Sector Update 5 June 2009 Equity Research PP11072/03/2010 (023549) NPLs yet to peak. Underweight Be cautious into 3Q. 1Q09 results of the six banking stocks we cover were generally in line, with combined net profit down 2.1% QoQ and 13.1% YoY. However, the weak 1Q09 GDP suggests growing stress in system loans over the coming months. We remain cautious on banks’ profits, especially from 3Q09. Underweight the sector. 1Q down a sharp 13.1% YoY. Other than AMMB’s positive surprise, results were generally in-line. The combined net profit of our banking universe was flattish QoQ but fell a sharp 13.1% YoY on lower treasury and FX income and higher loan loss provisions. Net interest income expanded, but the weak equity market continued to affect brokerage income, which contracted for the 5 th to 6 th consecutive quarter. Some signs of stress. Domestic loans continued growing at most banks. QoQ loan growth at the major banks (Maybank, CIMB Bank and Public Bank) outpaced system growth. Some loan segments, however, have begun showing stress. Domestic NPL saw upticks in the consumer (mortgage, autos) and working capital segments. Net NPL ratios continued to trend down due to the expanded loans base. Earnings to contract. There were no major revisions in our individual earnings forecasts except for AMMB (FY09: +16%, FY10: +7%). Our combined net profit forecast was upgraded by a marginal 0.1% for 2009 and 0.7% for 2010. We expect sector earnings to contract 9.9% in 2009, before recovering to 6.8% growth in 2010 (previously -10.1%, +6.1% respectively). This excludes further impairment in the value of long-term investments, merger costs and other one-offs. Asset quality concerns. 1Q09 GDP (-6.2% YoY, -7.7% QoQ) should be the weakest, suggesting that the worst may be over. However, we expect economic recovery to be slow, with real GDP to return to the 3Q08 high only in 4Q10. There is a 3-6 month interval from GDP trough to NPL peak. Hence, banks are set to report weaker profits on rising NPLs and higher credit charges from 3Q09. Mainly Sells. Against regional peers, the larger Malaysian banks are pricey. The current liquidity driven market has pushed valuations up but prospects for a strong economic recovery stay hazy. Sell into strength. Banking Sector – Peer Valuation Summary Stock Rec Shr px Mkt cap TP PER (x) PER (x) P/B (x) P/B (x) ROAE (%) ROAE (%) Gross yld Gross yld (RM) (RMm) (RM) CY09E CY10E FY09E FY10E CY09E CY10E FY09E FY10E Maybank * NR 5.50 38,927 NR 15.4 16.0 1.4 1.4 8.8 8.5 4.5 4.5 BCHB Sell 8.65 30,950 6.80 16.3 15.4 1.7 1.6 10.7 10.4 2.1 2.3 Public Bank Sell 8.75 30,904 7.60 13.0 12.6 2.8 2.5 22.3 20.7 5.7 6.3 RHB Cap Hold 4.18 9,002 4.30 10.6 9.9 1.1 1.0 10.5 10.4 3.8 4.1 AMMB Hold 3.36 9,149 3.30 12.0 11.6 1.2 1.1 10.0 9.2 2.4 2.7 EON Cap Sell 4.00 2,773 3.40 13.4 12.2 0.8 0.8 6.3 6.6 2.5 2.5 HL Bank * NR 5.70 9,007 NA 10.8 10.5 1.6 1.4 15.7 13.6 3.9 4.0 AFG * NR 2.12 3,282 NA 10.7 9.9 1.1 1.1 11.8 10.4 3.0 3.2 Affin Hldgs * NR 1.74 2,600 NA 11.4 10.1 0.6 0.5 5.4 5.7 2.8 2.7 Sector (weighted) 136,594 13.7 13.3 1.4 1.3 * Consensus; Source: Maybank-IB Banking Underweight (unchanged) Wong Chew Hann, CA [email protected](603) 2297 8686
Be cautious into 3Q. 1Q09 results of the six banking stocks we cover were generally in line, with combined net profit down 2.1% QoQ and 13.1% YoY. However, the weak 1Q09 GDP suggests growing stress in system loans over the coming months. We remain cautious on banks’ profits, especially from 3Q09. Underweight the sector. 