QE tapering continues to be among the policies to watch

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 -- BANKING

By: FocusM

Cheah King Yoong
Senior Analyst
Alliance Research Sdn. Bhd.

How did the year pan out for the banking sector?

Despite a slow start, it has been a good year for the banking sector.  On a year to date annualised basis, outstanding loans rose strongly by 10.1% in October which comes within our industry loan growth forecast of 10.5% for the year.

Net impaired loan ratio for October remains low at 1.35%, implying asset quality remains healthy.  We do not see a significant uptick in the net impaired loan ratio.

The banking system remains well capitalised, with total capital ratio, tier-1 capital ratio and common equity tier-1 (CET1) ratios for October at 14.4% (Sept: 12%) respectively.  These imply that the domestic banking system is resilient to withstand unanticipated shocks to the financial system, if any.

What are your expectations for the sector in 2014?

Despite a series of measures implemented by the authorities to contain the growth of household debt, we remain positive on the sector outlook for 2014 since we believe that (1) underlying fundamentals of the domestic banking sector remain solid, (2) foreign shareholding levels are on the lower end of historical range, (3) ongoing M&A theme will spice up the sector, and (4) valuations of selective banking stocks are decent at present level.

What will be the key events and challenges that will shape the sector’s prospects next year?

These include (1) unexpected drying up in investment banking deal flows due to the volatility of the capital market, (2) lower than expected loan growth, (3) larger than expected net interest margin (NIM) compression due to competition, and (4) deterioration in asset quality.

Foreign shareholding levels of selective banks have declined over the last few months.  Other than concerns over the potential earnings risks on domestic banks, which we believe are overblown, we opine that the dissipating foreign interests are mainly due to (1) uncertainties arising from eventual QE tapering by the Fed , and (2) potential rating cut by credit rating agencies if the federal government’s fiscal position does not improve.

With foreign shareholding levels at the lower end of historical range, we see limited downside risk going forward as we expect the start of QE tapering by Q1 2014 to significantly remove much of the uncertainty, while the implementation of fiscal consolidation measures by the government should avert the risk of imminent sovereign credit rating downgrade.