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Highlight Trade Wise: Can Malaysian banks sustain their premium?
by Cals Mon 18 Nov 2013, 15:45
| Highlight Trade Wise: Can Malaysian banks sustain their premium? |
| Business & Markets 2013 |
| Written by Tong Kooi Ong of theedgemalaysia.com |
| Monday, 18 November 2013 14:30 |
Apart from fund flows, there were also a number of reasons we can attribute to for this trend.
One is Bank Negara Malaysia’s mandatory consolidation of the banking sector following the Asian financial crisis. Fifty-eight local financial institutions (many of them highly profitable and unaffected by the crisis) were immediately merged into 10 large banking groups. This created a more oligopolistic structure for the industry and reduced competition.
Secondly, banks themselves have been more conservative since the end of that crisis, while Bank Negara has been very vigilant and prudent in regulating the sector. Malaysian banks now have high asset quality with low levels of non-performing loans. The test of this came during the recent US subprime crisis, when Malaysian banks were totally unscathed.
Ironically, one measure of this “prudence” may soon come back to haunt the banks.
During the Asian financial crisis, several Malaysian banks were badly affected by large lending for the purchase of shares and to the corporate sector, especially to tycoons, for property bridging loans and to finance mergers and acquisitions.
After this bad experience, banks focused on “safer” forms of lending, notably to households. Housing mortgages were seen as “safer” as they were more diversified (smaller amounts per loan, larger customer base) and households were generally unaffected by the financial crisis with low unemployment levels and stable home prices.
Coupled with globally low interest rates and the competition to grow profits, the banks began a huge lending binge to the household sector.
Let us look at some statistics:
Malaysia’s household debt to GDP ratio has increased from 47% in 2000 to 83%, the highest in Southeast Asia and second highest in Asia after South Korea. In contrast, the ratios for Indonesia and Thailand were just 15.8% and 30% respectively, while the developed Asian economies of Singapore and Hong Kong had lower ratios of 67% and 58%.
Lending to the household sector has far outpaced overall lending growth (please see chart 1). Since 2000, lending growth for mortgages has increased 15.7% annually, while loans for the purchase of cars have risen 14.1% per year. Both have outpaced overall bank lending growth of 8.4% per year, resulting in sluggish growth for corporate loans.
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According to the World Bank, net interest margins have fallen from 3.4% in 2000 to 2.6% in 2011 as competition increased for lower-margin mortgages, with banks pushing for volume to raise overall profitability.
Loans for mortgages are currently priced at around 4.2%, compared with 6% to 7% for good quality small and medium-sized enterprises. As margins narrow, the cushion to absorb higher non-performing loans also falls. This raises the question of whether risks are correctly priced at this point of the cycle.
What lies ahead?
The property curbs proposed under Budget 2014 will have a dampening effect on property demand and prices. Coupled with a rash of credit tightening measures earlier implemented by Bank Negara and the increasingly squeezed lower and middle classes, demand for household loans will inevitably slow. This could also have an effect on asset quality for banks.
At the same time, the risks for loans to purchase cars are also now substantially higher as new car prices fall, and especially going forward when Malaysia tries to meet the AFTA commitment to remove import duties.
If Malaysia introduces a scrap car policy for old cars, as earlier proposed under the 2009 National Automotive Policy review and favoured by car manufacturers to push sales, it will be even worse.
Corporate loans are unlikely to pick up strength next year, with overall GDP growth chugging along at a 5% to 5.5% clip. With corporate sector lending growing at an anaemic pace of about 6% to 7% in the past year, they will not be able to buffer the households’ slowdown.
Net interest margin will likely narrow further. Margin compression has been a persistent trend due to rising competition, overheads and funding costs. On a positive note, those with regional operations, such as CIMB and Maybank, will be able to buffer this as margins elsewhere are higher. Indonesian banks, for instance, yield net interest margins of 5% to 7%.
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The biggest risk in all this is the potential for major capital outflows next year. As the US and European economies recover and quantitative easing ends, foreign funds are likely to leave this region. This could have major repercussions on domestic interest rates, exchange rates and asset prices.
Taking a look at valuations, Malaysia’s four listed largest banks — Maybank, Public Bank, CIMB Group and Hong Leong Bank — are trading at mostly 1.9 to 2 times book, with the exception of Public Bank at 3.3 times book (please see table 1).
By comparison, Singapore’s big three banks — OCBC, UOB and DBS — are trading at 1.3 to 1.6 times book. The more exciting Indonesian banks — where growth prospects are stronger — are trading mostly around 1 to 2.7 times book, with many options below 2 times book. The two largest Thai banks, Siam Commercial Bank and Kasikornbank, are trading at 2.4 and 2.2 times book respectively, but the rest are around 1.4 times book.
With the higher interest margins and return on equity in Indonesia and Thailand, the P/E valuations for banks there are below 10 times, compared with 12 to 14 times for Malaysia.
Malaysian banks are already well priced. The pricing may have been justified in the past for their consistent growth performance and asset quality. However, with household loan growth and quality likely to fall amid continued interest margin compression, the earnings outlook will be dampened substantially.
This story first appeared in The Edge Malaysia Weekly Edition, on November 11 - November 17, 2013.
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