Smaller banks overtake bigger peers
FY18 was more of a foundation year for MBSB Bank and the base building will continue into FY19
The sector's fundamentals to remain intact with healthy earnings and strong asset quality
BY
DOREENN LEONG
Banks are the backbone of any economy. They
play a vital role in economic development and provide financial
resources to an individual, corporation and government. The health of an
economy is directly related to the financial status of its banks. As
such, it is crucial to monitor banking risks all the time so as to avert
the possibility of a financial or banking crisis.
In this month's Focus List, we evaluate the 10 listed banks by scrutinising their performance across five categories (see How we evaluated them ) to assess their strength and resilience.
A
newcomer to the banking list is MBSB Bank Bhd (wholly owned by Malaysia
Building Society Bhd), which takes the top spot on our list with an
overall score of 3.55. The bank was not in last year's list as it only
received approval from Bank Negara Malaysia to operate an Islamic bank
in April last year.
MBSB
Bank, which became a full-fledged Islamic bank after completing the
RM645 mil acquisition of Asian Finance Bank Bhd, is the country's
second-largest Islamic bank. Surprisingly, in just a short time, MBSB
Bank managed to upstage other bigger banks after coming in tops in three
of the five categories.
MBSB
Bank had the best score in terms of tier 1 capital to risk weighted
assets (17.97), loan-loss reserves to non-performing assets (306.70) and
efficiency ratio (26.34).
According to MIDF Research, FY18 was more of a foundation year for MBSB Bank whose base performance will continue into FY19.
"MBSB
was only converted into a banking entity in 2QFY18. The necessary
infrastructure has been put in place to operate as a new entity. We
believe it will take time before MBSB could reap the full benefit.
"We
opine that the status of MBSB will be significantly enhanced once it
becomes a full-fledged Islamic bank. Therefore, we are maintaining our
buy call with a revised target price of RM1.25 (from RM1.23) as we
rollover our valuation to FY20. Our TP is based on price-to-book value
(PBV) multiple of 0.9 times."
MBSB
group president and CEO Datuk Seri Ahmad Zaini Othman had said its loan
growth would be driven by new revenue streams such as trade finance,
treasury, wealth management products and services, as well as
alternative financing like peer-to-peer lending.
Meanwhile,
Alliance Bank Bhd maintained its second position, outpacing its
larger-cap peers with an overall score of 3.85. The SME-focused banking
group has the second-smallest market cap among the country's listed
banks. It scored the best in terms of deposits to funding with a score
of 0.15. Joel Kornreich was appointed Alliance Bank group CEO on Jan 1,
2015.
Public
Bank Bhd, on the other hand, lost its top spot and sits in third place
on our list with an overall score of 4.10. Despite this, the
second-largest bank by market capitalisation continued to do well in the
non-performing assets to total assets category with the highest score
of 0.20.
Malaysia's
largest bank by market capitalisation Malayan Banking Bhd did not fare
well as it dropped a notch to sixth position with an overall score of
5.45.
Challenging year
Most
banks faced a challenging operating environment last year as they saw
slower loans growth, net interest margin (NIM) compression and lower
non-interest income (NII).
Still,
analysts expect the sector's fundamentals to remain intact with healthy
earnings and strong asset quality, while return on equity is still
good.
"We
remain positive on the prospects of the banking sector as evidenced by
recent data from Bank Negara Malaysia (BNM), which showed stronger
industry loan growth and loan approvals," Rakuten Trade Sdn Bhd
vice-president of research Vincent Lau tells FocusM .
"Malaysia's
second quarter gross domestic product (GDP) growth of 4.9% shows our
economic fundamentals remain resilient amidst the challenging global
environment. Fears of recession are greatly overplayed," he adds.
Lau says the recent banking results remain encouraging with growth in both loans and and earnings.
"Banks'
current valuations and yields make it an attractive value proposition.
The pump-priming and revival of infrastructure projects are expected to
provide growth impetus for the banking sector," he adds.
However,
Lau believes the challenges include a possible rise in non-performing
loans (NPL) should growth slow drastically and the country falls into
recession.
Meanwhile
Etiqa Insurance and Takaful chief strategy officer Chris Eng says: "As a
whole, there remain some risks in the banking sector.
"While
corporate sector loans have slowed down due to the delay in some mega
infrastructure projects and business sentiment uncertainty, the retail
sector has slowed down due to lower demand for properties. We don't
really see that much change in sentiment over the next six months.
"Negative
driver will be the environment of falling interest rates which could
pressure NIMs for the banks. Offsetting this somewhat will be the
conservative provisioning that has already happened over the last 12
months, some of which could be reversed in the coming one or two
quarters to relieve NIM pressure," he adds.
According
to credit rating agency RAM Holdings Bhd, Islamic financing is still
anchoring the growth of the overall banking sector. Islamic banking
continued to expand at a much faster pace than conventional loans in
2018, coming in at 11% versus 10.3% in the previous year, in contrast to
the latter's 3.3% growth. As at end-January 2019, Islamic financing
comprised some 32% of the overall system's loans.
RAM expects the financing growth of the Islamic banking sector to stand at around 10-11% in 2019.
It
maintains a stable outlook on the Malaysian Islamic banking sector, in
line with its view on the overall domestic banking system.
RAM's
key expectations for the Islamic banking sector in 2019 include Islamic
financing growth will hover around the low teens, asset-quality
indicators should remain resilient, strengthening funding profile in the
lead-up to the implementation of the net stable funding ratio (NSFR)
requirement, stable outlook on profitability despite slight margin
compression and strong capitalisation.
"The
asset-quality indicators of Islamic banks have remained relatively
benign, with a gross impaired financing (GIF) ratio of 1.2% as at
end-January 2019 and an annualised credit cost ratio of 27 bps in 9M
2018.
"That
said, we note an uptrend in the absolute GIF of Islamic banks, which
increased 13% in 2018. On the other hand, the implementation of
Malaysian Financial Reporting Standards 9 has bolstered loss-absorption
buffers; the Islamic system's GIF coverage ratio had improved to 103% as
at end-January 2019 (end-December 2017: 89%).
"While
the moderation in economic growth may affect borrowers' repayment
capabilities and thus lead to an uptick in impairments, the asset
quality of the Islamic banking industry is unlikely to deteriorate
significantly," RAM adds.
The
credit rating agency says in 2018, the Islamic banking system's
deposits continued expanding at a healthy 12.4%, following its
commendable 14.2% growth the preceding year. The bulk of the expansion
stemmed from fixed deposits as banks are bracing for the implementation
of the NSFR requirement.
"Despite
the deferred adoption of the NSFR, margin pressure is unlikely to ease
amid the ongoing keen competition for retail and SME deposits, as banks
keep building up their funding bases. However, the overall outlook on
profitability remains stable as banks keep a tight rein on operating
expenses," explains RAM co-head of Financial Institution Ratings Sophia
Lee.
Liquidity
stayed healthy as at end-January 2019, with the industry's liquidity
coverage ratio standing at 143%. The Islamic banking system also
remained well capitalised, with respective common equity tier-1 and
total capital ratios of 13.3% and 17.6% as at the same date. FocusM
How we evaluated them
To rank
the banks in terms of relative strength, we used a similar approach
employed by Bloomberg Markets in assessing the world's strongest banks.
Bloomberg
evaluated the banks in five categories with weightage assigned to each.
The categories are Tier 1 capital to risk-weighted assets (40%),
non-performing assets to total assets (20%), reserves for loan losses to
non-performing assets (20%), deposits to funding (15%) and efficiency
ratio, which compares costs with revenues (5%).
FocusM ''s research team used the same weightage to benchmark the listed banks.
