Banking - Beyond The Headlines

kiasutrader

Publish date: Wed, 20 Jun 2012, 08:48 AM

THE BUZZ

The Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) has revised the Shariah screening methodology for companies based on the following new Financial Ratio Benchmarks:

Conventional interest bearing debts cannot exceed 33% of a company's total assets
Conventional cash deposits cannot exceed 33% of a company's total assets

The new benchmark, which is not mandatory, only applies to companies intending to retain their Shariah-compliant status.

OUR TAKE

One-off refinancing kicker at first glance? The new benchmarks essentially encourage corporates that wish to maintain their Shariah-compliant status to ensure that they cap the ratio of their non-Shariah compliant/conventional interest-bearing debts as a percentage of total assets to not more than 33%. This may potentially provide positive upside for banks via earning one-off Islamic/sukuk debt refinancing or origination fees from corporates needing to transfer or refinance their debts to Shariah-compliant Islamic/sukuk debts.

But most outstanding corporate bonds are Islamic sukuk. At first glance, one might view this as an opportunity for banks with strong Islamic banking sukuk franchises such as CIMB and Maybank to benefit from the new ruling as corporates may wish to raise fresh Islamic bonds or sukuk to refinance their existing conventional bonds. However, as shown in Figure 1 below, a large portion of outstanding long-term corporate bonds and commercial papers in Malaysia (85.1%) are already in the form of Islamic sukuk.

Private debt securities market relatively liquid only for AAA to AA-rated bonds. It is also equally important to take note of the fact that only AAA to AA-rated private debt securities in Malaysia command decent yields of 3.4%-to-4.0% for one-year maturities and 4.3%-to-5.0% for longer tenure 10-year bonds. As such, many corporates which do not have such strong ratings and which need to refinance their current conventional bonds or debts in the form of sukuk to comply with the new Shariah-compliant regulation are likely to garner a very poor take-up rate, making such transactions unfeasible. We believe that a large number of the outstanding AAA-rated bonds of strongly rated corporates in Malaysia are likely to be sukuk after all, and as such, do not require urgent refinancing just to comply with the new Shariah benchmarks.

Relatively low corporate gearing equals minimal scope for upside. We also note that the gearing of corporates in Malaysia has declined significantly, which essentially implies that: i) most corporates would be in compliance with the 33% conventional debt to total assets minimum benchmark requirement, which will thus allow them to retain their Shariah status without having to refinance their conventional debts in the form of sukuk, and ii) many large and well-capitalized corporates are likely to tap the Sukuk/Bond market rather than the more expensive conventional corporate loans for their financing needs. Furthermore, with most of the large corporate already tapping the sukuk market, the scope for conventional bond refinancing is again marginal, notwithstanding a few exceptions.

Maybank, CIMB and AMMB dominate in terms of Islamic assets. As shown in Figure 6 below, Maybank, CIMB and AMMB have the largest proportion of Islamic banking financing assets to total loans base in percentage terms, with Maybank among the most aggressive. However, RHB Capital currently has the lowest Islamic financing to deposit ratio of 70.4% among the banks, given its aggressive fixed deposit gathering thrust over the past two years. In view of the relatively low contribution of Islamic banking income, the segment will continue to expand at a much stronger pace than conventional financing. However, as there is a fair degree of cannibalization on conventional financing, one has to assess the total growth of the banking group's overall asset and income growth, which are expected to somewhat moderate in 2012 (8.5% industry loans growth forecast) vs that of 2011 (13.6%).

Maintain NEUTRAL. We remain NEUTRAL on the sector. While we do not expect any major meltdown in asset quality or liquidity constraints, we think that earnings growth may have slowed significantly, as reflected in 1Q12's uninspiring loans and net interest income sequential growth, which were at their 4- and 5-year historical lows respectively. Aggregate pre-provision operating profit dipped 2.4% q-o-q despite a 14.4% q-o-q spike in non-interest income, largely driven by unsustainable and lumpy trading and investment gains. Our large cap banking top picks are CIMB (BUY, FV: RM8.53) and MAYBANK (BUY, FV: RM9.85).

Source: OSK