Banking Monthly Review : December 2008

January 7, 2009 at 6:22 am Leave a comment

· November statistics highlight weakening forward numbers
Loan approvals extended to its third consecutive y-o-y drop, falling by 44.0% as at November 2008 after October and September’s respective falls of 14.4% and 1.2%. While these sharp falls may prove to be startling numbers, it is not totally unexpected given current economic conditions and the high base numbers in 2007 that it is cooling off from.
Asset quality remained healthy, with 3-month net NPL ratios holding steady at 2.4% of total loans while 6-month net NPL ratios improving a notch to 1.8% of total loans.
· Shareholding increase activity eases off
Share prices of banking stocks under coverage strenghtened during the month, even as the likes of EPF, PNB and LTAT eased off on their increaeses in shareholdings as compared to November. Bumiputra-Commerce was the only institution engaging in share buy-backs during the month as Hong Leong and Public Bank remained on the sidelines.
· Capital raising all round, globally and domestically
During the month, financial institutions in Australia announced an approximate AUD12bn capital raising exercise. Back at home, Bumiputra-Commerce announced that it had successfully placed out RM1bn as part of a RM4bn capital raising program. RHB Capital announced Bank Negara’s
approval of its RM1.1bn CP/MTN program while Hong Leong Bank made known its intentions to raise RM1.1bn for the subscriptoin of foreign currency denominated principal-protected investments.
· Valuations still undemanding
While we don’t think we’re out of the woods altogether with this current ecomomic and financial climate and do expect another interest rate cut and a slight rise in loan delinquencies and thereby impacting earnings of most financial institutions, we are still positive on the prospects of AMMB desipte its recent share price recovery, which is more a result of its deep undervaluation vis-à-vis its peers we believe. We are also positive on the prospects of Bumiputra-Commerce Holdings and expect strong recoveries when market conditions improve.
Maybank’s overhang right now is the potential impairments on its overseas acquistions which continue to concern us, despite its current weak share price.
Public Bank will continue to remain a solid investment into strength, despite its investment risk-rewards leaving slightly lesser scope for upsides as compared to the rest. Its attractive dividend yields adds to the strong investment merits in the stock. The same can be said about Hong Leong Bank

CURRENT NUMBERS DECENT, FORWARD NUMBERS WEAK
Bank Negara’s recent release of its November 2008 statistical bulletin has shown a mixed
set of numbers, showing some worrying signs, but one which is within anticipation as we
continue to expect industry loans growth to taper off to 4-5% in 2009, from the expected 9-
10% for 2008.
Overall banking loans registered a +10.7% growth in November, slightly higher than the
previous month’s +10.3%. Loan applications and approvals as at the same period dipped a
whopping 36% and 44% y-o-y respectively however, on lower demand for business-related
loans. While it may prove to be startling number, it is not totally unexpected given current
economic conditions and the very strong base numbers in 2007 that it is cooling off from.

While loans growth is an important component in banks’ earnings, what poses greater risks
now are the potential rise in delinquencies of those large numbers of loans approved and
disbursed during that particular “high growth period”. Cumulative loans approved as at
November have fallen a marginal 0.2% as compared to the corresponding period in 2007.
Though there are no conclusive trends and numbers to formulate a concrete opinion, the
numbers highlighted in Figure 2b in the previous page do indicate that we should not be
surprised to see industry loans growth tapering off to 4-5%, led by a sharp weakening in
demand for business (non-household) loans on the back of our expected 2009 GDP of 4.1-
4.3%.
As we had highlighted in our November banking monthly review of the industry’s gradual shift
towards consumer-based loans, wide-spread and big-ticket delinquencies as seen during the
1997-1998 period may not be witnessed, continued economic weakness will nevertheless put
strains on consumers’ disposable incomes and ultimately affected repayment capabilities
somewhat. and the consumer While still a small proportion to the entire industry’s loans
book, what is of increasing concern to us is the rising demand for credit card loans, which if
let unchecked, could potentially give rise to delinquencies in the coming months as economic
conditions remain weak.
Net NPL ratio remained steady at 2.4% on a 3-month basis, but has improved to 1.8% on a
6-month basis. The system’s capitalization remained strong with a risk-weighted capital ratio
(RWCR) and core capital ratio of 12.5% and 10.4% respectively.
Deposits within the banking system kept pace with a 12.4% y-o-y growth (October: -10.9%),
aided in part by payment of government outlays and transfers to businesses and statutory
authorities. The 16.5% and 7.0% respective growth in corporate and consumer deposits
(October: 14.3% and 6.4% respectively) indicates a growing preference for cash over
investments in these trying times.
The loans deposit ratio remained relatively unchanged in November at 76.7% on a m-o-m
basis (October 76.6%).