For
our list, we made a head-to-head comparison on how the banks stacked up
against each other. The ratios were compiled from Bloomberg da
Smaller banks overtake bigger peers
FY18 was more of a foundation year for MBSB Bank and the base building will continue into FY19
The sector's fundamentals to remain intact with healthy earnings and strong asset quality
BY
DOREENN LEONG
Banks are the backbone of any economy. They
play a vital role in economic development and provide financial
resources to an individual, corporation and government. The health of an
economy is directly related to the financial status of its banks. As
such, it is crucial to monitor banking risks all the time so as to avert
the possibility of a financial or banking crisis.
In this month's Focus List, we evaluate the 10 listed banks by scrutinising their performance across five categories (see How we evaluated them ) to assess their strength and resilience.
A
newcomer to the banking list is MBSB Bank Bhd (wholly owned by Malaysia
Building Society Bhd), which takes the top spot on our list with an
overall score of 3.55. The bank was not in last year's list as it only
received approval from Bank Negara Malaysia to operate an Islamic bank
in April last year.
MBSB
Bank, which became a full-fledged Islamic bank after completing the
RM645 mil acquisition of Asian Finance Bank Bhd, is the country's
second-largest Islamic bank. Surprisingly, in just a short time, MBSB
Bank managed to upstage other bigger banks after coming in tops in three
of the five categories.
MBSB
Bank had the best score in terms of tier 1 capital to risk weighted
assets (17.97), loan-loss reserves to non-performing assets (306.70) and
efficiency ratio (26.34).
According to MIDF Research, FY18 was more of a foundation year for MBSB Bank whose base performance will continue into FY19.
"MBSB
was only converted into a banking entity in 2QFY18. The necessary
infrastructure has been put in place to operate as a new entity. We
believe it will take time before MBSB could reap the full benefit.
"We
opine that the status of MBSB will be significantly enhanced once it
becomes a full-fledged Islamic bank. Therefore, we are maintaining our
buy call with a revised target price of RM1.25 (from RM1.23) as we
rollover our valuation to FY20. Our TP is based on price-to-book value
(PBV) multiple of 0.9 times."
MBSB
group president and CEO Datuk Seri Ahmad Zaini Othman had said its loan
growth would be driven by new revenue streams such as trade finance,
treasury, wealth management products and services, as well as
alternative financing like peer-to-peer lending.
Meanwhile,
Alliance Bank Bhd maintained its second position, outpacing its
larger-cap peers with an overall score of 3.85. The SME-focused banking
group has the second-smallest market cap among the country's listed
banks. It scored the best in terms of deposits to funding with a score
of 0.15. Joel Kornreich was appointed Alliance Bank group CEO on Jan 1,
2015.
Public
Bank Bhd, on the other hand, lost its top spot and sits in third place
on our list with an overall score of 4.10. Despite this, the
second-largest bank by market capitalisation continued to do well in the
non-performing assets to total assets category with the highest score
of 0.20.
Malaysia's
largest bank by market capitalisation Malayan Banking Bhd did not fare
well as it dropped a notch to sixth position with an overall score of
5.45.
Challenging year
Most
banks faced a challenging operating environment last year as they saw
slower loans growth, net interest margin (NIM) compression and lower
non-interest income (NII).
Still,
analysts expect the sector's fundamentals to remain intact with healthy
earnings and strong asset quality, while return on equity is still
good.
"We
remain positive on the prospects of the banking sector as evidenced by
recent data from Bank Negara Malaysia (BNM), which showed stronger
industry loan growth and loan approvals," Rakuten Trade Sdn Bhd
vice-president of research Vincent Lau tells FocusM .
"Malaysia's
second quarter gross domestic product (GDP) growth of 4.9% shows our
economic fundamentals remain resilient amidst the challenging global
environment. Fears of recession are greatly overplayed," he adds.
Lau says the recent banking results remain encouraging with growth in both loans and and earnings.
"Banks'
current valuations and yields make it an attractive value proposition.
The pump-priming and revival of infrastructure projects are expected to
provide growth impetus for the banking sector," he adds.
However,
Lau believes the challenges include a possible rise in non-performing
loans (NPL) should growth slow drastically and the country falls into
recession.
