News

BNM Stability report salient points: 1) household indebtness risk well contained even under stress testing scenarios; 2) risk from property market mitigated; 3) business credit risk remained sound and intact; 4) limited external contagion risk even after stress test; 5) financial sector can withstand extreme macroeconomic shocks, reaffirmed by IMF; and 6) expect smooth transition to into Basel III liquidity standard.

New reference rate or base rate (BR): 1) replaces BLR for new loans from 2nd Jan 2015; 2) only reflect benchmark cost of funds (BCF) and SRR; 3) spread always positive as it reflects credit and liquidity risks as well as cost and margin; 4) BLR based loans unchanged but changes linked to BR; 5) banks have flexibility to determine BR; and 6) should have no impact on effect rate.

Comment

Stability report largely in line with our view that the system is sound and in position to whether any adverse environment.

We believe BNM’s stress tests are comprehensive and robust vis-à-vis HLIB own amateur stress testing scenarios (please refer to our report entitled “2014 Outlook” dated 2 Jan 2014). However we believe both delivered the same message that the sector’s capital is able to absorb potential rise in delinquencies without significant adverse impact.

While BNM’s stress tests focused on the impact on capital, our amateurish stress testing suggests that, under the base worst case scenario, capital ratios will remained intact (in line with BNM) and only slowed but not derailed earnings growth. Even when we equate BNM’s extreme stress test on household with RM30.5bn new impaired loans, our sensitivity analyst shows that sector aggregate earnings will be setback by 27%, a far cry from 2001 when sector aggregate earnings fell by 45% despite relatively lower new NPL of RM13.1bn.

As for the BR, we believe banks will use KLIBOR as the BCF and similar spread to match with current effective rate, resulting in no significant change in effective rate. However, we believe this is just a prelude to an eventual move to full risk-based pricing whereby banks with low cost of funds and better efficiency will benefit given the flexibility in trade-off between margin and market share (i.e. can either enjoy higher margin by quoting comparable rate or gain market share by quoting very competitive yet risk-adjusted rate).

Risks

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.

Rating

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.

Top Picks

Maybank & RHB Cap.

Source: Hong Leong Investment Bank Research - 20 Mar 2014