The Financial Stability Review highlighted the quality and resilient of the domestic banking system. However, concerns still prevail from property market imbalances, but overall risks look stable for 2019. Our view of moderate loans growth still holds; thus, we maintain a Neutral outlook for the sector. However, valuations seem more attractive and most of the banking stocks under our coverage are rated as OUTPERFORM except for CIMB (TP: RM6.10), HLBANK (TP: RM20.60), PBBANK (TP: RM24.10) and RHBBANK (TP: RM5.80) which are at MARKET PERFORM.

BNM released its 2018 Financial Stability Report yesterday emphasising again the soundness, stability and resilient of the domestic banking system. The domestic financial market conditions remained orderly supported by strong domestic financial institutions. Market risk exposures were at manageable levels due to prudent risk management with lower risks seen from external borrowings. Strong capital and liquidity buffers are supporting the resiliency of the banking system while liquidity and funding conditions remained conducive for financial intermediation activities. The report highlighted that household debt remained elevated but expanded at a slower pace in line with income growth. Debt repayments continued to be supported by income and employment growth. Despite healthy financial buffers, BNM highlighted that lower income households remain vulnerable but their share of household debt declined due to implementation of responsible lending standards. Despite overall quality of household debt remaining sound, BNM sees that certain households are showing sign of difficulty in servicing their debt. House prices continued to ease as demand for high-end properties softened due to affordability issue for most buyers. BNM sees that demand for owner-occupied housing to outstrip supply but believes with better alignment and coordination from the Government and developers to align demand and supply, the housing market will improve. From BNM’ sensitivity analysis, the domestic banks capital buffers are sufficient to withstand the property market broad price correction plus potential spill-over to other sectors.

For 2019 the risk outlook of domestic financial stability to remain broadly stable. Credit risk from households, property market and non-financial corporations to remain stable. However, risks from the property market are elevated with levels of unsold housing units expected to rise in the short-term. Incoming supply from office space and shopping complex are compounding the risks. Market, liquidity & funding and contagion risks, on the other hand, are expected to remain stable. Strong domestic institutional investors and financial institutions are expected to remain supportive with ample liquidity on the back of attractive valuations. Loan-to-Fund (LTF) and Loan-to-equity (LTFE) are sustained at levels of 80% and 70%, which are supportive of the banks’ critical needs. Contagion risks from NBFIs are expected to remain low with the strengthening of governance and management of NBFIs to support improvement in performance and resilient of NBFIs. BNM sees 2019 business activity to be supported by sustained demand and continued income and employment growth with downside risks coming from external conditions i.e. slower global growth, trade war and volatility in commodity prices.

Household debt expanding at a slower pace. 2018 saw household debt moderating further (+4.7% YoY) as loans from NBFI’s slowed. For 2018, household debt to GDP declined by 80bps to 83%. Residential property loans remained the main contributor to household debt. With income and employment stable, households continue to manage their debt payments. While Household financial assets expanded at a slower pace (dropping by 340bps to +5.0% YoY) ratio of household assets to debt remained high at 4x. Financial assets and liquid financial assets (LFA) to debt remained resilient at 2.1x and 1.4x, respectively. Higher risks remained for those earnings household debt remaining elevated, BNM sees financial stability risks being mitigated, as debt expanded in line with income. Exposures of financial institutions to households have reduced with 2/3 of household lending secured by property and securities. Vigilance in prudent lending and risk management are still in place with 70% of newly approved loans’ Debt-toService ratios (DSR) remaining below 60%. Household asset quality remained intact with both aggregate impairment ratio and aggregate delinquency ratio improving and stable at 1.2%. However, risks can be seen from: (i) lower-income borrowers (500k mortgages, (iii) borrowers depending on variable income sources, and (iv) urban dwellers experiencing higher cost of living. From its own stress scenarios, BNM expects banks to remain resilient to potential losses. Potential losses of between RM60-RM108b are manageable as these are within the banks’ excess capital buffers which stood at RM143b as of end-2018.

Limited Impact from potential credit losses. BNM’s sensitivity analysis of large non-financial corporation (NFC) shows that banks will be able to withstand potential credit losses (from severe shocks) from these borrowers. Estimated potential losses are estimated to about 1/3 of the banks’ capital buffers. Post shock, these borrowers may face short-term liquidity constraints but will be able to meet debt obligations from earnings with their interest coverage ratio at 2.2x.

BNM’s multi-solvency stress test continues to show resilience of the banking system. Domestic banks remained wellpositioned to absorb potential losses using the capital and earnings buffers with post-stress capital ratios well above the minimum regulatory requirements. Under the most adverse scenarios, gross impairment ratios rose to 8.6%. Under its Adverse Scenario 2, 56% of total losses are due to banks’ exposure to business driven by large NFC borrowers with weak financial standing. Exposures to households contributed to 35% of total losses. Over a third of these household losses comes from borrowers with

No change in our views of moderate loans ahead with growth driven by the resilient household as income and employment continue to be stable. Further external risks might put a dampener on business sentiments with softer demand and applications with higher risk perceived lowering approval rates. The dampening credit demand might be exacerbated by an increase in corporate bonds as upside pressure on interest rates lessens. While we view that banks will still maintain selective asset quality, the stable system asset qualities will see continued demand from the resilient households especially demand for residential property and personal financing (from quality borrowers). Affordable housing (<500k) will be the driver of mortgage loans given the lower risks perceived from this segment.

Source: Kenanga Research - 28 Mar 2019