MAJOR SHAREHOLDERS EASING OFF ON PURCHASES IN DECEMBER
The collective increases in equity stakes of financial institutions owned by the Employees
Provident Fund (EPF), Permodalan Nasional Berhad (PNB) and Lembaga Tabung Angkatan
Tentera (LTAT) continued into December, though on a much slower pace as compared to the
previous month. BCHB Holdings was seen continuing with its buy-back program during the month, while Hong Leong and Public Bank remained on the sidelines. Share prices of banking stocks under coverage perked up a little over the month, with AMMB Holdings registering the biggest gain. s positively however as we opine that the sharp weakening of share prices of some of these banks are overdone.

SIGNIFICANT BANKING NEWSFLOWS FOR THE MONTH
· Swiss bank Credit Suisse, announced during the month, 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 month, 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.
· Commonwealth Bank of Australia, Westpac Banking Corporation and Australia & New Zealand Banking Group Ltd raised about AUD10bn during the month by selling stock and bonds to boost its respective balance sheets which had been dented by rising defaults. Commonwealth will sell up to AUD750m in stock to Merrill Lynch and price AUD2.7bn of bonds. Westpac sold AUD2.5bn in stock and AUD1.5bn of notes while ANZ sold AUD2.7bn of debt.
· The world’s biggest financial companies have raised USD894bn in new capital since the sub-prime crisis began last year, triggering almost UDS1tn in write-downs and losses, data compiled by Bloomberg showed.
· Hong Leong Bank announced its intention to raise up to RM1.1bn in nominal value unsecured and unsubordinated bonds to subscribe for foreign currency denominated principal protected investments through its subsidiaries. The tenure of the bonds will be 4 years from the date of issuance.
· Bumiputra Commerce Holdings will rename BankThai PLC and appoint a new chief executive officer after completing a mandatory offer to purchase shares it does not already own in the bank by next month. The bank’s integration into the Group, and transformation is expected to take 3 years. The total acquisition cost is expected to be as much as 20bn baht (RM2bn), including a capital injection of about 6bn baht (RM600mn). The bank is also expected to record a net loss this year after it wrote down all its investments in collateralized debt obligations, and may start to make operational profits next year.
· Macquarie Group Ltd, Australia’s largest investment bank raised USD1.2bn in capital during the week by selling government-guaranteed bonds. This comes fresh on the back of Wetpac, ANZ and Commonwealth Bank’s capital raising exercise the week before.
· 2008 was a year to forget for investment bankers as more deals were withdrawn during the year than before, and with overall merger and acquisition activities down 35% for the year. Over 1,100 deals worth USD800bn were cancelled, up from just under 800 in 2007 according to data gathered by Thomson Reuters, losing banks fees of about USD815m.
· CIMB Bank, subsidiary of Bumiputra-Commerce Holdings has raised RM1bn in capital via a private placement of non-innovative tier-1 stapled securities. The bank had earlier obtained approval from the Securities Commission and Bank Negara for a RM4bn fund-raising plan. The proceeds from the program will be used for working capital and general banking purposes.

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