Malaysian banks
Net interest income improved despite a softer net interest margin (NIM), thanks to loan growth (+4% quarter-on-quarter [q-o-q), 9MFY11: 9%). Non-interest income was the key drag on earnings with mark-to-market losses from interest rate swaps and derivatives, and lower fee income from treasury and unit trusts. These left pre-provision profits flat q-o-q.
Provisions fell due to recoveries coupled with higher provisions set aside in the quarter before. Gross non-performing loan (NPL) ratio improved to 3% against 3.2% in 2QFY11, while absolute NPLs fell further, easing concerns of asset quality stress. Malayan Banking Bhd’s (Maybank) NPL ratio continued to improve despite the uptick in PT Wahana Otomitra Multiartha Finance’s (WOM Finance) NPLs, as its used motorcycle exposure is largely contained.
Loan growth had moderated slightly since early 3QFY11, but loan applications and approvals surged in October this year. We are retaining our 14% loan growth target for FY11, but trim FY12’s marginally to 13% after cutting assumptions for CIMB Group and AMMB Holdings Bhd. New private debt security issuances grew 49% (RM56 billion until October 2011 against RM37 billion the same period last year) and the pipeline remains healthy.
We expect NIM to weaken further as competition for deposits drives up funding costs, while loan pricing remains competitive. Banks with Indonesian operations (BII and CIMB Niaga) are also expected to see weaker NIMs due to higher funding costs.
We sense that some local banks are shying away from competing in mortgages and are seeking to improve NIM by focusing on higher yielding auto, personal and SME loans. Asset quality should remain under control given Bank Negara Malaysia’s rules for prudent retail lending.
We like Alliance Financial Group (“buy”, target price [TP]: RM4.30) for its scalable domestic franchise and non-interest income traction, which ensures sustainable earnings and return on equity. Among large caps, we prefer Maybank (“buy”, TP: RM10.60) for its resilient transactional banking income and dividend yields. We also like Hong Leong bank Bhd (“buy”, TP: RM16) for merger synergies. — HwangDBS Vickers, Dec 5
This article appeared in The Edge Financial Daily, December 6, 2011.
Net interest income improved despite a softer net interest margin (NIM), thanks to loan growth (+4% quarter-on-quarter [q-o-q), 9MFY11: 9%). Non-interest income was the key drag on earnings with mark-to-market losses from interest rate swaps and derivatives, and lower fee income from treasury and unit trusts. These left pre-provision profits flat q-o-q.
Provisions fell due to recoveries coupled with higher provisions set aside in the quarter before. Gross non-performing loan (NPL) ratio improved to 3% against 3.2% in 2QFY11, while absolute NPLs fell further, easing concerns of asset quality stress. Malayan Banking Bhd’s (Maybank) NPL ratio continued to improve despite the uptick in PT Wahana Otomitra Multiartha Finance’s (WOM Finance) NPLs, as its used motorcycle exposure is largely contained.
Loan growth had moderated slightly since early 3QFY11, but loan applications and approvals surged in October this year. We are retaining our 14% loan growth target for FY11, but trim FY12’s marginally to 13% after cutting assumptions for CIMB Group and AMMB Holdings Bhd. New private debt security issuances grew 49% (RM56 billion until October 2011 against RM37 billion the same period last year) and the pipeline remains healthy.
We expect NIM to weaken further as competition for deposits drives up funding costs, while loan pricing remains competitive. Banks with Indonesian operations (BII and CIMB Niaga) are also expected to see weaker NIMs due to higher funding costs.
We sense that some local banks are shying away from competing in mortgages and are seeking to improve NIM by focusing on higher yielding auto, personal and SME loans. Asset quality should remain under control given Bank Negara Malaysia’s rules for prudent retail lending.
We like Alliance Financial Group (“buy”, target price [TP]: RM4.30) for its scalable domestic franchise and non-interest income traction, which ensures sustainable earnings and return on equity. Among large caps, we prefer Maybank (“buy”, TP: RM10.60) for its resilient transactional banking income and dividend yields. We also like Hong Leong bank Bhd (“buy”, TP: RM16) for merger synergies. — HwangDBS Vickers, Dec 5
This article appeared in The Edge Financial Daily, December 6, 2011.