1Q down a sharp 13.1% YoY. Other than AMMB’s positive surprise, results were generally in-line. The combined net profit of our banking universe was flattish QoQ but fell a sharp 13.1% YoY on lower treasury and FX income and higher loan loss provisions. Net interest income expanded, but the weak equity market continued to affect brokerage income, which contracted for the 5th to 6th consecutive quarter. Some signs of stress. Domestic loans continued growing at most banks. QoQ loan growth at the major banks (Maybank, CIMB Bank and Public Bank) outpaced system growth. Some loan segments, however, have begun showing stress. Domestic NPL saw upticks in the consumer (mortgage, autos) and working capital segments. Net NPL ratios continued to trend down due to the expanded loans base. Earnings to contract. There were no major revisions in our individual earnings forecasts except for AMMB (FY09: +16%, FY10: +7%). Our combined net profit forecast was upgraded by a marginal 0.1% for 2009 and 0.7% for 2010. We expect sector earnings to contract 9.9% in 2009, before recovering to 6.8% growth in 2010 (previously -10.1%, +6.1% respectively). This excludes further impairment in the value of long-term investments, merger costs and other one-offs. Asset quality concerns. 1Q09 GDP (-6.2% YoY, -7.7% QoQ) should be the weakest, suggesting that the worst may be over. However, we expect economic recovery to be slow, with real GDP to return to the 3Q08 high only in 4Q10. There is a 3-6 month interval from GDP trough to NPL peak. Hence, banks are set to report weaker profits on rising NPLs and higher credit charges from 3Q09. Mainly Sells. Against regional peers, the larger Malaysian banks are pricey. The current liquidity driven market has pushed valuations up but prospects for a strong economic recovery stay hazy. Sell into strength.
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Sector Update 5 June 2009
Equity Research PP11072/03/2010 (023549)
NPLs yet to peak. Underweight
Be cautious into 3Q. 1Q09 results of the six banking stocks we cover were generally in line, with combined net profit down 2.1% QoQ and 13.1% YoY. However, the weak 1Q09 GDP suggests growing stress in system loans over the coming months. We remain cautious on banks’ profits, especially from 3Q09. Underweight the sector.
1Q down a sharp 13.1% YoY. Other than AMMB’s positive surprise, results were generally in-line. The combined net profit of our banking universe was flattish QoQ but fell a sharp 13.1% YoY on lower treasury and FX income and higher loan loss provisions. Net interest income expanded, but the weak equity market continued to affect brokerage income, which contracted for the 5th to 6th consecutive quarter.
Some signs of stress. Domestic loans continued growing at most banks. QoQ loan growth at the major banks (Maybank, CIMB Bank and Public Bank) outpaced system growth. Some loan segments, however, have begun showing stress. Domestic NPL saw upticks in the consumer (mortgage, autos) and working capital segments. Net NPL ratios continued to trend down due to the expanded loans base.
Earnings to contract. There were no major revisions in our individual earnings forecasts except for AMMB (FY09: +16%, FY10: +7%). Our combined net profit forecast was upgraded by a marginal 0.1% for 2009 and 0.7% for 2010. We expect sector earnings to contract 9.9% in 2009, before recovering to 6.8% growth in 2010 (previously -10.1%, +6.1% respectively). This excludes further impairment in the value of long-term investments, merger costs and other one-offs.
Asset quality concerns. 1Q09 GDP (-6.2% YoY, -7.7% QoQ) should be the weakest, suggesting that the worst may be over. However, we expect economic recovery to be slow, with real GDP to return to the 3Q08 high only in 4Q10. There is a 3-6 month interval from GDP trough to NPL peak. Hence, banks are set to report weaker profits on rising NPLs and higher credit charges from 3Q09.
Mainly Sells. Against regional peers, the larger Malaysian banks are pricey. The current liquidity driven market has pushed valuations up but prospects for a strong economic recovery stay hazy. Sell into strength.
