Tarzimanov: ‘Maybank’s solid and growing capital base provides it with a good buffer against rising problem assets.’

Operating conditions for sector likely to remain challenging

PETALING JAYA: Concerns over the asset quality of Malaysian banks are coming to the fore yet again as operating conditions for the industry are expected to remain challenging amid the ongoing domestic and external headwinds.

According to analysts, weak crude oil prices, sluggish external demand, weakening ringgit and rising cost of living in the country could raise credit risk for banks and put their balance sheet under pressure with the rise of the industry’s gross impaired loans.

Maybank Investment Bank Research (Maybank IB), for one, had imputed increasing gross impaired loans ratio for 2016 and 2017 amid the slower economic growth momentum in these two years.

“The biggest challenge into 2017 would still be in managing asset quality in an environment of ongoing economic uncertainty, particularly on the external front. Domestically, the weaker ringgit and spike in bond yields pose short-term earnings risks in the form of potential mark-to-market losses on investments and borrowings,” Maybank IB said in a report yesterday.

The brokerage had conservatively estimated the industry’s gross impaired loan ratios to increase to 2.03% this year and 2.17% next year from 1.75% in 2015.

According to Maybank IB, while banks’ SME-loan portfolio would remain relatively healthy, there could be some deterioration in household and oil and gas (O&G) loan books.

“Household asset quality is likely to see some mild deterioration amid higher living costs, and we are keeping a watchful eye on the O&G and non-residential property loan books,” Maybank IB said.

“Apart from isolated cases, the SME sector still looks robust with little sign of stress at this stage, but a slowdown in domestic consumption is likely to have a knock-on effect,” it added.

Maybank IB said it remained neutral on the Malaysian banking sector, whose core earnings growth was expected to trend at 3%-4% in 2016-2017 and return on equity would likely remain under pressure over the period.

For the sector, the brokerage recommended “buy” on Alliance Financial Group Bhd(AFG), Hong Leong Bank Bhd (HLB) and BIMB Holdings Bhd.

Data released by Bank Negara last week showed that the sector’s gross impaired loan ratio had remained relatively stable at 1.65% as at end-October. But the absolute gross impaired loans of the industry during the period showed an increase of 0.6% month-on-month and 7.9% year-on-year (y-o-y).

For the quarter to September 2016, the cumulative absolute gross impaired loans rose 12% y-o-y to RM27.75mil. This was driven mainly by a 43% jump in Malayan Banking Bhd’s (Maybank) gross impaired loans due to the higher incidence of restructured and rescheduled, or R&R, loans, emanating from the O&G, shipping and steel-related sectors.

On a q-o-q basis, CIMB Group Holdings Bhd, Public Bank Bhd, HLB and RHB Bank Bhd saw increases in absolute gross impaired loans.

CIMB’s gross impaired loans increased 4% q-o-q, with the bulk of this increase emanating from Indonesia (+7% q-o-q), Thailand (+3% q-o-q) and Malaysia (+2% q-o-q), while that of Public Bank rose 8% q-o-q with an increase across most major consumer loan segments, attributed to a handful of accounts but much of the delinquent amounts have since been collected.

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HLB saw its absolute gross impaired loans rise 6% q-o-q on account of a single corporate gross impaired loans (partly related to O&G) and higher gross impaired loans in the personal loans segment, while RHB’s absolute gross impaired loans rose 11% q-o-q due to the impairment of several lumpy corporate loans out of Singapore (O&G and manufacturing/trading related).

AMMB Holdings Bhd, on the other hand, continued to see strong recoveries in the auto space which is why its gross impaired loans has continued to improve, while AFG saw the normalisation of some of its R&R accounts during the quarter.

Meanwhile, Moody’s Investor Services said Maybank’s solid capital base would provide buffer against the bank’s rising problem assets that stemmed primarily from Singapore and Hong Kong – two of its key markets.

“The rising problem assets in Singapore (mostly related to O&G accounts) and Hong Kong (due to a few large groups of borrowers) reflect primarily idiosyncratic risk, and we expect in the longer term that Maybank’s credit profile will benefit from its presence in these otherwise low-risk markets,” Moody’s vice-president and senior credit officer Eugene Tarzimanov said in a statement yesterday.

“Maybank’s solid and growing capital base also provides the bank with a good buffer against rising problem assets, and will enable it to maintain its credit standing in line with its current ratings,” he added.

The international rating agency noted that Singapore was Maybank’s most important foreign operation, accounting for 25% of its gross loans as of September 2016. It said that while Hong Kong accounted for a less material 2% share of its loan book, a jump in delinquencies there had put its Hong Kong problem loans ratio well ahead of other markets, from virtually nil in 2015.

Consequently, the rising problem assets in these markets pushed the bank’s problem loans ratio to 2.2% in September 2016, from 1.9% at end-2015.

Despite the weakening conditions, Moody’s said Maybank’s credit profile would benefits from its presence in the two developed markets, given the generally less volatile credit and economic conditions, stable employment and better protection of creditor rights, relative to emerging markets.

It said Maybank would also benefit from its strong and rising capitalisation, adequate problem loan coverage, good profitability, and solid liquidity and funding profiles.

Meanwhile, AffinHwang Capital Research said if the industry asset quality ratios continued to deteriorate in the coming months, it could be a cause for concern. The brokerage noted that among the key sectors that remain vulnerable were manufacturing, mining and quarrying, construction and transport, storage and communication.

In its report last month, CIMB Research said it expected the industry’s gross impaired loans ratio to increase mildly to 1.8% by end of 2016, before rising further to 2% by end of 2017.

Similarly, UOBKayHian said credit quality would remain a key factor of the industry’s earnings resilience as overall loan growth would likely remain subdued.

“As it would be prudent for banks to start building up provision buffers ahead of the MFRS9 implementation in January 2018, we believe the market will continue to favour banks with high provision buffers,” the Singaporean brokerage said in its report dated Dec 5.

UOBKayHian’s top two sector picks were Public Bank Bhd and BIMB.