Banking Weekly Review: 1st – 7th December 2008
· Public Bank – still going strong
During the week, we hosted a luncheon with the Public Bank Group for our clients, and came away confident that the Group will continue to grow in strength and build on its already strong base. Valuations are arguably “expensive”, but for good reason. Its asset quality is the best in the industry, and loan loss provisioning the most prudent. Management’s commitment to
maintaining its dividend in absolute quantum going forward offers a gross yield of 6%, admirable in current market and economic conditions.
· Elsewhere, more shedding of jobs
Credit Suisse, during the week, announced that it was reducing its workforce by 5,300 globally, mostly in investment banking. This comes on the back of a USD2.5bn loss as at the end of November. HSBC had also recently announced the shedding of 500 jobs at its British banking business following a review of the business.
· Valuations relatively undemanding
While we continue to maintain our NEUTRAL stance on the sector as a whole, we are positive on the propsects of and expect stronger recoveries in the share prices of AMMB Holdings and BCHB Holdings when market conditions improve. Maybank’s potential impairments on its overseas
acquistions continue to concern us, despite its current weak share price. Public Bank will continue to remain a solid investment into strength, despite its risk-rewards leaving slightly lesser scope for upsides as compared to the rest. Its attractive dividend yields however, warrant continued exposure to the stock. The same can be said about Hong Leong Bank, though not in the
PUBLIC BANK – STILL GOING STRONG
We hosted a luncheon with the Public Bank Group for our clients during the week, where we had the pleasure of the company of Chief Operating Officer Mr Wong Jee Seng and Group Economist En. Nasaruddin Arshad share with us on the prospects and challenges of the Group, and we came away with confidence that management is fully “on-the-ball” and that its growth path is on track despite visibly tougher economic and operating conditions. Valuations are arguably expensive, but for good reason. Asset quality is the best in the industry, with net NPLs at 0.9% against the industry’s 2.4% and loan loss provisioning the most prudent. We continue to like the Group for its strong earnings prospects, astute credit policies, superior ROEs and attractive dividend yields.
Key takeaways from the meeting, which may not necessarily be altogether new to the investing community, but nevertheless good points to reinforce:
· Focus will continue to be on the retail segment, an area it has always been strong in, and which currently contributes in excess of 80% of Group earnings. Home mortgages, vehicle financing, credit cards and personal financing are points of growth.
· Weaker capital markets will not impact Group as much as other banking groups given the relatively smaller contribution of non-interest income to net income.
· Cost of funding for loans is low as 92% comprise of deposits, hence “healthier” spreads.
· A 1% drop in OPR will impact the Group’s net profits by approximately RM100m, should all rates (BLR and correspondingly, savings) fall in tandem. Given the current operating condition however where BNM has set a floor for FD rates (1- month, 3.0% and 12-months 3.5%), the impact will be slightly more pronounced.
· The recent reduction in SRR will “bring back” some RM300m to the fold, which it can then lend to the inter-bank market and generate income. RM10+m is the anticipated amount.
· Exposure to SME is not too much of a concern as close to 80% of it is to importers of consumer goods which feed the domestic services sector which is expected to remain strong in the coming quarters, and not the exporters of goods and services to the global marketplace which is undeniably going to face harsh operating conditions.
ACTIVITY IN THE MARKET WEAK IN THE RECENT WEEK
The Employees Provident Fund (EPF) continued to be the signficiant player in the market last week with regards to banking stocks, albeit on a relatively muted scale as compared to previous weeks. Share prices remained mostly flat for the week.
· Citigroup Inc plans to sell Nikko Citi Trust and Banking Corporation, its trust bank unit in Japan, in its efforts to reduce payroll and costs at its Japanese operations. The deal could possibly raise up to USD420m, with major Japanese banks like Mitsubishi UFJ Trust and Banking Corp, Sumitomo Trust and Banking Co Ltd, and Mizuho Trust and Banking Co Ltd reportedly showing interest in making bids.
· Citibank (M) Berhad, locally-incorporated subsidiary of the Group, has meanwhile reinforced its financial soundness and preparedness to weather the on-going economic and financial crisis. The bank is backed by an asset base of RM43.3bn domestically, while liquidity stood at RM14.5bn as at Sept 30th. In the recent financial quarter (Sept 30), the bank posted cumulative nine-month net profits of RM611.2m on revenue of RM2.2bn.
· Swiss bank Credit Suisse, announced during the week, that it had posted losses totaling USD2.5bn at the end of November and was trimming its workforce by 5,300 globally, mostly in investment banking. The Group has thus far managed to chart its course through the worst financial crisis since the Great Depression without state aid, but hefty losses at its investment banking unit have dragged it into a 1.3bn Swiss Franc (approximately USD1.1bn) loss in the third quarter.
· HSBC, Europe’s biggest bank, also made an announcement during the week saying that it was cutting 500 jobs at its British banking unit following a review of the business.
· China’s sovereign wealth fund, China Investment Corp, stated recently that it was ”not brave enough” to invest in foreign financial institutions and lacks confidence in the shifting US financial regulatory situation. The fund is most well-known for investing in private equity firm, Blackstone Group, just before its listing at USD31 a share. The stock recently closed at about USD5 a share. Its 10% investment in Morgan Stanley at USD50 a share has fallen in value to about USD12 a share.
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