Investment Highlights

• BNM released the financial stability review report for 2018 and held a briefing yesterday. Below are the key highlights:
• The Central Bank highlighted that banking sector remained resilient, supported by healthy profits with ROE of 12.6% coupled with strong liquidity and capital buffers. Domestic financial stability has been maintained with the sustained debt servicing capacity of household and businesses while risk from the property sector has been contained.

• The banking sector recorded a CET1 capital ratio of 13.1%, low net impaired loan ratio of 0.9% and loan loss cover of 97.9%. Liquidity continued to be ample with a LCR of 143.2%, well above the transitional regulatory minimum requirement of 90.0% in 2018.

• Growth in household debts continued to ease to 4.7% in 2018 (2017: 4.9%) contributed largely by slower pace of loans for purchase of residential property and motor vehicles. Even though household debt to GDP remained elevated, it declined further to 83.0% compared to 83.8% the previous year.

• Two thirds of the household debts are secured by financial assets comprising of properties and securities. Growth in household assets moderated in 2018, but still outpaced the expansion in debts. The financial asset-to-debt and liquid financial asset-to-debt was stable at 2.1x and 1.4x respectively for the household sector in 2018.

• Share of borrowings by borrowers with income lower than RM3,000 per month to the total household debts fell to 19.3% (2017: 19.9%; 2016: 21.9%). This will lower the potential default risk of loans from this segment which is deemed as vulnerable.

• Debt servicing ratio for 70% of the newly approved household loans continued stay below 60.0%.

• Overall, asset quality of household loans remained stable with a GIL ratio of 1.2%. However, there remains some pockets of risk as highlighted by BNM, particularly the housing loans for purchase of properties above RM500,000 where borrowers’ income are not so stable in servicing their debts. Also, another segment to watch is the personal financing to borrowers with income of below RM5,000 a month.

• House prices are still growing albeit modestly at 1.1% for 3Q 2018 based on preliminary data of BNM (1H2018: 4.0%). The easing has been contributed by the weaker demand for higher-end properties. These properties continued to be unaffordable for most buyers. Firm demand for houses below RM500,000 has been seen and there has been a shift in housing supply towards the affordable segments in the past two years. Besides, the government has introduced measures to address the structural mismatch between housing supply and demand. These coupled with initiatives to improve financial affordability and reduce the level of unsold properties, the outlook for the property sector is likely to gradually improve ahead albeit still a soft market in the near term. Meanwhile, the oversupply of office and retail spaces in the non-residential property market continues to persist.

• Non-financial corporate (NFC) debts grew by 6.5% with financing extended to the construction, manufacturing and real estate sectors. Debt-to-GDP ratio climbed to 103.7% for the business sector in 2018.

• Debt servicing ratio (DSR) for businesses remained healthy despite the increase in leverage as evidenced by a higher debt to equity ratio of 49.3%. NFCs recorded a lower interest coverage ratio (ICR) of 7.2x (2017: 9.1x) attributed to the decline in ICR of companies in the property and construction sectors. Supply disruptions in the commodity sectors, weaker domestic currency and uncertainties after GE14 have all contributed to the weaker earnings of companies in most sectors.

• Overall the business sector’s cash-to-short-term debt ratio (CASTD) remained stable at 1.6x, standing above the prudent threshold level of 1x. CASTD for the property sector fell slightly while the ratios for both oil & gas and construction sector were stable.

• For oil & gas sector, we understand that more contracts were awarded in 2018 than 2017. However, the impact from these contracts has yet to the flow through the earnings of the oil & gas players. With debt rationalisation, the ability of oil & gas companies to service their debts moving forward is likely to improve. GIL ratio for oil & gas loans was high at 10.2%. On a comforting note, provisions for impairments of loans in this sector have already been largely provided for by banks.

• Impaired loan ratio of the overall business sector was lower at 2.3x in 2018 vs. 2.6x the previous year. Meanwhile, the GIL ratio for SME loans was 2.4%.

• Domestic financial markets saw a cumulative portfolio investment outflow of RM44.0bil in 2018. Nevertheless, the market was supported by domestic institutional investors’ purchase of securities taking advantage of attractive valuations.

• On net stable funding ratio (NSFR), the extension of the observation period to 31 Dec 2019 was announced in Oct 2018. At at end of 2018, the average NSFR for the banking industry was 109.3% with 83% of banking institutions reporting NSFRs of at least 100%. We understand the central bank is conducting further work on the liquidity risk management practices of banks as additional input to the finalisation of the requirements for the ratio. We gather that the implementation globally remains uneven with BNM targeting to finalise the requirements for NSFR by 1H2019. We maintain OVERWEIGHT on the sector. This is due to the anticipation of global liquidity into emerging markets from a slowdown in normalisation of the US monetary policy that is widely expected. The fund inflows are expected to benefit share prices of banking stocks which are liquid, offering decent dividend yields with banks still expected to deliver positive growth in earnings despite challenging conditions. Arising from the recent share price weakness of CIMB, we are upgrading our call on the stock to BUY from HOLD with an unchanged fair value of RM5.80/share based on 1.0x P/BV (FY19 ROE: 9.4%). Our top picks are RHB (FV: RM6.30/share), BIMB Holdings (FV: RM5.10/share) and Maybank (FV: RM10.70/share).

Source: AmInvest Research - 28 Mar 2019