Banking on sound asset quality

Banking on sound asset quality
Business & Markets 2013
Written by CIMB Research  
Friday, 29 November 2013 11:03

Banking sector
Maintain neutral: We were negatively surprised by Standard and Poor’s Rating Services’ (S&P) downgrade of its rating outlook for four financial institutions from “stable” to “negative”, citing high household debt as the reason. This could adversely affect sentiments on banking stocks in the near term.

The four are CIMB Group Holdings Bhd, AmBank (M) Bhd, RHB Bank Bhd and RHB Investment Bank Bhd.

We do not see material risks for a significant uptick in Malaysian banks’ impaired loan ratios. This is premised on: (i) the healthy economic climate; and (ii) continuous improvement in bank loan approval and monitoring systems. We are more concerned about top line growth in the mature Malaysian financial market and pressures on margins. We remain “neutral” on the sector with RHB Capital Bhd (RHBCap) as our top pick.

S&P, meanwhile, has reaffirmed the ratings and maintained a stable outlook on four other banks — Malayan Banking Bhd, Public Bank Bhd, CIMB Bank and CIMB Investment Bank.

We are confident of Malaysian banks’ capabilities in keeping their impaired loan ratios at bay. In fact, the industry’s gross impaired loan ratio has been falling from 3.4% in 2010 to 2.7% in 2011 and 2% in 2012. Also, banks have built up their loan loss coverage to a strong 97.6% as at end-September 2013.

For this industry, household loans are mainly in the form of residential mortgages, which are mostly well collateralised. Housing loans make up 27.9% of the industry’s loan base, compared with 4.8% for personal loans and 2.8% for credit card receivables.

The above news can inflict negative sentiment on banking stocks, especially RHBCap and AMMB. However, we do not see significant risks for a deterioration in the asset quality for both banks. Hence, we see any price weakness for RHBCap, which is our top sector pick, as a buying opportunity. — CIMB Research, Nov 27

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This article first appeared in The Edge Financial Daily, on November 29, 2013.