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Banking On Financial Sector Growth
Malaysia Perspective | 01 October 2010
By:

By Ann Lee

Maybank Shows Strength and Resilience
Maybank is riding on a better than expected results wave. Its 4Q-2010 net profit of RM912 million was 11% lower q-o-q due to higher pre-emptive provisions. Net interest income was higher thanks to improved Net Interest Margins (NIM) of 16bps to 2.44% despite competitive pressures. Loans grew strongly at 4% q-o-q bringing full year loan growth to 10%. Non-interest income was lower q-o-q due to RM49 million unrealised losses relating to the cross currency swap in 4Q-2010. The transfer from life insurance surplus fund to shareholders funds amounted to RM190 million. Gross Non Performing Loans (NPL) ratio improved to 2.9% while loan loss coverage increased to 125%. Both Tier-1 Capital Adequacy Ratio (CAR) and RWCAR stood at 13.8%. Maybank would be adopting the FRS139 standards next quarter.

Maybank’s international business (largely from Singapore and Indonesia) contributed 23% to pre-tax profit. Bank Internasional Indonesia’s (BII) loans expanded by 33%

y-o-y, largely from higher margin segments, such as the SME and consumer segments. BII’s NIM stood at 5.9% but is likely to slide due to competitive pressures, but its NPL ratio is still progressing during the quarter as it is still addressing issues with legacy NPLs. Maybank Singapore remains resilient with loan growth at 9% y-o-y and NIM 2% while NPL ratio stood at 0.6%, lower than its Singapore peers. Maybank declared a 44sen gross final Dividend Per Share (DPS), of which 40sen would be eligible for the dividend reinvestment scheme (DRS) at a discounted share price. This would be tabled to shareholders and should be completed by Nov 10. Assuming shareholders all opt for the DRS, Maybank’s Tier-1 CAR and RWCAR will increase to 14.9%.

Analyst’s Recommendation:
Maintain buy as their TP is equivalent to 2.3x CY11 BV, and based on the following Gordon Growth Model assumptions: 16% sustainable ROE, 7% long-term growth and

10.8% cost of equity. Key catalysts include: NIM improvement following OPR hikes, better performance at BII, and build-up of Malaysian capital markets and treasury

capabilities.

Hong Leong Leverages on Regional Growth
The bank recorded a 4Q-2010 net profit of RM301million. It was lifted by higher NIM (+9bps q-o-q) while provisions were significantly lower. Non-interest income was lower q-o-q due to absence of revaluation gains for securities and derivatives in 3Q10. Otherwise, fee income and forex gains were stable, while gain from sale of securities and dividends improved q-o-q. Loans surged 3% q-o-q largely from consumer and working capital loans, bringing FY10 loan growth to 8%.

Gross NPL ratio reduced to 1.9% (3Q10: 2.1%) while absolute NPLs declined by 6%

q-o-q. Overheads were 6% lower q-o-q with cost-to-income ratio at 44%. Bank of Chengdu’s contribution surged to RM59 million, bringing full year contribution of RM144million (12% of pre-tax profit), tripling its contribution since the acquisition in 2007. Capitalisation was strong with both Tier-1 CAR and RWCAR at 12.9%. Domestically, full OPR hike impact has yet to kick in, hence NIM expansion is likely in FY11. Loans are expected to grow at 10% with focus still in SME and consumer segments. The bank guided that its gross NPL ratio would rise to 2.4% once it adopts the FRS 139 next quarter. Should the acquisition of EON Cap materialise, Hong Leong Bank would benefit from size, scale and reach. But this appears to be delayed due to EON Cap’s EGM and a pending court hearing. Meanwhile, we believe Hong Leong Bank will continue expanding its regional endeavours, leveraging on its China presence with Bank of Chengdu likely to grow in excess of 20% y-o-y.

Analyst’s Recommendation:
Maintain Buy at RM10.50 TP. The TP is based on the Gordon Growth Model and implies 2.2x CY11 BV, with the following assumptions: 16% ROE, 4% long-term growth and 9.4% cost of equity. Analyst’s like Hong Leong Bank for its strong domestic franchise, ability to leverage on its low loan-to-deposit ratio, and regional expansion plans.

Alliance Financial Group Remains Buoyant
Alliance Financial Group (AFG) held an analyst briefing on its 1QFY11 results recently. Group CEO Mr. Sng Seow Wah announced that the Group’s overall strategy of achieving “sustainable growth” remained unchanged. ROE target is 14-16%, with the higher band possibly achievable in the next 18-24 months. Management pointed out underlying earnings and prudent capital management as the key ROE drivers. On earnings, the emphasis would be diversifying revenue stream whilst maintaining quality. Consumer and SME segments remain the Group’s main income driver and focus, but it will continue to expand non-interest income stream specifically in the area of wealth management, treasury and investment banking.

On the financial side, the Group will actively manage its balance sheet, keeping a close eye on loans and deposits quality. Management is cognisant of the Group’s higher than industry average loan-to-deposit ratio (93% versus 81% industry) and it will strive to narrow this gap without comprising deposits quality. One approach is to continue its CASA growth, which currently is at 42% of total deposits.

Analyst’s Recommendation:
Maintain Buy and RM3.45 TP based on the Gordon Growth Model, assuming 5% long term growth, 14% ROE, and 10.5% cost of equity. Analyst’s like the group as a small cap pure domestic play with a scaleable niche growth strategy, and for M&A potential.

AMMB Holdings Strong on Increased Revenue
AMMB Holdings net profit of RM368 million (+43% y-o-y; +52% q-o-q) was 19% and 22% ahead of analyst’s consensus estimates, respectively. NIM grew 2bps to 2.33% mainly due to re-pricing following the Overnight Policy Rate (OPR) hikes. Loans grew 2% q-o-q driven by business and corporate loans, and selected retail segments. Deposits were flat q-o-q with CASA slipping marginally but offset by growth in fixed deposits. Non-interest income grew 21% q-o-q on continued strong capital market activities and gain from sale of AFS securities and derivatives. Overheads were significantly lower, reducing cost-to-income ratio to 44%. Provisions were lower q-o-q due to FRS adjustments and improved recoveries. Gross NPL ratio was 3.7% with loan loss coverage ratio still strong at 94%, while provision charge-off rate was 14bps (versus 22bps in 4Q-2010). Retained earnings fell 6.6% (net) with the adoption of FRS 139. Tier-1 CAR and RWCAR were 10% and 16%, respectively.

However analyst’s believe there will be lower NIM ahead. This would be due to deposits re-pricing in the next 2-3 quarters, given its higher proportion of fixed rate deposits. We tweaked FY11-12F earnings to account for lower NIM and higher NPL ratio following the adoption of FRS 139.

Analyst’s Recommendation:
They have downgraded to Hold on narrower upside and limited near term catalysts. They do not discount catalysts arising from its medium term aspirations, but it will take time to

materialise. Their RM5.50 TP is based on the Gordon Growth Model and assumes 14% ROE, 11% cost of equity, and 5% long term growth.


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