Investment Highlights

BNM released the financial stability review report for 1H 2018 and held an analyst briefing yesterday. Below are the key highlights:

• The central bank highlighted that domestic financial stability continued to be sustained in 1H2018 despite uncertainties caused by domestic factors (opaqueness in policies after the outcome of GE14) and external factors (trade-related tensions, emerging market capital outflows with the US interest rate rising and stronger USD).

• Financial institutions remained fundamentally sound with strong capitalisation and profitability. The banking sector recorded a total capital ratio of 17.0% and an ROE of 13.3%. Liquidity in the banking system continued to be ample. LCR was 139.3%, well above the transitional regulatory minimum requirement of 90.0% in 2018.

• Household debts grew by 5.2% in 1H2018 (2017: 4.9%) driven largely by growth in secured loans (loans for purchase of residential properties). In 1H2018, the approval of residential property loan applications was above 70.0% but the rate declined thereafter to around 65.0%. First-time home buyers accounted for 70.0% of the total house financing. Risk of significant price correction for properties is low as housing demand remained firm.

• The debt servicing ratio (DSR) of household and business loans has been supported by sustained income and employment growth as well as healthy financial positions. For the household sector, the financial asset-to-debt ratio and liquid financial-asset-debt ratio were 2.1x and 1.4x respectively. This was comfortably above the threshold of 1.0x. The business sector’s cash-to-term-debt ratio and interest coverage ratio were both above the threshold levels at 1.5x and 8.2x respectively.

• Impairment of loans rose slightly faster for households with less stable earnings and those facing higher cost pressure. There have been upticks in impairments of personal loans, residential and non-residential property loans. Upticks in impairment of residential and non-residential property loans were mainly for properties exceeding RM500,000. Despite the increase, impairments still remained low as evidenced by the stable impaired loan ratio for household debts for banks and non-banks at 1.6%.

• Civil servants are more indebted with their borrowings comprising of 20.0% of total household debts. However, risk from this segment remained low. This is based on the low impairment ratio of civil servants’ debt of 1.3% and with the debt-at-risk accounts making up only 2.2% of the total household debts.

• Circa three quarters of new loans approved were to borrowers with DSR lower than 60.0%. Among the positives, the share of borrowings by low income earners has continued to trend downwards. In 1H18, household debt-to-GDP further improved to 83.8% from 84.2% in 2017.

• Banks are able to withstand shocks from household lending with an excess capital buffer of RM138.5bil.

• We understand there is an imbalance in the demand and supply of affordable homes. Excess supply of office spaces and shopping complexes persists with banks’ exposure to these segments accounting for 5.0% of the total loans.

• Non-financial corporate (NFC) debts expanded by 7.2% with financing extended to the construction, manufacturing and real estate sectors. NFC debt-to-GDP in 1H2018 was higher at 105.3% (2017: 102.8%).

• The debt servicing capacity of NFCs slipped to 8.2x in 1H2018 from 9.1x in 2017 contributed by the softer earnings of most business sectors. Asset quality of loans to the business sector remained sound with a stable impaired loan ratio of 2.6%.

• Conditions for oil & gas companies remained challenging due to the slow rise in capital spending (capex) by oil producers. This is despite the rising oil prices. Banks’ exposures to the oil & gas sector account for 6.0% of total business exposures. Meanwhile, in the real estate sector, we understand that weak sales performance continued to the impact earnings of companies in the sector.

• Banks are able to withstand shocks under adverse scenarios in the stress test with their capital and earnings buffer.

• Domestic financial markets saw a net sell-off of RM24.7bil in government bonds and equities by foreign investors. Nevertheless, the market was supported by domestic institutional investors with a net purchase of RM59.7bil in bonds and equities.

• We maintain OVERWEIGHT on the sector. Although conditions have been challenging coupled with the slowdown in the GDP growth which we have factored into our estimates, we continue to expect a decent earnings growth of 6.2% for banks in FY19. Besides, expect asset quality of banks are expected to remain stable with no significant rise in provisions while overhead expenses are likely to improve with higher operating efficiencies ahead. We still see an upside in share prices based on our valuations which are pegged to banks’ FY19 BV/share. Bank stocks continue to be high in liquidity and seen as offering steady and decent dividend yields. Our BUY calls are RHB Bank (FV: RM6.10/share), Public Bank (FV: RM26.00/share), Alliance Bank (FV: RM5.00/share), BIMB Holdings (FV: RM5.40/share), Maybank (FV: RM10.70/share) and MBSB (FV: RM1.27/share). We have HOLDs on CIMB (FV: RM6.30/share) and Hong Leong Bank (FV: RM20.20/share). We have upgraded our call on MBSB from HOLD to BUY with an unchanged FV of RM1.27/share. This is due to the recent share price weakness resulting in value emerging for the stock.

Source: AmInvest Research - 27 Sept 2018