Banking Sector – Peer Valuation Summary Stock Rec Shr px Mkt cap TP PER (x) PER (x) P/B (x) P/B (x) ROAE
(%) ROAE
(%) Gross
yld Gross
yld (RM) (RMm) (RM) CY09E CY10E FY09E FY10E CY09E CY10E FY09E FY10E Maybank * NR 5.50 38,927 NR 15.4 16.0 1.4 1.4 8.8 8.5 4.5 4.5 BCHB Sell 8.65 30,950 6.80 16.3 15.4 1.7 1.6 10.7 10.4 2.1 2.3 Public Bank Sell 8.75 30,904 7.60 13.0 12.6 2.8 2.5 22.3 20.7 5.7 6.3 RHB Cap Hold 4.18 9,002 4.30 10.6 9.9 1.1 1.0 10.5 10.4 3.8 4.1 AMMB Hold 3.36 9,149 3.30 12.0 11.6 1.2 1.1 10.0 9.2 2.4 2.7 EON Cap Sell 4.00 2,773 3.40 13.4 12.2 0.8 0.8 6.3 6.6 2.5 2.5 HL Bank * NR 5.70 9,007 NA 10.8 10.5 1.6 1.4 15.7 13.6 3.9 4.0 AFG * NR 2.12 3,282 NA 10.7 9.9 1.1 1.1 11.8 10.4 3.0 3.2 Affin Hldgs * NR 1.74 2,600 NA 11.4 10.1 0.6 0.5 5.4 5.7 2.8 2.7 Sector (weighted) 136,594 13.7 13.3 1.4 1.3 * Consensus; Source: Maybank-IB
Banking Underweight (unchanged) Wong Chew Hann, CA [email protected] (603) 2297 8686
Banking
5 June 2009 Page 2 of 12
An uninspiring 1Q
No major surprises, flattish QoQ. There were no big surprises in the 1Q09 results of the Malaysian banks, with combined net profit being flattish QoQ, but down YoY. AMMB’s final result for FY09 was above expectations due to lower impairment loss on investments. Combined net profit of the six banking groups in our coverage universe was down 2.1% QoQ, and a sharper 13.1% YoY on lower treasury and FX income and higher loan loss provisions. Net interest income continued to expand. Combined core net profit was up 2.3% QoQ, but it was still down 7.9% YoY. Some loan segments were beginning to show stress.
Note: Comprising Maybank, BCHB, Public Bank, RHB Cap, AMMB and EON Cap Sources: Companies, Maybank-IB
1Q08 Net Profit Net profit
(RM m) YoY QoQ vs. Maybk-IB’s
expectations Comments (1Q09 vs. 4Q08)
Maybank 503 -33.7% -31.5% NA 1Q09 affected by: i) higher mark-to-market loss on securities and derivatives (interest rate swap), ii) lower net forex gain, iii) higher loan loss provisions, iv) impairment losses on investments.
BCHB 614 +14.7% +92.7% Within Strong treasury income in 1Q09 (4Q08 affected by one-off M&A related charges).
Public Bank 589 +2.9% -9.9% Within Combined net interest and Islamic banking income marginally down mainly due to lower NIM from loan-deposit repricing gap.
RHB Cap 229 +2.8% +16.1% Within Stronger QoQ due to lower loan loss provisions and leaner opex.
AMMB 180 -17.3% -27.5% Above Preceeding quarter included RM95.5m gain from sale of 19% stake in general insurance business.
AMMB core 180 -17.3% +17.9% Investment income improved QoQ, while loan loss provisions were lower.
EON Cap 80 +4.2% -10.6% Within Weaker QoQ due to lower NIM, and net forex loss.
Total 2,194 -13.1% -2.1% - - Total core 2,194 -7.9% +2.3% - - Sources: Companies, Maybank-IB
Net interest inc Non-interest inc Islamic banking inc
Note: Comprising Maybank, BCHB, Public Bank, RHB Cap, AMMB and EON Cap Sources: Companies, Maybank-IB
Net interest income expanded, mixed impact from OPR reduction. Combined net interest income grew 1.7% QoQ and 13% YoY, boosted by the consolidation of BII at Maybank from 4Q08 and BankThai at BCHB from 1Q09. The 150 bps cut in the central bank’s overnight policy rate (OPR) since Nov 08 had a mixed impact on 1Q09’s net interest margins (NIM) – negative at Public Bank, AMMB and EON Cap (due to the loan-deposit repricing gap), neutral at RHB Cap, but positive at Maybank and BCHB (higher spreads for loans). NIM expansion at the Indonesian subsidiaries also raised overall NIM at Maybank and BCHB.
