By G. Sharmila
Analysts are concerned about asset quality, nett interest margin and common equity Tier 1 ratios of local banks. Is the sector losing its lustre, or is there still hope for believers in banking stocks?
Sector background: The third quarter of 2015 (3Q15) reporting season brought with it a mixed bag of results from the banking sector, with some banks results meeting consensus estimates, while others were below expectations.
Kenanga Research, in a sector update dated Dec 8, said that seven out of nine banking stocks under its coverage met expectations, while two were below expectations.
The seven stocks were Affin Hwang Capital, Alliance Financial Group (AFG), AmBank, BIMB Holdings, Hong Leong Bank (HLB), Maybank and Public Bank, while CIMB Group and RHB Capital came in below expectations, the research house said.
It noted also that sector earnings were marginally higher for quarter-on-quarter (q-o-q) but lower year-on-year (y-o-y) at 0.7% and -5.4% respectively. It noted that for a q-o-q basis, AFG, AmBank, CIMB, Maybank and Public Bank saw a growth range of 10% to 25% due to higher operating income, while RHB saw its earnings fall sharply by 64% due to its one-off career transition scheme (CTS).
Kenanga also noted that the liquidity position for the sector is narrowing. Improved loan growth from the sector saw aggregate loan-deposit-ratio (LDR) improving by 215 basis points (bps) q-o-q indicating liquidity position narrowing, it said.
The research house believes that nett interest margin (NIM) compression is unavoidable as given that LDR is on the uptrend with deposit growth lagging loan growth, competition for deposits will likely increase, thus pushing NIM pressure downwards.
Another area of concern is the sector’s cost-to-income ratio (CIR), which was above the 50% mark for the fourth straight quarter, where q-o-q CIR fell by 92 bps but surged by 203 bps y-o-y.
Kenanga noted that Public Bank still has the best CIR with CIR down by 123 bps, while RHB Capital has the worst with its CIR up by 21 percentage points due to the CTS.
The asset quality of banks also deteriorated slightly during 3Q15, according to Kenanga, with the exception of BIMB, HLB, Maybank, Public Bank and RHB Capital. Kenanga expects asset quality to stay moderate for the remainder of the year as banks continue to seek out new, creditworthy customers.
It added that most of the banks saw their common equity Tier 1 (CET1) ratio lessened. BIMB, CIMB, HLB, Maybank, Public Bank and RHB Capital saw their CET1 ratios dip between 15 and 110 bps q-o-q, Kenanga pointed out. The drop was due to the increase in their risk weighted assets from the previous quarter. However, Kenanga also said that overall, the banks’ CET1 ratios are still comfortably the regulatory requirement of 7%.
What analysts think: Kenanga Research, which has a “neutral” rating on the local banking sector, noted that local banks are faced with structural and cyclical headwinds such as slower loans growth, narrow liquidity environment, compressing NIM, weak capital market activities and rising credit costs.
Kenanga Research advocated caution on the sector and advised investors to adopt a selective stock picking strategy. The research house has “outperform” ratings on Maybank and RHB Capital.
Maybank IB Research also expressed some reservations concerning the domestic banking sector. “Undoubtedly, the key challenges persist and topmost would be NIM and asset quality preservation. We forecast a 12 bps NIM compression in 2015, seven bps in 2016, and impute a higher average credit cost of 27 bps for 2016 versus 21 bps in 2015.
“We have cut our 2015/2016 aggregate core nett profit growth to just 0.5%/5.7% from 2.6%/7.2% before. The faster y-o-y growth in 2016 is premised on a smaller compression in NIM, higher cost efficiencies, and a lower corporate tax rate,” it said in a Dec 3 report. It also maintained its “neutral” rating on the banking sector.
It said that stripping out CIMB, for which it expects 2016 earnings to rebound by 18% due to lower credit costs and overheads, aggregate 2016 nett profit growth for the sector would be just 3.3%.
“Returns on equity (ROEs) are expected to compress further, especially after factoring in the rights issues at HLB and RHB. We now expect the aggregate ROE for the banks in our coverage to decline to 11% in 2016 from 11.3% in 2015.
“Our preference would be for banks with liquid balance sheets to better withstand price competition, thus our buy calls on AFG, BIMB and HLB/Hong Leong Financial Group, that have nett LDRs of 85%, 81% and 80% respectively as of end-Sep 2015,” Maybank opined.
Moody’s Investors Service, in a report on Dec 7, said it expects Malaysian banks’ profitability deterioration to continue into 2016 as the operating environment will remain challenging.
“Rising credit costs have adversely affected banks’ profitability and return on assets (ROA) has fallen to a three-year low. The seven institutions’ average ROA fell 24 bps to 1.03% during the first nine months of 2015 from 1.27% during the same period of 2013,” the global ratings agency said, referring to the seven banking groups under its coverage. They are AmBank, CIMB Group Holdings, CIMB Bank Bhd, HLB, Maybank and Public Bank.
“Slowing economic growth, low commodity prices and currency volatility in the region have all contributed to rising non-performing loans and credit costs among Malaysian banks. The banking groups’ average loan loss provisions percent of pre-provision income grew to 9.37% in the first nine months of 2015 from 5.52% in the same period last year,” Moody’s said.
According to Moody’s further, Malaysian banks reported pressured NIMs over the past 12 months because of elevated funding costs from the introduction of the liquidity coverage ratio this year, which prompted the banks to attract better-quality but more expensive retail and small and medium enterprises’ deposits. It added that the average NIM among the rated bank groups fell to 2.23% in September from 2.41% a year ago.
Peer comparison:
StockStalk: Next year looks set to be a tough one indeed with the challenging economic environment and liquidity, as well as asset quality issues banks have to face. Given the numerous downsides to investing in banks, we, like some of the analysts, are more comfortable stock picking in these turbulent times.
We like banks like CIMB and Maybank for their regional exposure and diversification and banks like Public Bank for its strong balance sheet and stable CIR. However, investors need to bear in mind that the economic environment is going to be volatile and hence stock picking may not be the best short-term strategy when eyeing banks to invest in.
As always, we believe that the fundamentals win in the end, and therefore investors should be looking for solid, long-term investments rather than a bank that will give them quick returns. This is simply because in the current and future environments, this will likely not happen. We think that investors should approach the sector with caution and thoroughly study individual banks’ financials and guidance before settling on one to invest in.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell any stocks. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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