deposit ratio of 54.4% which leaves it ample room to increase its lending base and interest income.

A combination of increases in equity stakes by the Employees Provident Fund (EPF), Kumpulan Wang Amanah Persaraaan (KWAP), Permodalan Nasional Berhad (PNB) and Lembaga Tabung Angkatan Tentera (LTAT), and share buy-backs didn’t do much to help lift share prices off their lows over the last one month. We view these moves positively however as we opine that the sharp weakening of share prices of some of these banks are overdone.


MAY MK, Hold, RM7.00. Maybank’s 1QFY09 results were dragged by a whole host of oneoff charges this current quarter, with a RM242m impairment charge taken on its investment in Pakistan and a markedly higher personnel cost owing to a revision of salaries of unionized employees. There was a big plus during the quarter however, as the Group wrote-back the RM484m provision it had made for the non-refundable deposit pertaining to the BII acquisition in the immediate preceding quarter.
Operationally, loans growth remains robust while asset quality continues to improve. Its higher exposure to non-consumer loans however puts it at greater risk to rising delinquencies in these trying times. A potential 1% uptick in NPL levels could erase between 12-28% off its net earnings.
The Group has grown in a hurry, making the purchases of its Indonesian and Pakistani banks within the space of a year at prices many have deemed to be expensive, which could ultimately take a toll on its balance sheet and profitability if not managed well. Add to that the current economic climate and a potential deterioration in the quality of its loans book, managements’ future steps are steeped with challenges. We remain cautious of the Group’s prospects in the intermediate term.

BCHB MK, Buy, RM8.60. Weak capital market activities certainly had a telling effect on Bumiputra-Commerce Holding’s results, as it reported a cumulative 3QFY08 net profit that fell short of consensus estimates. Two numbers stand out in an otherwise decent set of financials given current market conditions: 1) The higher loss amount in its revaluation reserve for available-for-sale securities, and 2) a RM542m unrealised loss arising from derivative financial instruments. The former, we believe to be due to some impairment charges on its equities portfolio given that some of the fixed income losses in the previous quarter would have been clawed back with the easing of yields. The latter, we believe most likely to be from its currency swap arrangements. Just to note, AMMB Holdings reported a similar-type loss in the current financial quarter.
Operationally, loans growth remains robust while asset quality continues to improve. Net NPL levels are now down to 3.1%, a marked improvement from 6.4% in 1Q05.

PBK MK, Buy, RM10.40. The Group’s 3QFY08 results came in broadly within expectations, with net profits coming in at 78% of estimates. Even though still robust, the 9-month loans growth eased to 22% compared with 23.8% achieved in 1H with loan base expanding by RM16.8bn. Domestic loans market share rose to 14.8% (end-Aug 08) from 14.4% as at end- 07, and has more than doubled from 6.4% market share in 2001. Lending activities continued to focus on the retail sector (HP financing, housing, personal use), accounting for 64% of group loan portfolio.
Despite the increase in PAT earnings (+3.8% q-o-q, +13.4% y-o-y), there are signs of weaknesses in the 3Q results – most apparent is the 14% q-o-q and 25.4% y-o-y drop in non-interest income, partly due to the weak capital market. The following divisions also reported poorer performances – retail operation (-5.8% q-o-q), fund management (-4.4% q-oq). Asset quality continued its downtrend with 3-month net NPL down to 0.87% from 0.93% in June 08, the best ever, mainly due to reduced new NPLs during the period. Loan loss
coverage is also at its best level of 159%.

HLBK MK, Buy, RM6.40. Net profits of RM242mn came in broadly within expectations, representing 28% of full year forecasts on an annualised basis. We expect a more challenging operating environment in the months ahead, and should see numbers falling more in line with expectations in the coming quarters as we have already assumed a more conservative loans growth assumption of 5-6% for FY09 and FY10 in our recent revision. Similar with all the other banking groups, weak equity and capital market activities had an effect on earnings, though not as pronounced. While net interest income held steady, noninterest income was aided by a foreign exchange gain of RM41.8m and unrealised gain of RM6.7m on revaluation of securities during the quarter, which would otherwise have registered flattish growth y-o-y.
The group now ranks alongside Public Bank with superior asset quality ratios, with net NPL ratios falling to 1.3%, loan loss coverage expanding to a healthy 109%, and risk-weighted capital ratio at a strong 14.1%. Even a potential 1% hike in NPLs will impact earnings by only about 3-5%.

AMM MK, Buy, RM3.90. Net loans growth registered a commendable 11.8% y-o-y, driven in part by a 52.6% surge at the business banking division while the retail banking division registered a steady 3.8% y-o-y increase. HP financing only grew 2.3% y-o-y while mortgage loans contracted by 1.0% y-o-y, both of which constitute 60% of the bank’s total loans portfolio. We expect stronger growth numbers from its retail banking going forward however, given the returning affordability of consumers on the back of easing prices and costs. Net NPL ratio continued to improve, down to 3.0% (1QFY09: 3.3%) while loan loss coverage
increased to 74.5%. Trying economic conditions in the near term however may put its asset quality at risk from a potential hike in delinquencies. While a slight increase will not be a surprise, we do not expect it to spike to historically high levels as we expect stricter credit risk management processes in place with the recent entry of ANZ. Just to note, a 1% hike in net NPLs will erode FY09 and FY10 earnings by c. 25% based on previous provision trends.


Entry filed under: Business, Finance, Stock Market. Tags: , , , , , , , , , , , , , , , , .

December 1, 2008 Daily Highlights Construction Monthly Review: November 2008

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed

%d bloggers like this: