Small investment banks must shape up to survive

Wednesday December 7, 2011

Plain Speaking - By Yap Leng Kuen

THE rush by banking groups to expand into investment banking (IB) business has somewhat put the smaller IB outfits into a spot.

What is going to happen to them once all the big boys have gotten their IB act together? Will they be swallowed or is there still a place and role for them?

One important role the smaller IBs can play is that of independent financial advisor (IFA). Many banking groups that already lend to their customers seeking IB services may not be able to undertake the role of IFA.

That is where smaller but credible IB houses can play a significant role.

Following the proposed merger between RHB Capital and OSK Holdings Bhd, a lot of attention has been given to the fate of the next largest standalone IBs, which are K&N Kenanga Holdings Bhd and Hwang DBS Investment Bank.

K&N Kenanga was in the news, with reports speculating that it was looking to buy the IB business of the ECM Libra financial group.

While nothing conclusive has come out of it, that piece of market talk was enough to fuel further curiosity over K&N Kenanga's plans. Meanwhile, Hwang DBS is keeping very quiet over its plans amidst these recent developments.

While they may be focused on being niche players, these smaller IBs may have to be content with getting smaller deals or just end up as partners with the bigger IBs in major transactions.

A bigger bank-backed group will have the balance sheet to undertake larger transactions. One notable case is the Maybank/Kim Eng partnership that will enable Kim Eng to expand the regional IB business via more investments from Maybank and also to undertake bigger transactions based on the balance sheet and customer base that Maybank has regionally.

Kim Eng is already a successful regional player in six out of 10 Asean countries with international presence in Hong Kong, New York and London. It made a pre-tax profit of S$128.9mil for the year from June 2010 to July 2011. But it recognises the forces of globalisation and the need for further strength in times of crisis.

That does not mean the smaller IBs cannot survive the onslaught of liberalisation and tough times.

They will have to work harder to maintain their strong reputation, client network and marketing skills. While shaping up, they may make themselves beautiful enough to attract some good suitors.

In the case of Kim Eng, it had to be attractive enough to get a big buyer like Maybank that paid a whopping S$1.79bil or 1.9 times book value for the Singapore-based IB that has the top brokerage position in Thailand.

When the CIMB investment banking group bought GK Goh for S$239.14mil back in 2005, it paid 1.3 times book value.

As the offers go higher and supply gets scarce, there is a chance for the smaller but good IBs to fetch a favourable exit price.

Thus lie the challenges for these IBs amidst interesting times.

Associate editor Yap Leng Kuen thinks that ideally, there should be a place in the sun for everyone.

http://biz.thestar.com.my/news/story.asp?file=/2011/12/7/business/10045706&sec=business

Bankers also do national service

Wednesday May 18, 2011

Bankers also do national service
Plain Speaking - By Yap Leng Kuen


POST financial crisis, a lot of “casualties'' especially in the form of loan restructuring and recovery. There are many instances of brave souls slogging away into the wee hours to come up with major restructuring schemes.

Famous examples include Danaharta, Danamodal and the Corporate Debt Restructuring Committee (CDRC). That was Malaysia's experience during the 1997 Asia financial crisis. On a wider scale, the US Federal Deposit Insurance Corp and the US Government undertook massive restructuring of troubled mortgages and bank assets during the 2008 subprime crisis.

These are experiences of large organisations that are set up for the specific purpose of restructuring. They are backed by the government and exert considerable powers in the process.

But when Jamelah Jamaluddin joined Kuwait Finance House Malaysia Bhd (KFH) early last year, it was already some time after the financial crisis and many banks were already on the recovery path. At KFH Malaysia, it was different story. Overwhelmed by rising non-performing finance and a pile of debts, KFH Malaysia was in dire need of a revamp.

Why did Jamelah, who was already in a good position helming RHB Islamic Bank, jump into KFH Malaysia and its messy loan debt situation? Can't she just sit back and enjoy life? Instead, she found herself thick in the middle of an RM800mil debt pile at KFH Malaysia.

Unravelling that has taken a lot of her time while she also has to focus on building up the bank to offer the full suite of products under its universal banking licence. “When I first came in, I didn't know where to start,'' she said, looking visibly happier now that she has taken stock of all the assets.

