- The press has reported that banks may be required to hold a minimum collective assessment rate of 1.2% by end-2015. The press reported that, according to a circular from Bank Negara to financial institutions last week, all banks are required to set aside a minimum collective assessment (CA) rate of 1.2% of total loans effective 31 December 2015.

- To recap, previously, there was no minimum requirement as banks were allowed to set the CA rate (formula being collective assessment balance over gross loans net of individual assessment balance) based on their own risk assessment of probability of default (PD) and loss given default (LGD) under FRS139, which came into effect in FY10. Prior to FY10, banks were required to maintain a minimum CA rate of 1.5% under the old GP3 guideline.

- Banks may be allowed to meet the minimum requirements from retained earnings. The press reported that banks may be allowed to meet the minimum requirements by setting aside the amount from retained earnings, in which case it may not affect net earnings. However, if the additional requirements are required to be set aside from earnings, this is expected to affect net earnings ahead. The press reported that financial institutions are seeking further clarification from Bank Negara on whether to set aside the provisions from net earnings.

- Banks which may need to raise CA rates are PBB, RHB Cap, AFG and Maybank. Based on our estimate of collective assessment rates (formula being collective assessment balance over gross loans net of individual assessment balance), banks that may have shortfall are PBB with the lowest CA rate of 0.72% currently, followed by RHB Cap at 1.10%, AFG at 1.11% and Maybank at 1.17% (see table in following page).CIMB and HLBB have adequate CA rates, with CIMB’s CA rate at 2.38%, followed by HLBB’s at 1.25%.

- Additional collective provisioning required. With this possible new requirement, we estimate that PBB may need to set aside an additional collective provisioning of RM1.06bil. The additional collective provisioning required from other banks are less significant - RHB Cap is RM122mil, while Maybank is RM100mil and AFG at RM26mil. If the additional amount is to be set aside from retained earnings, we estimate that there may be about 4% reduction in PBB’s book value per share to RM6.22/share from RM6.50/share FY14F.

- Maintain NEUTRAL. We maintain our NEUTRAL rating. The press reported that the regulator’s latest move may be to ensure adequate level of collective impairment is keeping pace with strong credit growth. We expect upticks in impaired loans for the industry this year. Thus, the latest possible move to raise CA rate is positive as it may set aside further loan loss provisioning buffers. 

Source: AmeSecurities