BNM has issued a circular which required banks to maintain, in aggregate, Collective Assessment (CA) provisions and regulatory reserves of no less than 1.2% of total outstanding loans/financing (excluding loans/financing with an explicit guarantee from the Federal Government of Malaysia), net of individual impairment provisions, by 31 Dec 2015.
Banks with CA ratio that is significantly lower than the required 1.2% could suffer due to the need to provide additional CA in their P&L. Based on banks results announcement, Public Bank and Affin have the lowest CA ratios of 0.72% and 0.93% respectively (see Figure #1).
RHB Cap, AFG and Maybank may also be impacted, albeit marginally, given that their ratios were 1.10%, 1.11% and 1.17% respectively, just a tad below the minimum requirement.
Meanwhile, HL Bank, CIMB Group and AMMB’s ratios are higher than the minimum of 1.2% at 1.25%, 1.42% and 2.27% respectively.
However, the impact on earnings could be muted given that the 1.2% requirement also includes regulatory reserves. Banks with shortfall could utilize that or transfer from their retained earnings. Nevertheless, the latter would impact dividend payout.
Moreover, banks mentioned above have sizeable statutory reserves in their books which coupled with their CA reserve would be comfortably meeting the 1.2% (based on our backof- envelop calculation).
Banks also has two years to comply which means that they can smoothen the potential impact on earnings, especially for those banks that are slightly below the 1.2%.
Overall, we believe the impact on earnings is likely to be muted given the sizeable statutory reserves sitting in banks’ book.
However, over the longer term, it means that banks would have one less avenue to boost their earnings via lowering CA provisions. This is largely in line with our expectations that provisions (which have been one of the major earnings drivers over the last few years) will no longer be one of the main avenue that fuel earnings growth.
Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), non-interest income growth as well as more macro prudential measures.
NEUTRAL
Positives – Best proxy to the impact of ETP (sector with third highest multiplier effect), domestic consumerism (albeit slower) and economy, strong asset quality, robust capital ratios, capital management and M&As.
Negatives – Competitive pressure on margin, potential of recession which would increase the possibility of rise in delinquencies, portfolio losses from foreign outflow and rising burden of low income group.
RHB Cap, Maybank & AFG.
Source: Hong Leong Investment Bank Research - 11 Feb 2014