Local banks avoid global problems

PETALING JAYA: Malaysia’s banks remain well capitalised and made ample preemptive provisions to weather a potential global economic downturn.

In recent days concerns have been growing over the future of two of the world’s largest investment banks, namely Credit Suisse and Deutsche Bank, as their share prices continue to tank.

Foreign wires report the banks’ credit default insurance levels were approaching degrees not seen since the global financial crisis of 2007-2008 when Lehman Brothers, the fourth largest investment bank in the United States, collapsed and filed for bankruptcy.

Rakuten Trade Sdn Bhd head of equity sales Vincent Lau told StarBiz that it is not an apple-to-apple comparison.

“These institutions and our banks are worlds apart. Local banks are well-capitalised, plus they are not involved in complex financial instruments such as hedge funds and derivatives which these global investment banks do,” he said.

According to Lau, the local banking system’s robust leading indicators bode well for its mid-term outlook.

“August loan growth was strong. While the rising interest rates may put some strain on borrowers, our channel checks so far show that it was still manageable despite gradual unwinding of the loan repayment assistance. Further interest rate hikes will benefit banks,” he added.

Analysts note the banking system’s August loans and deposits growth continued to gain traction, growing at 6.8% and 7.5% year-on-year, respectively.

“While better business loans were expected, the continued support from household loans was unanticipated in a rising rate environment. Meanwhile, GIL (gross impaired loan) trends were at stable levels indicating that the industry could have normalised post-repayment assistance programmes,” said Kenaga Research.

However, it said banks marked a slightly higher loan loss coverage for the month at 97.3% (versus July 2022’s 96.5% and August 2021’s 103.4%) to build in more defensive bookings amidst inflationary spurred concerns on delinquencies.

Following the loan growth momentum, Kenanga has raised its 2022 industry growth target to 6% and 6.5%, while TA Research anticipates a 5.8% loan growth, which is within Bank Negara’s 5.4% to 6.4% forecast.

Moving forward, Kenanga anticipates two more 25-basis-point overnight policy rate hikes in the subsequent Bank Negara’s Monetary Policy Committee meetings, which could lift banking margins.

This would translate favourably on 2023 earnings, notwithstanding the lapse of 2022’s prosperity tax in addition to higher possibilities of writebacks, it added.

Meanwhile, UOB Kay Hian (UOBKH) Research said the level of repayment assistance across banks has declined significantly from a peak of over 25% to 3% and 5% as as at July 2022, and is expected to continue improving on the back of the reopening of the economy.

“As such, we believe banks have made ample pre-emptive provisions, which prompts us to retain our expectations for sector net credit cost to continue its recovery path well into 2023,” said the research firm.

As far as valuations go, UOBKH Research said the sector is currently trading at an undemanding 0.96 times 2023 price-to-book.

“We note that while macroeconomic conditions are expected to see a slower growth outlook in 2023 versus 2022, it is still expected to be significantly stronger than during the Covid-19 lockdown period,’ it added.

Similarly, Hong Leong Investment Bank Research said the risk-reward profile of banking stocks are skewed to the upside with robust profit growth and undemanding valuations being the impetus to drive their performance.

However, it expects the GIL ratio to climb but said it “would not be overly worried since banks have made heavy preemptive provisions in FY20-FY21 to cushion this”.

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