The Financial Stability Report (FSR) 2017 released by Bank Negara Malaysia (BNM) articulates a largely stable and liquid financial system, with asset quality concerns appearing contained. Macquarie Equities Research (MQ Research) released a report yesterday (19 Jun), providing a summary of the FSR.

MQ Research’s top picks within the banking sector are HLBK and RHB, while Maybank and CIMB are overly-discounted and could show value.

Conclusion

• BNM’s FSR 2017 articulates a largely stable and liquid financial system, with asset quality concerns re commercial property and oil & gas appearing contained. In reiterating MQ Research’s overweight position on Malaysian banks, ample liquidity may see anticipated deposit re-pricing undershoot, with returns on equity (ROE) potentially also boosted by post-MFRS 9 refocus on capital optimisation. MQ Research’s bear/worst case valuation estimates have government-linked companies (GLC) banks Maybank and CIMB looking overly-discounted.

Impact

• Household gearing dynamics improve: growth in household borrowings moderated for the seventh consecutive year, while ratio of household debt-to-GDP has declined to its lowest in five years. From an asset offsetting-perspective, the growth in household financial assets outpaced that of debt for the first time since 2012 while the majority of household debt (52%) is for purchase of residential properties (i.e., assets).
• Corporate debt, NPL risks: aggregate non-financial corporations’ (NFCs) debt-to-GDP moderated to 103% (2016: 110%) – note the last three quarters of 2017 saw net corporate repayments. BNM singled out oil & gas (O&G) and real estate sectors as areas of asset quality vulnerability for the banks. O&G sector (c.6% of system loans) impaired loans ratio rose to 5.5% (2016: 4.2%) vs. sector at 2.5% (flat year-on-year (YoY)), while oversupplied office space and shopping complex segments are a further c.5% of total loans.
• Banks – potential NIM, dividend upside: limited foreign selling of Malaysian Government Securities (MGS) post-new government and robust banking system liquidity gauges mean 1Q18 net interest margin (NIM) spikes reported by the banks post-Jan overnight policy rate (OPR) hike may prove more resilient than expected as deposit repricing/competition undershoots expectations. Further, with sector average common equity tier 1 (CET 1) ratio at an ample 13% post-MFRS 9 application, MQ Research anticipates capital management momentum via
  • rising dividend payout ratios for top-pick mid-cap banks, i.e., RHB and HLBK; and,
  • steadily rising cash component re declared dividends from Maybank and CIMB re their long-running Dividend Reinvestment Plans (DRPs; MQ Research expects complete phase-out by FY20).

Outlook

• Mid-cap banks HLBK (digitalisation strategy) and RHB (value + yield upside) are top picks, while AMMB has takeover attraction; among big-caps, Maybank and CIMB show value; switch out of structurally-challenged Public Bank as current defensive investor bias fades, with amount spent on IT and key management age profile underscoring evolutionary headwinds.

Source: Macquarie Research - 20 Jun 2018