Her journey at KFH Malaysia began one fine day when she received a call from one of the bosses from the headquarters. “He said We are in town and want to see you,” recalls Jamelah. Four high-profile men in business suits showed up and told her in no uncertain terms that they only wanted her for the job even though she had suggested some other names.

They all knew it would be no easy task to clean up the bank, which had been set up with much fanfare but was suffering under big losses. The business and management had to be revamped while an internal audit was conducted. Hers was a tough job and there was no time for a popularity contest.

“I like challenges and to do things differently,'' she said. Work satisfaction and personal achievement are important to her. Already a successful merchant banker of 25 years, she decided to switch career path to Islamic banking and was deputy CEO of KFH Malaysia when it started five years ago. “There are a lot of new and exciting things to learn in Islamic banking,'' she said. “It's all up to the person. Passion is what drives an Islamic banker to excel and learn new things everyday.''

Next, she is going into retail banking for KFH Malaysia - a new field for her which she finds interesting and stimulating.

Apart from personal achievement, Jamelah also sees her work at KFH Malaysia as part of national service. “It is not for the money,'' she said. “It is also our duty to ensure that the interests of foreign investors, in this case the Kuwaitis, are looked after well as they have poured into a huge amount into this investment.''

In the context of national service, a lot of names come to mind. Within the banking fraternity, Datuk Seri Hamidy Hafiz who retired as CEO of Affin Bank, is chairman of the revived CDRC and national guarantee corporation, Danajamin.

Tan Sri Amirsham Abdul Aziz, who retired as Maybank president and CEO, was appointed chairman of the National Economic Advisory Council (NEAC) in June 2009.

Associate editor Yap leng Kuan is happy that money is not the only buzz word in the corporate world.

http://biz.thestar.com.my/news/story.asp?file=/2011/5/18/business/8703279&sec=business

---

Wednesday May 18, 2011

Kuwait Finance House recovery on track
By YAP LENG KUEN
lengkuen@thestar.com.my




Islamic bank carrying out revamp under 5-year plan

KUALA LUMPUR: Kuwait Finance House (M) Bhd (KFH), the largest Islamic bank in terms of capital, aims to get back into the limelight for the right reasons. The last time it attracted media interest was following news of an internal audit on a net loss and surge in non-performing finance (NPF).

Prior to that, news that it had discontinued the rating services by RAM Ratings, to be in line with the rating practices of the parent and group.

Having engaged the services of Malaysian Rating Corp Bhd (MARC). this decision was part of its cost rationalisation; nevertheless, it had sparked speculation as to what else could be going on at KFH.


Jamelah Jamaluddin
“We have taken stock of all our assets,'' CEO Jamelah Jamaluddin told StarBiz. “We feel more comfortable now as we know which are the accounts that need to be restructured.''

Declining to divulge further details, she said that of the total group assets of RM10.9bil, “only a fraction'' needed to be restructured or recovered.

“The recovery process is doing well since it started last year,'' she said. More than RM100mil out of debts of RM792mil has been recovered or restructured.

The internal audit has been completed and findings handed over to the authorities.

“The board is aware of the findings,'' Jamelah said. “We have not taken any legal action as more groundwork is to be done. Whether there will be a legal case eventually, we do not know. It is too preliminary.''

Under its five-year transformation plan, the focus this year will be three-pronged branding, building up human resource capability and change in corporate culture.

Under its current emphasis to grow retail business in line with its universal banking concept, more branding activities are targeted. Staff quality, competency and diversity will also be strengthened while the mentoring process is under way.

Meanwhile, the culture should reflect the values and expectations of an Islamic bank, she said. “It's in the way we behave, dress and take care of our clients. We must show fairness, integrity and honesty,'' she said.

“We believe the numbers will come once we have diversified the business, and set up the correct focus and system of values,'' she said. Last year, the emphasis was on improving asset quality, recovery and business growth.

KFH Malaysia, which has 10 branches, returned to the black in the fourth quarter ended Dec 31, 2010 with a profit of RM13mil from a net loss of RM35.5mil in the previous corresponding quarter but reported a full year (FY10) net loss of RM75.6mil which more than double its net loss the year before.

As part of its group-wide strategic planning, KFH Malaysia aims to enhance its position as the hub for South-East Asia with a possible presence in Indonesia.

In Australia, KFH is pursuing deals via its advisory licence with an expected bilateral loan signing in the horizon. “The loan will be structured in an Islamic way and we are working with a bank in Australia,'' she said,

Under its five-year plan which ends in 2014, KFH Malaysia targets to grow both the retail and wholesale business. “We started five years ago on the wholesale business and are now picking up on retail banking. More branches will be set up along with alternative distribution channels, new products and services.

“A year ago, we started to enhance our policies, the respective standard operating procedures, credit control and risk management. We are now embarking on portfolio or industry focus,'' said Jamelah.

In the wholesale area, the focus will be building quality assets and driving fee-based income; in the capital markets, it will be issuance of local and foreign denominated sukuk.

Among the winning retail strategies at KFH Malaysia is the introduction of the gold account, which sells physical gold and acts as a deposit account.

“Leveraging on the expertise of our sister company in Turkey, we have mastered the procedure for managing the gold account,'' she said, adding that the bank hoped to sell one tonne of gold by year-end compared with 500kg currently.

“We will innovate and ride on our group-wide suite of products which we will adapt for local use,'' she said.

http://biz.thestar.com.my/news/story.asp?file=/2011/5/18/business/8696207&sec=business

Malaysian banks: By market capitalisation

Banking sector: Valuations are undemanding

Banking sector: Valuations are undemanding

Written by Financial Daily
Tuesday, 08 March 2011 11:28


Banking sector
Maintain overweight:

The sector’s value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. — Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

How do Banks make Profits?

A bank generates its income from three main sources.

1. There is the net interest rate difference between what it earns on loans and what it pays for deposits.
2. There are the extra fees it charges for various services and
3. There is the profit it earns from other activities like running a stockbroking division, a funds management business and offering services to customers like helping them with foreign exchange transactions.

Banks can also be involved as active traders in financial markets.

As far as the income they earn is concerned, this is generally about 3 per cent of the value of the multi billion dollars of assets for which they are responsible.  

• About 2.4 per cent of this 3 per cent comes from interest income and 
• about 0.6 per cent from fees and other income.

From this it pays running expenses that reduce the income on total assets to about 2 per cent. 

The other major cost is allowing for bad debts, which can arise from people not being able to pay their interest as well as from losses on bank business enterprises.

• These expenses can range widely from 0.2 per cent of assets when times are good to more than 1 per cent during bad times. 

Last but not least is tax which reduces any net income by 30 per cent.

From these basic observations, the major challenge banks currently face in developed countries comes from bad debts.

Summary:

3 Main Sources of Income

(1) Interest Income = 2.4% of Total Assets

(2) Fees and (3) other Income = 0.6% of Total Assets

Total Income = 3.0% of Total Assets

less

Expenses = 1% of Total Assets

Profit before provisioning for bad debts and before tax = 2% of Total Assets

less 

Provisioning for Bad Debts = 0.2% to 1% of Total Assets

Profit Before Tax = 1.8% - 1% of Total Assets

less 

Tax = 30%

Profit After Tax = 1.26% - 0.7% of Total Assets

Besides looking for a consistent mid- to high-teen ROE, it is good to see a high level of ROA as well.


For banks, a top ROA would be in the 1.2% to 1.4% range.






Related:
What should investors look for when investing in banks and other financiers?
http://myinvestingnotes.blogspot.com/2010/05/what-should-investors-look-for-when.html

Comparative Analysis of Banking Stocks (16.5.2010)

http://myinvestingnotes.blogspot.com/2010/05/comparative-analysis-of-malaysian.html

http://spreadsheets.google.com/pub?key=t3v2VY0rD9DcGSjmVkAV-gQ&output=html

How to analyze the market?  Bank

http://myinvestingnotes.blogspot.com/2008/08/how-to-analyze-market-bank.html

Hallmarks of Success for Banks: ROE and ROA
http://myinvestingnotes.blogspot.com/2009/06/hallmarks-of-success-for-banks-roe-and.html

Bright Net Profit Numbers for Malaysian Banks

Solid Q2 signals record year for Malaysia banks
By Adeline Paul Raj
Published: 2010/08/28

Earnings will continue to be on an uptrend in the next two quarters on the back of loan expansion, say analysts

Banks, as expected, turned in solid report cards in the second quarter, pointing to full year that could see record earnings for the industry as loans continue growing and provisions fall.

