A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 S E C T O R R E P O R T Thursday, March 20, 2014 FBM KLCI: 1,817.44 Sector: Finance Banking Sector Financial System Well Buffered to Withstand Potential Shocks THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* TA Research Team Coverage Tel: +603 2167 9610 liwong@ta.com.my TA Research Team Coverage Key takeaways from BNM s Financial Stability and Payment Systems Report 2013 Household debt accelerated to an all-time high in 2013 Health of the country s financial system remains resilient Malaysian banks well buffered to withstand micro and macro headwinds Majority of banks ready to meet Basel III s liquidity standard of 100% by 1 Jan 2019 Implementation of new Base Rate expected to promote better transparency, pricing discipline and efficiency among financial players New pricing of cheques deferred to 2 Jan 2015 (from 1 Apr 2014) Household debt accelerated in 2013 BNM reported higher household debt of 86.8% (2012: 81.3%) in 2013. The level of household indebtedness is expected to continue accelerating as BNM expects demand for credit to stay robust, driven by the relatively young and more affluent population settling in urban centres. Nevertheless, as subsidy cuts spur inflationary pressures, managing the potential risks associated with high household indebtedness will continue to be the center of focus for the regulator in 2014. Figure 1: Household sector: Composition of credit providers Page 1 of 5
Figure 2: Composition of borrowings Figure 3: HH Debt vs. HH Financial Assets (RMbn) Figure 4: HH Debt and HH Financial Assets vs GDP (%) Page 2 of 5
But the system s asset quality remains sound For now however, BNM reported that the health of the country s financial system remains resilient and well buffered to absorb any potential economic and financial shocks. Based on an analysis to calculate potential losses based on severe assumptions on household default and incidences and loss given default (LGD), the estimated expected loss would come to c.rm30.5bn - well within the absorption capacity of the banking system. The central bank further noted that banks capital buffers stood at more than five times the estimated losses from a 40% contraction in house prices and stressed probability of default. This is underpinned by favourable employment and income conditions (with >50% of borrowers earning more than rm5k per month) and accumulation of household financial assets, which rose 11.2% (and accounting for a healthy 193.5% of GDP). Figure 5: Household sector, Banking system Average probability of Average loss given default (%) default (%) Expected Loss (RMbn) Purchase of residential properties 2.7 18.3 1.4 Purchase of motor vehicles 2.8 48.7 1.8 Unsecured financing 3.5 77.0 2.4 * Figures are based on 3 year averages between 2011-2013 Figure 6: Household sector, Banking system: Potential losses based on severe assumptions on household default incidences and loss given default Vehicle hire Personal Housing Loan purchase financing Credit cards Total* Probability of default (%) 7.2 7.2 10.5 10.5 Loss given default (%) 40 75 95 95 Potential losses (RM bn) Borrowers earning RM3k or less per month 1.5 2.8 2.2 0.8 8.4 Borrowers earning RM5k or less per month 3.4 4.6 3.6 1.7 15.3 All borrowers 9.4 7.5 5.7 3.5 30.5 *Total includes other household loans such as financing for the purchase of non-residential properties and consumer durable Measures introduced to contain risks effective We believe tighter lending rules (implemented in July 2013) and efforts to curb speculative activity in the property market should continue to help contain risks to financial stability from household lending. Limiting the tenure for personal loans to 10 years and placing a ban on pre-approved personal financing products had effectively reduced new approvals of personal financing by 18% (based on the number of borrowers) and 52% (based on amount borrowed). Bulk of the decline is attributed to a marked slowdown in personal financing facilities approved by NBFIs. Other broader structural measures to help ease financial burden as noted by BNM include an increase in the