The Financial Stability Review highlighted the quality and resilience of the domestic banking system. Asset quality from both Households and Business looks contained with debt servicing and interest coverage ratio remaining prudent and comfortable. Capital Buffers are more than adequate with stress test showing that Capital Ratios will be well above the regulatory requirements in the event of adverse shocks. While we see moderate loans growth ahead, the resilient asset quality translates to stable credit cost, sustaining profitability. However, valuations are attractive and undemanding with most of the banking stocks under our coverage rated as OUTPERFORM with Top Picks are CIMB and ABMB.

BNM released its 1H19 Financial Stability Report yesterday emphasising again the soundness, stability and resilient of the domestic banking system. The financial sector remains resilient amid the moderation in loans growth with market conditions that remained orderly despite increased volatilities due to trade conflict and geo-political tensions. Funding condition was stable, supported by sound domestic institutional investors. However, vigilance continued on household and corporate debts due to the heightened volatility in global markets as housing market shows signs of recovery but with risks remaining elevated in commercial property segment.

Households’ resilience remains intact with Household assets exceeding debt. Household debt to-GDP rose 20bps (2018: 82%) to 82.2% as debt grows at 5.1% YoY (vs 2018: +4.7% YoY) but outpaced by growth in household financial assets at +6.8% (vs 2018: +5.1% YoY). Aggregate debt repayment capacity remained strong as aggregate level of household assets exceeded debt at 4.1x (2018: 4.1x) with household financial assets at 2.2x of debt. Two-third of these financial assets is in the form of liquid financial assets such as deposits and unit trust funds. Exposures of banks and NBFIs to the more vulnerable segment (borrowers whose earnings are

Risks from household debt contained. Impairment ratio for Banks and NBFIs saw a 10bps uptick in 1H19 to 1.3% (2018: 1.2%) but still below its 5-year average of 1.5%. Default incidents by housing borrowers continued to increase, most prevalent among (i) loans >RM500k and (ii) borrowers with greater variability in their monthly income. However, risks to the financial system remained low as these borrowers accounted for only 6.2% of total household lending with only 0.9% of such loans being classified by banks and DFIs as impaired.

Housing transaction remained strong led by affordable housing. Recovery seemed to be in the cards for the housing market with transaction volume growth of +7.5% YoY (vs 4Q18: +2.0% YoY) and growth in value at +10.6% YoY (vs 4Q18: +3.3% YoY). Housing priced RM300k to 500k range at +2.4% YoY (vs 2018: +1.1% YoY). However, market conditions remained soft with housing price index falling to +1.3% YoY in 1Q19 from +2.6% YoY in 4Q18. Unsold units rose 5.3% YTD with 68% of these unsold units coming from properties valued at >RM300k and with 67% coming from high rises.

Oversupply in the office and commercial space (OSSC) likely to persist but banks’ exposure remained low. Incoming supply of office space in the Klang Valley remained at a sizeable 36.3m square feet with an average of 4.4m square feet/annum expected to add to the market supply between 2019 and 2021 (higher than the 3-year average of 2.3m square feet/annum. Incoming supply of shopping complexes in key states stood at 140 units amounting to 67.8m square feet of new retail space. Vacancy rates of OSSC and retail space in major cities in Malaysia are higher than peers’ average; thus, risks of downward adjustment to prices of retail and office space remain elevated. However, banks’ exposure to the OSSC segment accounts for 3.4% of total outstanding loans, and 4.6% of holdings of bonds and sukuk and continue to be largely performing.

Applications for higher-end financing increasing but overall loan impairment ratio remained stable. Financial Institutions exposure to the property sector in 1H19 moderated, at +5.7% YoY growth (vs 2018: +6.6%). Demand for home financing continued to support credit growth with stronger growth in financing applications for residential properties priced <RM1m (1H19:+12.7% YoY vs 2018:+1.3% YoY). Growth in non-residential properrties was at +2.7% YoY for 1H19 (vs 2018: 2.3%) driven by end-financing for purchase of shops and shopping complexes. Sound lending practises continued to mitigate risks from potential adverse developments in the property market. Loan impairment ratio for purcahse of residential, non residential and OSSC remained low at 1.1%, 1.4% and 2.1% for 1H19 (vs 2018: 131%, 1.4% and 2.1%) respectively. 83% of residential property loans were for owner-occupiers who have stronger incentive to maintain loan repayments than speculators/investors. Furthemore 69% of outstanding loans have LTV of <80%, proving buffer against potential losses from defaults in the event of an adverse price correction. Based on the Bank's sensitivity analysis, banks continued to maintain sufficient capital buffers to absorb 1.5x potential losses under severe stress scenarios (referring to 50% earnings shock on large corporate borrowers and 50% decline in property prices.

Source: Kenanga Research - 19 Sept 2019