Analysts believe earnings, which probably came in at the highest ever for the April-to-June period, will continue to grow on a quarter-to-quarter basis this year.

Earnings will continue to be on an uptrend in the next two quarters on the back of loan expansion, especially on the retail side, and better fee-based income, said banking analyst Wong Chew Hann of Maybank Investment Bank Research.

"It should be another year of record earnings," she remarked.

Top banker Datuk Seri Nazir Razak concurred.

"This most likely will be a record year on continued loan expansion and as capital markets continue to be active," the chief of the country's second largest lender, CIMB Group Holdings Bhd CIMB, told Business Times yesterday.

The industry's loan growth has so far had been better than expected, coming in at 12.5 per cent as at end June from a year ago.

Some analysts are now looking to raise their loan growth forecasts for the year. Wong plans to raise hers to around 12 per cent compared to about 10 per cent before.

The industry seems to be in good health in terms of asset quality and banks also appear to have much better control over costs, analysts noted.

The only concern they had for the industry was the recent creeping in of much stiffer competition in the mortgage and hire-purchase loan segments, as well as in customer deposits, which could hurt margins.

Even foreign banks have been in the action, going all out to grab higher market shares in those areas by offering attractive rates and innovative packages.

"That puts pressure on margins but the OPR (overnight policy rate) hikes earlier may help cushion the pressure somewhat," said David Chong, an analyst at RHB Research Institute.

On the whole, banks' second quarter earnings were either in line with analysts' expectations, or slightly better than expected.

Analysts cited top lender Malayan Banking Bhd (Maybank) as having the best results as well as the best dividends of the nine local banking groups.

An analyst from a foreign research house felt that Alliance Financial Group Bhd, the smallest banking group, was the most disappointing in terms of loan and deposit growth.

Banks like Maybank and CIMB saw earnings from their overseas operations, especially Indonesia, come in strongly for the quarter.

Read more: Solid Q2 signals record year for Malaysia banks http://www.btimes.com.my/Current_News/BTIMES/articles/bankq2-2/Article/index_html#ixzz0xykGjOxy

Laggards Maybank, RHBCap more attractive after rate hike

Laggards Maybank, RHBCap more attractive after rate hike

Written by Loong Tse Min & Daniel Khoo
Monday, 17 May 2010 10:54

KUALA LUMPUR: Banks have started to raise interest rates after Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points (bps) and big capitalised laggards could be the unexpected beneficiaries, analysts said.

Banks which were considered fully valued and less exciting due to their smaller share of the investment banking market, will now look attractive with an expected growth in net interest margins (NIM) of 10bps.

HwangDBS Vickers Research said other banks, which were laggards, would also benefit include Malayan Banking Bhd and RHB Capital Bhd. It said these banks would also benefit as proxies to economic growth after the first-quarter gross domestic product (GDP) grew at a sizzling 10.1%.



Last Thursday, BNM raised the OPR by 25bps to 2.5%, the second rate increase since March 4 and this has prompted several banks to hike their rates, effective this week.

Last Friday, Malayan Banking Bhd said it would revise upwards its deposit and base lending rate (BLR) from tomorrow with 25bps each. Maybank Islamic Bhd’s base financing rate (BFR) will similarly be increased by 25bps to 6.05%.

Other banks which are raising their rates are CIMB Bank, CIMB Islamic Bank and Bank Islam Malaysia Bhd.

HwangDBS said the OPR hike was positive for most banks as BLR-based loans tend to be re-priced within a week of a rate hike, while deposit rates take longer to adjust due to the various time buckets.

