BNM’s Financial Stability Review 2H19 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 revised stress test showing that Capital Ratios will be well above the regulatory requirements in the event of adverse shocks. While loans growth will be muted ahead, the resilient asset quality translates to manageable credit cost, supporting earnings. Given the uncertainties and risks ahead, we prefer stocks that have a robust buffer in their CET1. We find that both MAYBANK and PBBANK have the most enduring buffer in the event of a total loss scenario with CET1 resilient at 11.5% and 11.0%, respectively. Looking at the fair value of the banking stocks based on the adverse scenarios, we find that most stocks’ price dips are unwarranted, trading below their implied fair value on each scenario; thus, we maintain OVERWEIGHT.

BNM released its 2H19 Financial Stability Report last Friday with a positive view that Financial Institutions remained resilient despite the on-going challenging environment. The Banking system has sufficient liquidity with Liquidity Coverage Ratio (LCR), Loan-to-Fund (LTF) and Loan-to-Fund and Equity (LTFE) ratios at 149%, 83% and 73%, respectively, supported by stable funding sources. The debt servicing among households remained sustainable despite the elevated levels of household debt with risks to the financial system mitigated by financial buffers and lower exposure to vulnerable households (June 19: 18% of total household debt).

While BNM highlighted that household debt remains elevated driven by loans of residential properties with impairments on housing loans increasing, it sees the growth coming from a low level with limited risks to banks due to improved assessments of loans affordability. BNM view that vast majority of household borrowers will be resilient to a significant decline in house prices and income shocks. Risks remain concentrated among borrowers with monthly earnings of

Source: Kenanga Research - 6 Apr 2020