- Revisiting capital. With Public Bank (PBB) recently announcing a RM5bil rights issue, we expect ongoing queries on capital for other banks as well.

- Phase-in arrangements allow some time for compliance. To recap, most banks currently appear to have sufficient capital, but this is mainly because of Bank Negara Malaysia’s (BNM) phase-in arrangements in relation to investments in the ordinary shares of subsidiaries and unconsolidated financial/insurance/takaful affiliates. While these are to be fully-deducted out in the calculation of common equity tier 1 (CET1) capital, BNM allows time for banks to only fully comply in 2018 under a phase-in arrangement. The phase-in arrangement allows for a portion to be deducted using the corresponding deduction approach: 20% in 2014, 40% in 2015, 60% in 2016, 80% in 2017 and 100% in 2018.

- But the entire 100% of investments in subsidiaries and unconsolidated entities have to be deducted entirely (fully-loaded basis) by 2018. On a fully-loaded basis, we estimate the banks with relatively low banking CET1 ratios to be Maybank at 8.52% and HLBB at 6.6% currently.

- Possible capital raising by Maybank, HLBB and RHB Cap. Assuming that a minimum CET1 ratio of 10% is a reasonably level, we estimate the shortfall to HLBB’s capital to be up to RM3bil, by 2018, implying a possible rights issue ahead. We estimate that Maybank may also need fresh capital of up to RM7.6bil, assuming the incorporation of its Singapore subsidiary.

- RHB Cap may need to retain capital to address its double leverage ratio. Both RHB Cap’s group and banking level CET1 ratios look adequate currently. The only issue for RHB Cap, we believe, is the ongoing deliberations to reduce the group’s double leverage ratio further from 134% as at end-FY13 (end-FY12: 136%) to probably around 120%. This implies that RHB Cap may need to retain additional capital of RM918mil.

- Maintain NEUTRAL. AFG’s capital levels look comfortably high at more than 10%; thus we do not expect AFG to raise fresh capital. In a nutshell, other than an uncertainty over the direction of cost of funds, we think that there is a renewed focus on capital now. We remain NEUTRAL on the sector. 

Source: AmeSecurities