“Our sensitivity analysis shows that every 25bps hike in OPR would raise lending yields by 17bps and increase cost of funds by 7bps, thus widening NIM by 10bps and boosting earnings by 6.5%, on average,” it said.

HwangDBS said Maybank was a good proxy to the higher GDP and OPR hike expectations. It expects Maybank’s loan portfolio to expand 12%-15% from 2010 to 2012 compared with the industry average of 8% to 9%.

“Maybank and RHBCap are high conviction picks and we have buy call and target prices of RM9.10 and RM7.30, respectively,” it said.

The research house said the Alliance Financial Group, with 84% variable rate loans in its portfolio, would be the biggest winner while AMMB Holdings Bhd would be least affected due to its high proportion of fixed rate loans (57%).

AmBank Group’s chief financial officer and deputy group managing director Ashok Ramamurthy said there may be potential for RM15 million to RM20 million of revenue in the next 12 months which would be lost through “margin compression” due to the rising interest rate environment — which would make borrowing costs more expensive.

“Most banks around the world try to borrow short and lend long. And when they do that in a rising interest rate environment, there will be margin compressions. Margin compressions will be capped at RM50 million, 1.5% of our current revenues; but our actual exposure is much smaller, about one third of that,” Ashok said.

“So when you talk about our earnings guidance with profit growth of 16%-20% next year, that is after taking into account any potential impact from rising interest rates — that’s the net growth,” he added.

Maybank’s president and CEO Datuk Seri Abdul Wahid Omar said with inflation expected to rise to 2.3%, and with OPR increasing to 2.5%, the country was now experiencing positive real interest rates (after deducting inflation from interest rate figures).

He said interest rates were currently “not too high nor too low” and that it was accommodative and conducive for business and growth in the economy.

On the possibility of more OPR hikes, HwangDBS expects the rate to rise by another 50bps to 3% by the fourth quarter.

However, CIMB head of economics research Lee Heng Guie said BNM was neutral on the next rate move.

“Based on BNM’s policy statement, it is quite neutral, given the continued uncertainty of external factrors such as Greece’s sovereign debt crisis. We do expect rate change to move at a measured pace,” said Lee.

AmResearch senior economist Manokaran Mottian said the 25bps hike was a preemptive move by BNM. The central bank’s 25bps hike in March had been vindicated by the strong first-quarter GDP data.

Meanwhile, RHB Banking Group will raise the BLR for RHB Bank Bhd and the BFR for RHB Islamic from 5.8% to 6.05% from Wednesday. The new fixed deposit rates will be 

• 2.5% (for one to five months, previously 2.25% for one to 11 months), 
• 2.7% (six to 11 months), 
• 3% for 12 months (from 2.6%) and 
• 3.1% (13 to 35 months).

This article appeared in The Edge Financial Daily, May 17, 2010.

Credit Suisse says HLB's offer price for EON Cap too low

Tuesday May 18, 2010

Credit Suisse says HLB's offer price for EON Cap too low
By RISEN JAYASEELAN


PETALING JAYA: Credit Suisse Securities (M) Sdn Bhd has deemed Hong Leong Bank Bhd's (HLB) offer price for the assets and liabilities of EON Capital Bhd (EON Cap) too low.

This has put the board of directors of EON Cap in a quandary, sources said. EON Cap's board met yesterday to discuss Credit Suisse's opinion on the offer.

The board had requested for its shares to be suspended from trading, pending an announcement related to the offer.

EON Cap said late yesterday evening that its board meeting had been adjourned “pending further clarification from independent financial adviser Credit Suisse.”

But a party familiar with the deal said with Credit Suisse telling the board that the offer was too low, the board has been put in a tough spot as to what to tell shareholders.

“The board had already said it was going to present the offer to shareholders. Does it now also tell shareholders not to accept the offer?” Sources say the situation is tenuous because HLB has no intention of raising its bid.

From its due diligence of EON Cap, HLB may be inclined to ask EON Cap to make some additional provisioning as a condition to the deal, stemming from what it (HLB) deems as unrecoverable loans.

This could mean that the price HLB is willing to pay for EON Cap may be lower than the RM7.20 per share it last made.