1Q09 Net Interest Income (excluding Islamic banking income) Net Int Inc (RM m) YoY QoQ NIM (QoQ) Maybank * 1,543 14.4% -0.3% 2.79% (+8 bps) /
2.57% (+2 bps) ex-BII BCHB # 1,407 25.0% 9.4% 2.6% (+10 bps) Public Bank 959 7.2% 0.7% 2.4% (-10 bps) RHB Cap 574 8.2% 0.2% 2.7% (unchanged) AMMB 445 3.8% 0.6% 2.99% (-8 bps) EON Cap 224 -3.5% -16.1% 2.64% (-20 bps) Total 5,152 13.0% 1.7% - * Consolidation of BII effective 4Q08. Excluding BII, we estimate net interest income
contracted 6.2% YoY and 3.1% QoQ due to higher interest cost for new acquisitions. # Consolidation of BankThai effective 1Q09. Excluding BankThai, we estimate net
interest income expanded by 15.4% YoY, and 1% QoQ. Sources: Companies, Maybank-IB
Brokerage and FX income down, mixed at treasury. Non-interest income continued on a sequential quarterly decline for most banking groups. Brokerage income declined for the 5th to 6th sequential quarter – 1Q09’s brokerage income for major banking groups plunged 51-63% YoY. FX income was also down for all banks. Treasury performance was mixed – strong at BCHB, while Maybank was affected by higher mark-to-market loss on securities and derivatives (interest rate swaps). Fee-based income for all banks either expanded or was flat QoQ.
Banking
5 June 2009 Page 4 of 12
1Q09 Non-Interest Income Non-Int Inc (RM
m) YoY QoQ % Non-Int Inc / Op
inc Maybank 630 1.9% -22.2% 25.2% BCHB 915 14.6% 96.5% 36.9% Public Bank 294 -47.2% -6.1% 21.0% RHB Cap 213 -12.4% -19.3% 25.2% AMMB 251 -3.6% -16.8% 29.5% EON Cap 70 4.4% -9.1% 20.6% Total 2,374 -6.7% 6.4% 28.2% Sources: Companies, Maybank-IB Loans growth at larger banks outpaced system growth. Domestic loans growth continued at most banks, with stronger QoQ loans growth at Maybank, CIMB Bank and Public Bank compared to the system growth. Loans expansion was mainly in the consumer segment (mortgage and autos), while loans to the SMEs were generally down, reflecting poor business sentiment. Major YoY loans growth at the group levels of Maybank and BCHB was aided by new subsidiaries: BII (Sep 08), BankThai (Jan 09), and M&A: Niaga-Lippo (Nov 08).
1Q09 Gross Loans Gross Loans at
Mar ‘09 (RM m) Vs. Mar ‘08
(YoY) Vs. Dec ‘08
(QoQ) Maybank 192,877 21.9% 1.8% Maybank (domestic) 104,490 12.6% 2.1% BCHB 134,810 33.4% 10.0% CIMB Bank (domestic) 92,009 18.6% 3.0% Public Bank 125,431 17.7% 4.2% Public Bank (domestic) 98,780 2.3% 4.3% RHB Cap 62,771 8.2% -0.6% AMMB 58,769 6.9% 0.6% EON Cap 31,027 6.5% 0.6% System * 733,874 +10.9% +1.0% * BNM Monthly Statistical Bulletin (Mar ‘09); Sources: Companies, Maybank-IB Stress showing in some loans segments. Sequential loan loss provisions (LLP) were lower at the smaller banks, while specific provisionings (including pre-emptive provisioning) was stepped up. NPLs crept up at the overseas operations: BII and the Singapore operations for Maybank, and from the consolidation of BankThai at BCHB. Domestic NPL saw upticks in the consumer (mortgage, autos) and working capital segments. Net NPL ratios of all the banks continued to trend down due to the expanded loans base.
