Overall, our banking system remains resilient and is able to withstand severe macro shocks. Also, both the household and business segments have adequate financial buffers to sail through tough times. That said, risks are well contained and thus, financial stability is expected to stay intact this year. However, the sector still lacks strong growth catalysts in the horizon. Also, there are risks of a potential OPR cut and muted capital market activities. At present, valuation is fair as it is discounted at -1SD to its 5-year mean P/B. For sector exposure, we continue to like RHB (TP: RM6.60) and BIMB (TP: RM5.00) given their positive risk-reward profiles.

Yesterday, Bank Negara Malaysia (BNM) released its 2018 Annual Report together with the Financial Stability and Payment Systems Report. In this write-up, we collated the key highlights relevant to the banking sector.

Resilient banking system; risks contained. The banking system continues to be resilient and is capable of weathering any potential systemic shocks from domestic and external sources. This is underpinned by: (i) strong capital buffers as CET1 ratio remains high at 13.1% (2017: 14.0%), (ii) sound asset quality with gross impaired loans (GIL) ratio at all-time low of 1.45% (2017: 1.55%), and (iii) robust sector liquidity coverage ratio of 143.2% (2017: 134.9%). Furthermore, risks to financial stability (like credit, market, liquidity, and contagion) were still very much contained in 2018. The general direction of risks is seen to be largely steady this year; BNM expects domestic financial stability to be broadly stable.

Household segment still in good shape. Although total household debt-to-GDP stands elevated at 83.0% (2017: 83.8%), we opine that the indebtedness is not at a hazardous level. Notably, two-thirds of the household debt is secured by properties and securities - effectively reduces net exposures. Moreover, the household sector’s aggregate financial asset-to-debt stood at 2.1x (flat vs 2017); if we were to consider only liquid financial asset (LFA), the debt cover is 1.4x (2017: 1.5x). Also, the share of borrowings by vulnerable borrowers (income less than RM3,000 with LFA-to-debt of 0.6x) is now below one-fifth of total household debt - this has been on a declining trend since 2012. Besides, the household’s GIL ratio improved a tad to 0.99% (2017: 1.01%).

Slightly more challenging business condition. As for businesses, we observed an unpleasant climbing trend for debt-to-equity and falling interest coverage ratio. That said, both were still at un-alarming levels of 49.3% (2017: 47.0%) and 7.2x (2017: 9.1x; prudent threshold 2.0x) respectively. On a more positive note, the cash-to-short term-debt ratio is stable and healthy at 1.6x (2017: 1.5x; prudent threshold: 1.0x). Also, asset quality for businesses has gotten better, seeing that GIL ratio fell to 2.07% (2017: 2.26%).

Retain NEUTRAL. Besides a sturdy banking system, we are comforted that both the household and corporate sectors have sufficient financial buffers to withstand severe macroeconomic shocks. Hence, asset quality should not see material deterioration as we believe borrowers can uphold their financial obligations when fall due. However, the sector still lacks strong growth catalysts in the offing. Also, there are risks of a potential OPR cut and muted capital market activities. At present, valuation is fair as it is discounted at -1SD to its 5-year mean P/B. For sector exposure, we continue to like RHB (TP: RM6.60) and BIMB (TP: RM5.00) given their positive risk-reward profiles.

Source: Hong Leong Investment Bank Research - 28 March 2019