EON Cap is said to be disappointed that HLB has not recognised certain deferred tax assets in its valuation of the former, sources say.

HLB's offer is also priced at around 1.4 times the book value of EON Bank, which some analysts deem as low in light of other banking merger and acquisitions done at higher multiples.

The bottom line is that at present, HLB's offer is the only one on the table for EON Cap's shareholders.

Current market conditions are likely to make it difficult for other bidders, such as Affin Bank Bhd, to raise funds to acquire EON Cap.

If this deal falls through, the next bidder for EON Cap may no longer have the luxury of having a lower threshold of shareholder approval for the deal to go through.

http://biz.thestar.com.my/news/story.asp?file=/2010/5/18/business/6282935&sec=business

Related:
Comparative analysis of Malaysian Banking Stocks (16.5.2010)

Comparative analysis of Malaysian Banking Stocks (16.5.2010)

Comparative analysis of Malaysian Banking Stocks
A quick look at Malaysian Banking Stocks (16.5.2010)
http://spreadsheets.google.com/pub?key=t3v2VY0rD9DcGSjmVkAV-gQ&output=html

Inflation may check Singapore bank profits

Inflation may check Singapore bank profits
May 05, 2010


SINGAPORE, May 5 — Singapore banks are mostly set to post double-digit rises in quarterly earnings as loans grew and bad debts declined, but rising inflationary pressures are raising medium-term concerns that higher rates may squeeze margins.

The city-state’s banks are benefiting from a strong recovery in the domestic economy, which is projected to expand as much as 9 per cent this year, its best annual performance since 2004. Singapore’s economy shrank 2 per cent last year.

But inflation — which is expected to hit a two-year high in the fourth quarter — is also posing a risk to short-term interest rates, which hit rock bottom during the financial crisis as Asian economies battled the global financial crisis.

“The main risk is an interest rate risk — a sharp repricing of the short-end of the curve which would result in a narrowing of net interest margins,” said Peter Elston, a strategist at Aberdeen Asset Management Asia.

“That repricing of the short end would be the result of a sudden change in inflationary expectations,” said Elston. Aberdeen owns OCBC and UOB in Singapore and Public Bank in Malaysia.

Analysts are bullish about bank earnings as strong capital markets and higher trading in currencies and bonds have helped lift results at global banks that are recovering from the credit crisis.

“The market will be looking for evidence of revenue recovery and that the earnings uplift from lower loan impairments is now largely a foregone conclusion,” Natasha Midgley, an analyst at Standard Chartered, said in a note. “In light of recent newsflow, we see scope for revenue-driven earnings’ upgrades.”

NEW STRATEGY

Banks will also benefit from a strong recovery in investor demand for mutual funds and insurance products, boosting fee income.

Analysts are also looking for clues from DBS chief executive Piyush Gupta on the progress he has made in implementing his new strategy that aims to widen the Singapore bank’s reach in Asia.

JPMorgan’s Harsh Wardhan Modi said Gupta has made a promising start, but he would like to see more progress in improving DBS’s Hong Kong business and gaining bigger market share in the segment serving small-and-medium enterprises as Asian economies recover.

In Malaysia, where most analysts do not provide quarterly forecasts, Macquarie Research expects banks will report on average a 43 per cent growth in net profit for Jan-March from a year ago, amid lower bad-debt charges.

Maybank’s earnings are set to outperform this year after its last financial year was marred by big writeoffs linked to acquisitions in Indonesia and Pakistan. — Reuters

Zeti: Interest rates need normalisation

Zeti: Interest rates need normalisation
Written by Siti Sakinah
Friday, 29 January 2010 18:33

KUALA LUMPUR: Some “normalisation” of the interest rates are now in order after they were reduced to “unprecedented” levels following the global financial crisis, said Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

She said on Friday, Jan 29 that the interest rates were reduced to the current 2% to avoid a fundamental recession as the global crisis had led to an emergency condition.

“Therefore, (we) need to look forward to some normalisation of interest rates at some point,” she told reporters after a public lecture by the first holder of the International Centre for Education in Islamic Finance (INCEIF) Chair, Dr Abbas Mirakhor.

