- The earliest banks to have reported results showed signs of rising auto impaired loans for the December 2013 quarter. The two earliest banks to have reported results for the December 2013 quarter are Public Bank (PBB) and Alliance Financial Group (AFG). Both have shown increases in auto impaired loans (see charts in following page).

- Six consecutive quarters of rising auto impaired loans for PBB. PBB’s impaired loans for the auto segment increased by 5.5% QoQ to RM357.5mil in 4QFY13, from RM338.9mil in 3QFY13 (see Chart 1 in page 2). This is the sixth consecutive quarter of rising auto impaired loans for PBB, which is well regarded for its strong asset quality. The QoQ increase is attributed to more stringent classification for impaired loans as it adopted a more prudent in-house stance. Thus, some borrowers may now be considered as impaired even though the customers are less than three months in repayment arrears. In addition, PBB has tightened its in-house criteria following further observations of delinquencies within certain segments of its auto loan portfolio since the beginning of 2012.

- AFG’s auto impaired loans has also increased, albeit from a small base. AFG also saw an increase in the auto impaired loans segment, albeit from a small base (see Chart 2 in page 2). The segment rose by 37.0% QoQ to RM9.0mil in end-December 2013, from RM6.6mil in end-September 2013. Both banks’ increases in auto impaired loans are not due to expanding loan bases, as can been seen from the gross impaired loans ratio. PBB’s gross impaired loans ratio has moved up to 0.79% from 0.76%, while AFG’s gross impaired loans rose to 0.87% as at end-Dec 2013 from 0.70% a quarter ago.

- The industry experienced upticks in auto impaired loans over the last four quarters. Generally, there was an upward trend in auto impaired loans for the industry over the last four quarters, as shown in Chart 4 on page 3. The latest QoQ uptick was 8.9% for the fourth quarter of 2013.

- Maintain NEUTRAL. We maintain our NEUTRAL rating on the sector. The latest results indicate some strains in the auto loans portfolio. This affirms our view that credit costs for the banking sector will likely normalise ahead. We maintain our credit costs assumptions at 35bps for 2014F and 31bps for 2015, on a calendar year basis.

Source: AmeSecurities