Draft on Net Stable Funding Ratio by BNM

We do not foresee issues arising from the banking sector’s compliance with the Basel III’s Net Stable Funding Ratio. According to Bank Negara, more than ¾ of banks are already in compliance (requirement ≥ 100%), and BNM is aiming to start the adoption by 1 Jan 2019. Maintain OVERWEIGHT. Sector top picks: AMMB, Public Bank and Maybank.

Net Stable Funding Ratio to Come Into Effect 1 Jan 2019

Bank Negara Malaysia (BNM) had announced the exposure draft on the proposed Net Stable Funding Ratio (NSFR) which is applicable to all banking institutions. The implementation of the NSFR in the Malaysian banking system will come into effect no earlier than 1 Jan 2019. The NSFR is a standard under the Basel III regulatory reforms that requires banks to maintain a stable funding profile relative to the composition of their assets and off-balance sheet activities (defined as ‘available stable funding’/ ‘required stable funding’ ≥ 100%).

Most Banks Are in Compliance With Basel III’s NSFR Requirement

The NSFR complements the objectives of the Liquidity Coverage Ratio (LCR) which came into effect since 1 June 2015. To recap, the LCR encourages short-term resilience (30 days) of bank’s liquidity risk profile while the NSFR reduces funding risk over a longer time horizon (one year), thus promoting longer-term resilience by ensuring asset portfolio is supported by stable funding on an on-going basis.

Industry Average NSFR at 107% as at June17

According to BNM, the banking industry’s average NSFR stood at 107% as at June17, with more than ¾ of industry banks at above 100%. Meanwhile, all banking institutions have LCR of above 100% as at June17 (above minimum regulatory requirement of 100% by 1 Jan 2019), while the industry average stood at 141% as at June17 (Maybank: 146%; Hong Leong Bank 137%; AMMB > 100%).

No Issues Anticipated on Compliance With NSFR

In our view, as most banks under our coverage are in compliance with the NSFR, having taken steps in the past few years to beef up necessary equity capital and debt capital, we believe that potential concerns over NIM compression arising from new debt-funding will not be a major issue.

Maintain Sector OVERWEIGHT Stance

We maintain our sector OVERWEIGHT rating. We foresee sector-earnings growth of 10.6% yoy in 2017E, followed by a more modest 3.8% yoy in 2018E and 4.1% yoy in 2019E (EPS growth: +8.6% in 2017E, +1.7% in 2018E, +2.0% in 2019E). Favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and accommodative monetary policy are supportive reasons for the growth in earnings. The sector’s overall valuation in 2017E still appears attractive at a 1.35x P/BV multiple (on a forward basis) against the past-10-year average of 1.6x and the past-5-year average of 1.5x. Key risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, much higher provisions on FRS 9 adoption.

Top Picks – AMMB, Public Bank, Maybank

We have a BUY rating on AMMB (RM4.31), with our Price Target of RM5.20 (based on 0.9x P/BV on CY18). We believe the stock price sell down is unjustified (currently trading at 0.77x P/BV vs. the sector at 1.34x), subsequent to the aborted merger plan with RHB Bank. While there are concerns on AMMB's contingent liabilities, management reassured that these are due in part to the ordinary course of business activities. Management remains focused on achieving a much improved operating and profitability level by year 2020 based on its Top 4 Aspirations programme. Near-term targets : i) a gross impaired loan (GIL) ratio below 1.88%; ii) a positive JAWs, with a CIR of ≤55% in FY18/19E; iii) a FY18/19E ROE target of 10%; iv) being a Top 4 bank in wholesale, SME and retail-banking..

We continue to like Public Bank (PBK MK, BUY, RM20.58; TP: RM24.00, based on a 2018E P/BV of 2.32x) given the group’s more stringent credit underwriting standards and established franchise in the domestic retail financing markets.

For Maybank (MAY MK, RM9.80, BUY, TP: RM10.50 based on a 1.5x P/BV target), we foresee a better year underpinned by robust fund-based income generation, while NIM is expected to remain steady. Asset quality is expected to improve as global headwinds ease, while its Indonesian unit is also showing signs of a turnaround.

Source: Affin Hwang Research - 29 Sept 2017