She said that the normalisation should not be looked at as a tightening, because the policy can still support growth “especially in an environment where inflation is going to remain modest”.

Asked on the danger of keeping the interest rates too low for too long, Zeti said that

• although there were no signs of asset bubble risk,
• it could lead to other financial imbalance, such as consumer moving their funds outside the country in order to enhance the return on their savings.

“It would result in them (the consumers) taking higher risk without them realising and cause problems later on,” she said, adding that if these problems were to happen, the central bank would have to implement more drastic measures, and to avoid that “we should look at some point to normalized the rates”.

Zeti said that the country was not seeing excessive leverage on home loans nor seeing the formation of an asset bubble as “borrowing by households still remains within prudential levels”. She said that Malaysia offers a wide range of advisory services so consumers had been “prudent in managing their debt and are living within their means”.

On a separate matter, Zeti said Malaysia’s plan to issue foreign banking licences would be revealed in the second half on this year as Bank Negara was currently in the process of evaluating the applications that had been sent before the Dec 31 deadline.

http://www.theedgemalaysia.com/business-news/158786-zeti-interest-rates-need-normalisation.html

Banking sector sees 19pc earnings growth this year

Banking sector sees 19pc earnings growth this year
Published: 2010/01/09


The banking sector expects an earnings growth of 19 per cent this year, premised on lower provisions supported by overall improved operating income.

HwangDBS Vickers Research, in its focus on the banking sector, said corporates have switched to the bond market for funding, adding that this served as an impetus for non-interest income expansion.

"We forecast a 10 per cent growth in non-interest income in 2010 and consumer loans will drive loans growth this year as corporates turn to the bond market to raise funds," the report added.

HwangDBS Vickers Research also expects SME loans utilisation to recover this year.

"Judging from loan applications and approvals by banks, we gather that the pipeline will be healthy," it said, projecting loans growth in 2010 between 8 and 9 per cent.

The research house said the top pick for Malaysian banks was CIMB because of its key proxy to Malaysian capital markets and regional expansion.

"We also like Hong Leong Bank for its reach in China which could spice up earnings growth as well as its regional aspirations.

"Hong Leong Bank is currently in talks to acquire EON Capital which is currently tagged for a merger and acquisition activity", the report said.

HwangDBS Vickers Research added there could be further room for earnings upgrade for selected banks such as Hong Leong Bank and RHB Capital when overnight policy rates move up.

For Maybank, there could be an upside on stronger Bank Internasional Indonesia earnings while Public Bank stood out as an excellent proxy of a quality bank.

"Public Bank loans growth still outpaces industry average while asset quality is still the best among peers," it said.

However, HwangDBS Vickers Research pointed out there were key risks to the sector's earnings.

"Key risk to earnings would be slower-than-expected drop in GDP growth which could potentially lead to slower recovery in overall earnings," it added.

As for Dubai's debt woes, it said not all Malaysian banks were exposed to the Middle East, nevertheless, a check with banks revealed that total exposure was less than RM200 million per bank.

HwangDBS Vickers Research said there was significant pick up in interest for banking stocks in 2009, which on the average, outperformed the FTSE Bursa Malaysia Kuala Lumpur Composite Index by 83 per cent. - Bernama

Malaysia may raise interest rates in the first half of the year

Malaysia may raise interest rates in H1: Citi
Published: 2010/01/27


Malaysia may raise interest rates in the first half of the year, said Citigroup Inc, which brought forward its estimated timing of an increase from the fourth quarter, after the central bank said borrowing costs can’t be kept “too low.”

The central bank may boost the overnight policy rate by 25 basis points at the next policy meeting on March 4, followed by another 25 basis points on May 13, Citi said.

Meanwhile, CIMB Group Holdings Bhd says Malaysia’s central bank may raise interest rates “sooner than expected” following yesterday’s monetary policy statement by Bank Negara Malaysia.

