- Recent upticks in MGS yield of 30bp to 50bps. There have been some upticks in the Malaysian Government Securities yield rates in recent weeks following newsflow of the US Federal Reserve possibly reducing its USD85bil monthly bond-buying programme. The Edge has recently reported high foreign shareholding of local bonds, with foreigners estimated to have tripled their holdings to 48.3% or RM144bil as at April this year. This compares to foreign shareholding of 13.4% of local bonds in 2009. This may give rise to concerns of liquidity outflow and impact on MGS yield.

- Leading to possible marked-to-market losses for banks’ securities portfolio. With the uptick, this may lead to unrealised marked-to-market (MTM) losses for banks’ securities portfolio. We have attempted to gauge the possible impact on the banks just purely based on textbook theory, from the banks’ securities portfolio. Based on our sensitivity analysis, assuming a 40bps rise in yield and average duration of 4, we estimate possible downgrade to banks’ net earnings ranging from -2% to -13%.

- HLBB remains conservative. The largest impact appears to be on Hong Leong Bank (HLBB), with a possible earnings downgrade of 13.2%. However, this is mitigated by reassurance during our recent company visit that the company has now almost fully sold off its trading portfolio before the election in May 2013 and does not expect to be affected by recent market volatility.

- AFG looking at market opportunities. The possible impact to Alliance Financial Group (AFG) may be -3.6% to our net earnings forecasts. However, we understand the company has already realised its trading securities portfolio at strong gains earlier. We believe the company views the current market volatility as an excellent opportunity to rebuild its trading book. Thus, we remain positive on AFG.

- Minimal impact for PBB. As for Public Bank (PBB), the potential reduction to net earnings is -6.0%. However, the company has reassured that its trading securities book is very insignificant with short-term tenures. Thus, it does not expect any significant impact to its net earnings from the recent market volatility.

- Maintain overweight. More importantly, most of the banks indicate that domestic liquidity remains ample with banking system’s loan-to-deposit ratio remaining healthy at 81.5%, total deposit of RM1,448bil and total loans of RM1,138bil as at end-April 2013. This implies excess of deposit over loans of RM310bil. To sum up, the impact to banks may not be as large as implied from pure application of textbook theory. We maintain Overweight.

Source: AmeSecurities