Banking Weekly Review : 12th – 18th January 2009
• Capital raising domestically
Financial institutions domestically have also been raising capital of late, as with their international peers. We believe this not to be so much out of a need to do so as core and risk-weighted capital ratios are still comfortably above statutory requirements, but more in preparation for possibly tougher operating conditions in the near term and also to take advantage of current yields in the market. In the light of these capital raising exercises, we do
expect some deterioration in dividend payouts this financial year and possibly the next.
• PNB reduces stake in Maybank
For the first time in a short while since we have been highlighting shareholdig movements, this is the first week we see sales by various major shareholders, the most notable of which are Permodalan Nasional Berhad and Amanah Saham Bumiputra collectively selling 2.25m shares in
Maybank. The Employees Provident Fund was also seen selling 0.9m and 0.7m shares in Hong Leong Bank and Alliance Financial Group respectively.
• Valuations relatively undemanding
We continue to be positive on the prospects of AMMB desipte its recent share price recovery, which is more a result of its deep undervaluation vis-àvis its peers, and Bumiputra-Commerce Holdings despite its recent run-up in share price, and expect stronger and faster recoveries in its fundamentals when market conditions improve.
Maybank’s overhang right now are the potential impairments on its overseas acquistions and 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.
Capital Raising By Local Banks
Maybank announced during the week that it was looking to raise another RM3bn in capital for working capital purposes, in addition to the RM9bn it had already raised to-date. This also comes on the back of various other institutions like Bumiputra-Commerce Holding and Public Bank raising capital last year after some aggressive expansions last year, as well to beef up their balance sheets as they face tougher operating conditions this year.
We highlight the following excerpts of Bank Negara’s guidelines on capital adequacy (BNM/RH/GL 001-20) to give a flavour of what financial institutions have the leeway to do, and what we could possibly expect this year should they embark on more capital-raising exercises.
Capital instruments are recognized for purposes of calculating the capital bases subject to the following limits:
• The total amount of supplementary capital eligible for inclusion shall not exceed the amount of Eligible Tier 1 capital
• The amount of subordinated term loans eligible for inclusion as Tier 2 capital are limited to 50% of Eligible Tier 1 capital. In exceptional cases, this limit may be exceeded with the prior written consent of Bank Negara, on a case-by-case basis
• Total issuance of IT1 capital instruments shall not exceed 15% of total Eligible Tier 1 capital (after the inclusion of IT1 instruments and net of goodwill)
• A limit of 50% of total Eligible Tier 1 capital (net of goodwill) is imposed on the total of Non-IT1and IT1 capital instruments, with IT1 capital still limited at 15% of Eligible Tier 1 capital.
Any amount in excess of the prescribed limits above shall be eligible for inclusion as upper Tier 2 capital. Notwithstanding the above limits, Bank Negara reserves the right to impose a lower limit based on the soundness of the individual issuer.
It must be highlighted that there is no pressing need for almost all these institutions to raise capital as core and risk-weighted ratios are still in excess of statutory requirements. We do not expect widespread earnings losses nor significant rises in delinquencies to cause severe impairments to banks’ balance sheets.
Both Maybank and Bumiputra-Commerce have plans to raise another RM3bn each in innovative and non-innovative securities, which would take its capital bases fairly close to the maximum allowable limit after which any issues would have to be equity-based. AMMB Holdings has a SGD425m Tier 1 issue outstanding, while Public Bank and Hong Leong Bank have made no intentions of knowing of raising any capital in the near term.
The table in the following page highlights the balance sheet assets which we believe are susceptible to weakening market conditions, though the occurrence of widespread defaults and delinquencies in some of them are quite remote, and the amount of leverage that has gone into the supporting of the banking business. Though the definition of leverage is the total asset against shareholders’ equity, we have (in this exercise) taken it to be defined as the total capital base to “support” the assets highlighted below.
Though there isn’t a particular number to indicate what is good and not, Public Bank seems to have the mostly highly-geared balance sheet of the 5 in comparison, a combination of very strong loans growth over the years coupled with generous dividend payouts. But despite this, the Group has managed to come out tops in terms of asset quality. AMMB Holdings would give the most comfort given its fairly low leverage ratios.
Share Sales For The First Time In Many Weeks
For the first time in quite a short since we’ve been highlighting major shareholding changes, this is the week where we’ve seen share sales most notable of which are Permodalan Nasional Berhad and Amanah Saham Bumiputra selling a collective 2.25m shares in Maybank. Elsewhere, the Employees Provident Fund was also seen selling 0.9m and 0.7m shares in Hong Leong Bank and Alliance Financial Group respectively. While the EPF’s share sale was as a result of portfolio managers switching their porfolio holdings, the sale by PNB and ASB could possibly have been due to a cash-raising exercise for the payment of dividends to unitholders more so than a sign of deteriorating fundamentals in the Group. Most share prices, meanwhile, weakened during the week as profit-taking activities was prevalent through the week in addition to a raft of downgrades in the sector by various foreign research houses.
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