supply of affordable homes and the development of a better integrated public transportation system. BNM to continue monitoring household indebtedness We continue to foresee further tightening measures to keep soaring property prices in check. These measures could include lowering the LTV for the third (and beyond) property mortgage from 70%. Additionally, we foresee: 1) further improvements in lending standards, 2) development of a framework for identifying and strengthening the regulatory and supervisory regime for financial institutions, and 3) an intensification of financial education programs through agencies such as AKPK. New Base Rate to promote transparency, pricing discipline and efficiency BNM also announced the New Reference Framework where a Base Rate will replace the Base Lending Rate (BLR) as the main reference rate for new retail floating rate loans. The new Base Rate will take effect on 2 Jan 2015. We are positive on the introduction of this new framework as it will better reflect changes in cost arising from monetary policy and market funding conditions, provide more transparent reference rate for consumers as well as allow greater discipline and efficiency among financial institutions. We believe Page 3 of 5
this new policy would be long term positive for margin as it encourages better discipline in terms of pricing of these retail loans among financial institutions. We opine that banks with a larger mix of cheap retail deposits will benefit most from the implementation of the new rate given that it will be determined by the financial institutions benchmark cost of funds and the Statutory Reserve Requirement (SRR). BNM added that other components of loan pricing would include borrower credit risk, liquidity risk premium, operating costs and profit margin that will be reflected in a spread above the Base Rate. Figure 7: Composition of total deposits By banks Figure 8: Computation of BLR Computed BLR = Intervention rate x 0.8 + 2.25% 1 - SRR Figure 9: Computation of new Base Rate Profit margin Operating cost Liquidity risk Credit risk + Benchmark cost of funds & SRR Spread Base rate (BR) Valuation and recommendation We make no change to our earnings assumption as we have already modelled in higher credit cost of around 8-10 bps on average for CY14. Here, we envisage some minor deterioration in asset quality for most of the banks under our coverage while the sector s average gross impaired loans ratio would remain little changed at around 1.85%. Maintain NEUTRAL on the banking sector. BUY reiterated for CIMB and Maybank. HOLD Affin and AMMB. Lastly, reiterate sell on RHB Cap, Hong Leong Bank, Alliance Financial Group and Public Bank. Page 4 of 5
Figure 10: Peers comparison EPS EPS growth PER Price TP Mkt Cap FY14 FY15 FY14 FY15 FY14 FY15 (RM) (RM) RM mil (sen) (sen) (%) (%) (x) (x) Maybank 9.57 11.90 BUY 84,828.5 77.7 82.1 5.2 5.6 12.3 11.7 CIMB 7.07 8.40 BUY 58,181.2 58.0 62.9 5.1 8.5 12.2 11.2 Public Bank 19.16 17.10 SELL 67,100.2 123.5 133.5 6.4 8.1 15.5 14.4 Hong Leong 14.08 13.70 SELL 25,327.1 108.1 115.9 4.7 7.2 13.0 12.1 AMMB 7.12 8.20 HOLD 21,461.0 59.5 63.0 9.7 5.9 12.0 11.3 RHB Cap 7.98 8.20 SELL 20,324.3 75.0 81.2 4.3 8.2 10.6 9.8 Alliance 4.26 4.45 SELL 6,594.9 35.8 38.4 2.9 7.2 11.9 11.1 Affin* 3.95 4.48 HOLD 5,903.7 45.3 50.7 4.2 12.0 8.7 7.8 Simple average 36,215.1 72.9 78.5 6.8 5.5 12.0 11.2 P/BV ROE ROA DPS Div yield FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 FY14 FY15 (x) (x) (%) (%) (x) (x) (sen) (sen) (%) (%) Ma ybank 1.3 1.2 14.2 13.5 1.2 1.2 50.0 50.0 5.2% 5.2% CIMB 1.7 1.7 15.1 15.3 1.2 1.3 29.9 31.5 4.2% 4.5% Public Ba nk 3.0 2.8 19.2 17.1 1.4 1.3 55.0 55.0 2.9% 2.9% Hong Leong 2.0 1.9 15.3 16.0 1.2 1.2 42.0 42.0 3.0% 3.0% AMMB 1.6 1.5 14.2 13.6 1.4 1.4 24.0 26.0 3.4% 3.7% RHB Cap 1.0 0.9 9.5 9.4 1.0 1.0 18.0 20.0 2.3% 2.5% Alliance 1.5 1.4 13.3 13.3 1.2 1.2 18.0 19.0 4.2% 4.5% Affin* 0.9 0.8 9.4 9.1 1.1 1.1 15.0 15.0 3.8% 3.3% Simple average 1.6 1.5 13.8 13.4 1.2 1.2 31.5 32.3 3.6% 3.7% Source: TA Securities, Bursa M alaysia, Bloomberg *Assume post merger with Hwang and Rights Issue Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 5 of 5