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Are Malaysian Banks Financially Capable Of Dealing With Another Global Crisis?
Malaysia Perspective | 25 October 2011

By Joshua Lim

The very last time when there was a global crisis led by the sub-prime meltdown in the US, Malaysian banks escaped without much harm done to their economic foundation. However, as the world looks like it is heading for another economic downturn, led by the US joblessness and debt scenario coupled with the Euro zone crisis, can Malaysian banks escape relatively unscathed this time round?

Experts are blowing the warning trumpet that the impending slowdown in global growth could lead to a crisis far worse than that experienced in the 2008-2009 period. The key risk for banks would be weaker capital market flows, hence, affecting banks with larger exposure to market-related activities. Markets have priced in fear and uncertainty in their projections.

Most banks are preparing for the worst post 2Q-2011 with worsening outlook in 2012, similar to that experienced in 2Q-2009. Analysts at HwangDBS Vickers are trimming their loan growth estimates for Maybank and CIMB, with 2012 loan growth projections now at 12% (previously 13%). They believe it would be more consumer loan driven than business. Loan growth prospects for 2011 would, however, remain strong at 15% with growth skewed towards business loans.

Based on the correlation between GDP growth and loan growth, a slide in GDP in 2012 from a recessionary scenario would result in a slowdown in business loans. In other words, the support for loan growth would come mainly from consumer loans, under which, resiliency is built on a strong base of natural growth arising from a need to buy a home and, perhaps, a car. Consumer growth pace, accordingly, would become patchy only when there are elements of speculation. Already, Bank Negara has in place sufficient measures to prevent excessive speculation.

Bank Negara has also implemented pre-emptive measures to ensure household debt level is kept under control. In 2010, household debt to GDP was 76%, with the largest chunk being mortgage (38%), followed by loans for personal use (29%). Although the combined level is high compared to historical levels of 60-70%, household debts are 70% backed by deposits and the rest by equity.

To keep loan amounts in check, Bank Negara has announced several measures. These include 70% loan-to-value (LTV) cap on the third and subsequent housing loan (effective from 3 November 2010) and revising risk weights applied by banks under the capital adequacy framework to 100% (from 75%) for housing loans with LTV over 90% (effective from 1 January 2011). Despite the measures, residential property transactions remained healthy, with mortgage applications and approvals firmed in the past few months. Meanwhile, rumours are circulating that Bank Negara might change the computation of mortgage eligibility to take into account net income rather than gross income. This move is believed to be under consideration. Currently, banks cap monthly instalments at not more than one-third of gross income.

The slowdown in auto loans was exacerbated by a change in the Hire Purchase Act in June 2011. The Parliament approved amendments to the Act in December 2010, and became effective on 15 June 2011. These policy changes are aimed at protecting car buyers, but had unintentionally slowed down car sales due to the lengthy process involved. However, this is likely to be a temporary hiccup, as cars dealers and banks refine their processes to bring the turnaround time gradually back to normal. Analysts also expect trade-in value (TIV) to improve in 2H-2011 as auto parts supply normalises.

Based on analyst’s sensitivity analysis, each 10 bps decline in Nett Interest Margin (NIM) would reduce net profit by 4-7%. Notably, banks with higher proportion of net interest income to total income would be more susceptible to NIM contraction. This is especially so for Hong Leong Bank, Public Bank and RHB Bank. CIMB, which has smaller proportion of net interest income, seemed to be less affected. Recurring non-interest income is crucial to sustain pre-provision profits. In spite of the still sustainable loan growth, banks are tweaking their non-interest income levers to offset slower net interest income growth. Transactional banking is becoming crucial as it does not only provide sustainable fees for banks but also for current accounts.

Bank Valuations

Alliance Financial Group (AFG) remains the top pick of HwangDBS Vickers Research (HDBSVR) for its scalable domestic franchise and non-interest income traction, which will ensure sustainable earnings and ROE.

Hong Leong Bank (HLB) is HDBSVR’s defensive pick and on synergies it will extract as a newly-merged entity via improved NIM and presence in auto and SME segments.

Among large caps, HDBSVR prefers Maybank for its resilient transactional banking income; with the dividend yield adding appeal. Given its stronger commercial banking supported by transactional activities, Maybank would be less susceptible to capital market weakness. Overall, its market related income is 21% of its non-interest income. The inclusion of Kim Eng should raise its investment banking income to 8% of total revenue (from 2%).

HDBSVR has, however, downgraded CIMB to Hold and cut its target price to RM7.40 after trimming forecast earnings by 23 to 27% on cautious guidance for 2012. Its high foreign shareholding level poses additional de-rating risk in times of deleveraging. Additionally, CIMB’s non-interest income had tumbled 38% year on year.

Separately, RHB Bank has put on hold its acquisition of Bank Mestika as well as the rights issue. HDBSVR believes this could be due to possible changes to ownership rules. RHB has paid RM113 million as a deposit for the proposed acquisition. The deposit would be refunded if the transaction is cancelled due to changes in the regulatory environment. HDBSVR has not included Bank Mestika’s acquisition and the proposed RM1.3 billion rights issue in its forecasts.

Meanwhile, HDBSVR has maintained Public Bank as a Hold. Loan growth is expected to remain strong and asset quality robust. The research house does not see an immediate need for Public Bank to raise capital, although it might change if Bank Negara decides to adopt a stricter-than-expected version of the Basel III rules. While Public Bank continues its 50% dividend payout, its dividend yield is less appealing compared to Maybank.

Elsewhere, the research house sees AMMB Holdings as a laggard. AMMB continues to lag its peers and the market despite consistent earnings delivery. However, HDBSVR does not discount AMMB surprising on the upside on dividends, since it has yet to leverage on its dividend reinvestment scheme. The research house is excited by how AMMB can leverage on ANZ Bank’s international connectivity via business development initiatives which will take time to materialise but had trimmed FY2012-2014F earnings by 1-5% on lower non-interest income.

In conclusion, HDBSVR believes that Malaysian banks, as a whole, would not be badly affected should there be a recession as the banks have strengthened their earnings and ROE base, while asset quality should remain stable. Currently trading at 1.9X CY12 BV (+2 SD), the research house’s base case target prices are premised on valuation base of between +1SD to +2SD. In its bear case scenarios, it assumed banks’ valuations would revert to between mean and +1SD.

* This article is written based on research conducted by media agencies and HwangDBS Vickers Research.

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