-  The press recently reported that all banks need to adhere to stricter classification practices for provisions and the probability of default (PD) on their respective loan accounts.

-  All banks need to have a PD of 100% post three months on their collective assessments, which is a stricter method.

-  The tougher classification requires banks to make PD provision for the full sum of a three-month-impaired loan when borrowers fail to make repayment in the fourth month.

-  We understand that most banks have already adopted this practice since FRS 139 came into effect in FY10.

-  CIMB, Public Bank (PBB) and Maybank have already adopted the practice of imposing a PD rate of 100% since four years ago in FY10.

-  We understand that Hong Leong Bank (HLBB) has also been adhering to this practice, while AFG has also been constantly reviewing its collective assessment methodology.

-  Thus, we remain comfortable with the asset quality of both HLBB and AFG, given the profile of both banks’ customer base.

-  As for RHB Capital (RHB Cap), the company has already alluded during its recent briefing that absolute collective assessment was raised by circa RM100mil in 1HFY14. This was due to more conservative adjustment to PD rates, which is now adjusted upwards to 100% for loans more than 3 months in arrears.

-  Thus, we are not making any major changes to our credit costs forecasts based on the latest news.

-  Nevertheless, we maintain our stance that sector credit costs should normalise ahead.

-  To recap, our credit cost assumptions for the banks was 36bps for 2014F, with a revision to 32bps (from 29bps) for 2015F.

-  The revision is due to our change in forecasts for CIMB in terms of credit costs, to 57bps, from 39bps previously for FY15F.

-  Maintain NEUTRAL on sector.

Source: AmeSecurities