Banks - Potential mark-to-market losses in 4Q14
Recommendation : Under Weight
The price drops in fixed income securities raised concerns over mark-to-market losses for banks in 4Q14. We estimate that every 1% write-down of the banks’ held-for-trading securities (HFTS) would reduce their yearly net profit by about 2.4%. Only Alliance may be spared as it did not have any HFTS as at end-Sep 14. We continue to rate the sector as Underweight given the concerns over (1) weak loan growth, (2) margin compression, and (3) upturn in credit costs. The sector would be further de-rated if mark-to-market losses cause the banks to report disappointing financial results in 4Q14. RHB Capital remains our top pick.
We continue to rate the sector as Underweight given the concerns over (1) weak loan growth, (2) margin compression, and (3) upturn in credit costs. The sector would be further de-rated if mark-to-market losses cause the banks to report disappointing financial results in 4Q14. RHB Capital remains our top pick.
Mark-to-market for HFTS
To explain, banks classify their investment portfolio into three classes – held-for-trading securities (HFTS), available-for-sale securities (AFSS) and held-to-maturity securities (HTMS). They need to mark to market their HFTS holdings, with gains or losses to be booked in their profit and loss statements.
Weaker non-interest income growth
Any mark-to-market losses for HFTS will reduce a bank’s investment income or even lead to net investment losses. This would dilute the expansion of fee income and weaken its non-interest income growth (ultimately net profit growth).
Impact on net profit
Based on our simulation, we estimate that every 1% write-down in the banks’ HFTS would lower their yearly net profit by an average of 2.2%. Alliance would be spared as it did not have any HFTS as at end-Sep 14. The impact on other banks ranges from 0.1% for Affin and 5.1% for Hong Leong Bank.
More weak results in 4Q14?
The mark-to-market losses would trim the banks’ net profits in 4Q14, potentially causing them to come in short of our forecasts. As such, we expect the banks’ net earnings growth to remain lethargic in 4Q14, probably at 2-5% yoy, albeit better than a drop of 2.2% yoy in 3Q14.
Source: CIMB Daybreak - 10 February 2015
Recommendation : Under Weight
The price drops in fixed income securities raised concerns over mark-to-market losses for banks in 4Q14. We estimate that every 1% write-down of the banks’ held-for-trading securities (HFTS) would reduce their yearly net profit by about 2.4%. Only Alliance may be spared as it did not have any HFTS as at end-Sep 14. We continue to rate the sector as Underweight given the concerns over (1) weak loan growth, (2) margin compression, and (3) upturn in credit costs. The sector would be further de-rated if mark-to-market losses cause the banks to report disappointing financial results in 4Q14. RHB Capital remains our top pick.
We continue to rate the sector as Underweight given the concerns over (1) weak loan growth, (2) margin compression, and (3) upturn in credit costs. The sector would be further de-rated if mark-to-market losses cause the banks to report disappointing financial results in 4Q14. RHB Capital remains our top pick.
Mark-to-market for HFTS
To explain, banks classify their investment portfolio into three classes – held-for-trading securities (HFTS), available-for-sale securities (AFSS) and held-to-maturity securities (HTMS). They need to mark to market their HFTS holdings, with gains or losses to be booked in their profit and loss statements.
Weaker non-interest income growth
Any mark-to-market losses for HFTS will reduce a bank’s investment income or even lead to net investment losses. This would dilute the expansion of fee income and weaken its non-interest income growth (ultimately net profit growth).
Impact on net profit
Based on our simulation, we estimate that every 1% write-down in the banks’ HFTS would lower their yearly net profit by an average of 2.2%. Alliance would be spared as it did not have any HFTS as at end-Sep 14. The impact on other banks ranges from 0.1% for Affin and 5.1% for Hong Leong Bank.
More weak results in 4Q14?
The mark-to-market losses would trim the banks’ net profits in 4Q14, potentially causing them to come in short of our forecasts. As such, we expect the banks’ net earnings growth to remain lethargic in 4Q14, probably at 2-5% yoy, albeit better than a drop of 2.2% yoy in 3Q14.
Source: CIMB Daybreak - 10 February 2015