Meanwhile
Etiqa Insurance and Takaful chief strategy officer Chris Eng says: "As a
whole, there remain some risks in the banking sector.
"While
corporate sector loans have slowed down due to the delay in some mega
infrastructure projects and business sentiment uncertainty, the retail
sector has slowed down due to lower demand for properties. We don't
really see that much change in sentiment over the next six months.
"Negative
driver will be the environment of falling interest rates which could
pressure NIMs for the banks. Offsetting this somewhat will be the
conservative provisioning that has already happened over the last 12
months, some of which could be reversed in the coming one or two
quarters to relieve NIM pressure," he adds.
According
to credit rating agency RAM Holdings Bhd, Islamic financing is still
anchoring the growth of the overall banking sector. Islamic banking
continued to expand at a much faster pace than conventional loans in
2018, coming in at 11% versus 10.3% in the previous year, in contrast to
the latter's 3.3% growth. As at end-January 2019, Islamic financing
comprised some 32% of the overall system's loans.
RAM expects the financing growth of the Islamic banking sector to stand at around 10-11% in 2019.
It
maintains a stable outlook on the Malaysian Islamic banking sector, in
line with its view on the overall domestic banking system.
RAM's
key expectations for the Islamic banking sector in 2019 include Islamic
financing growth will hover around the low teens, asset-quality
indicators should remain resilient, strengthening funding profile in the
lead-up to the implementation of the net stable funding ratio (NSFR)
requirement, stable outlook on profitability despite slight margin
compression and strong capitalisation.
"The
asset-quality indicators of Islamic banks have remained relatively
benign, with a gross impaired financing (GIF) ratio of 1.2% as at
end-January 2019 and an annualised credit cost ratio of 27 bps in 9M
2018.
"That
said, we note an uptrend in the absolute GIF of Islamic banks, which
increased 13% in 2018. On the other hand, the implementation of
Malaysian Financial Reporting Standards 9 has bolstered loss-absorption
buffers; the Islamic system's GIF coverage ratio had improved to 103% as
at end-January 2019 (end-December 2017: 89%).
"While
the moderation in economic growth may affect borrowers' repayment
capabilities and thus lead to an uptick in impairments, the asset
quality of the Islamic banking industry is unlikely to deteriorate
significantly," RAM adds.
The
credit rating agency says in 2018, the Islamic banking system's
deposits continued expanding at a healthy 12.4%, following its
commendable 14.2% growth the preceding year. The bulk of the expansion
stemmed from fixed deposits as banks are bracing for the implementation
of the NSFR requirement.
"Despite
the deferred adoption of the NSFR, margin pressure is unlikely to ease
amid the ongoing keen competition for retail and SME deposits, as banks
keep building up their funding bases. However, the overall outlook on
profitability remains stable as banks keep a tight rein on operating
expenses," explains RAM co-head of Financial Institution Ratings Sophia
Lee.
Liquidity
stayed healthy as at end-January 2019, with the industry's liquidity
coverage ratio standing at 143%. The Islamic banking system also
remained well capitalised, with respective common equity tier-1 and
total capital ratios of 13.3% and 17.6% as at the same date. FocusM
How we evaluated them
To rank
the banks in terms of relative strength, we used a similar approach
employed by Bloomberg Markets in assessing the world's strongest banks.
Bloomberg
evaluated the banks in five categories with weightage assigned to each.
The categories are Tier 1 capital to risk-weighted assets (40%),
non-performing assets to total assets (20%), reserves for loan losses to
non-performing assets (20%), deposits to funding (15%) and efficiency
ratio, which compares costs with revenues (5%).
FocusM ''s research team used the same weightage to benchmark the listed banks.
For
our list, we made a head-to-head comparison on how the banks stacked up
against each other. The ratios were compiled from Bloomberg
Calvin Comments:
THIS POST BY FOCUS MAG COMES AFTER CALVIN TAN RESEARCH HIGHLIGHT
https://klse.i3investor.com/blogs/www.eaglevisioninvest.com/222737.jsp