1Q09 Loan Loss Provision, NPLs, Loan Loss Coverage LLP
2-3% 2009 loan growth forecast retained. Loan disbursements, applications and approvals in the system slowed in Apr 09, reflecting cautious sentiment. YTD loans growth was slower at 1.4% (4M2008: +3.4%), driven by household loans (+2.2%) while business loans’ growth was anemic (+0.4%). Household loan growth was mainly in the residential property segment, aided by sales campaigns as developers cleared inventories. We retain our 2-3% loan growth forecast for 2009.
Expect rising NPL momentum. 1Q09 GDP (-6.2% YoY, -7.7% QoQ) should be the weakest, suggesting the worst may be over. We expect the economy to recover from 2Q09, but the recovery will be slow, with a return to 3Q08’s high only in 4Q10. The poor 1Q09 GDP suggests growing stress in system loans. We expect sector NPLs to accelerate in 3Q09, based on the historical 3-6 month interval from GDP trough to NPL peak. We retain our +50% NPL formation expectation for 2009, implying a gross NPL ratio of 7.2% by end-2009 (end-2008: 4.8%).
Malaysian GDP: The Worst is Over?
(10%)
(5%)
0%
5%
10%
100
110
120
130
140
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
E
3Q09
E
4Q09
E
1Q10
E
2Q10
E
3Q10
E
4Q10
E
RM b
Real GDP (LHS) YoY gwth (RHS)
We project sequential quarterly growth from 2Q09
Sources: Bank Negara, Maybank-IB
GDP trough vs. NPL peak: 3-6 months interval
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
-15%
-10%
-5%
0%
5%
10%
15%
4Q97
2Q98
4Q98
2Q99
4Q99
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
E4Q
09E
2Q10
E4Q
10E
RM m
Real GDP YoY Growth (LHS) Gross NPL (RHS)
GDP trough
GDP trough GDPtrough?
NPL peak NPL peak
NPL peak?
Sources: Bank Negara, Maybank-IB
Banking
5 June 2009 Page 8 of 12
Pricey against regional peers on P/BV and ROE. The current liquidity driven market has lifted valuations. Share prices of banking stocks have recovered 18-50% from their year-lows even though fundamentals remain weak. We continue to Underweight the sector.
Asian Banks (ex-Japan) : P/BV vs. ROE
Sources: Bloomberg (71 listed banks in Asia), Maybank-IB
Note: Maybank FYE June, BCHB FYE Dec, Public Bank FYE Dec, AMMB FYE Mar, RHB Cap FYE Dec, EON Cap FYE Dec Sources: Companies, Maybank-IB, Consensus estimates
Note: Maybank FYE June, BCHB FYE Dec, Public Bank FYE Dec, AMMB FYE Mar, RHB Cap FYE Dec, EON Cap FYE Dec Sources: Companies, Maybank-IB, Consensus estimates
Banking
5 June 2009 Page 12 of 12
Definition of Ratings Maybank Investment Bank Research uses the following rating system:
BUY Total return is expected to be above 10% in the next 12 months HOLD Total return is expected to be between -5% to 10% in the next 12 months SELL Total return is expected to be below -5% in the next 12 months
Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.
Some common terms abbreviated in this report (where they appear): Adex = Advertising Expenditure FCF = Free Cashflow PE = Price Earnings BV = Book Value FV = Fair Value PEG = PE Ratio To Growth CAGR = Compounded Annual Growth Rate FY = Financial Year PER = PE Ratio Capex = Capital Expenditure FYE = Financial Year End QoQ = Quarter-On-Quarter CY = Calendar Year MoM = Month-On-Month ROA = Return On Asset DCF = Discounted Cashflow NAV = Net Asset Value ROE = Return On Equity DPS = Dividend Per Share NTA = Net Tangible Asset ROSF = Return On Shareholders’ Funds EBIT = Earnings Before Interest And Tax P = Price WACC = Weighted Average Cost Of Capital EBITDA = EBIT, Depreciation And Amortisation P.A. = Per Annum YoY = Year-On-Year EPS = Earnings Per Share PAT = Profit After Tax YTD = Year-To-Date EV = Enterprise Value PBT = Profit Before Tax
Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. Maybank Investment Bank Bhd expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Bhd's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Bhd and Maybank Investment Bank Bhd accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
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