The central bank’s overnight policy rate may start rising in the first half of this year from the current level of 2 per cent and reach 2.5 per cent by year-end, CIMB said. -- Bloomberg

EPF net buyer in banking stocks

EPF net buyer in banking stocks

Tags: Bank Negara Malaysia | CIMB Group Holdings Bhd | Domestic banking stocks | ECMLibra Investment Research | EON Capital Bhd | EPF | Hong Leong Bhd | Maybank | PBB

Written by Yong Yen Nie
Monday, 14 December 2009 11:41

KUALA LUMPUR: The Employees Provident Fund (EPF) has re-emerged as a net buyer in most domestic banking stocks, especially large-capped ones since November 2009, a significant shift from its net selling activities in the period prior starting in April this year.

According to latest filings on Bursa Malaysia, EPF has raised its stakes in MALAYAN BANKING BHD [] (Maybank) and CIMB Group Holdings Bhd to 808.7 million shares or 11.4% and 462.22 million or 12.9%, respectively.

A month earlier, EPF held 788.25 million shares or an 11.1% stake in Maybank and 441.68 million shares or a 12.3% stake in CIMB.

Prior to this, the statutory pension fund had pared down its holdings in Maybank and CIMB from April this year. At end-April, it had held 887.77 million shares or a 12.5% stake in Maybank and 623.48 million shares or a 17.4% stake in CIMB.

EPF also picked up PUBLIC BANK BHD [] (PBB) shares in November, raising its interests to 474.93 million shares or 13.4%, compared with 461.54 million shares or 13.1% at end-October.

EPF used to hold a 14.8% stake comprising 523.76 million shares in PBB but had pared down its stake in the banking group since end-August this year.

It also accumulated more AMMB HOLDINGS BHD [] shares and held a 13.4% stake or 405.35 million shares in the banking group as of end-November, compared with 395.38 million shares or 13.1% a month earlier.

EPF had been a net seller in AMMB shares since July. As at end-June, EPF had held 451.57 million shares or a 15% stake in AMMB.

Banking analysts said EPF was seen to be turning its focus on banking stocks, given the improved indicators in the financial sector and stronger expectations of an improved economic outlook in 2010.

A banking analyst with a local research house said several research houses had made overweight calls on the sector following banks’ better-than-expected financial results for the quarter ended Sept 30, 2009.

“With the anticipation of a stronger economy next year, EPF would want to have an investment strategy that benefits the most from the recovery,” she told The Edge Financial Daily last week.

The banking analyst added that while there was still some upside left in the banking stocks, most of them were approaching the target prices.

“(Nevertheless), we believe buying activities for banking stocks will continue for the first half of 2010, underpinned by stronger economic trends, while profit-taking would be more pronounced by June next year,” she said.

EPF had also accumulated shares in other mid-capped banking stocks, filings on Bursa Malaysia showed.

According to filings last Friday, EPF had raised its interests in HONG LEONG BANK BHD [] to 177.28 million shares or 11.2% from 171.32 million shares or a 10.8% stake at end-October.

The pension fund had also increased holdings in ALLIANCE FINANCIAL GROUP BHD [] (AFG) to 235.9 million shares or 15.24% at end-November from 226.02 million shares or 14.6% a month earlier. Filings showed EPF has been accumulating shares in AFG since end-June.

EPF slightly pared down holdings in EON CAPITAL BHD [] to 83.4 million shares representing 12.03% at end-November from 83.62 million shares or 12.06% a month earlier.

Recent Bank Negara Malaysia statistics showed that the decline in loans growth had bottomed in October, following a faster loans expansion of 7.5% year-on-year (y-o-y) compared with 7.2% in September this year.

In a report, ECMLibra Investment Research said the improving loans growth corresponded with a gradual recovery in economic conditions, as shown by a 1.2% contraction in gross domestic product (GDP) for the third quarter of 2009 (3Q09), which was healthier than 1Q09’s and 2Q09’s contraction of 6.2% and 3.9%, respectively.

“Going by the lending indicators, it would seem that there has been some pent-up demand for credit, as shown in the double-digit y-o-y changes in the applications and approval numbers.

“Net NPL (non-performing loans) ratio on a three-month basis remained unchanged at 2.1%, but has improved to 1.5% on a six-month basis (from 1.6% previously),” it said.

The research house added that the banking system’s capitalisation remained stable with risk-weighted capital ratio and core capital ratio of 14.5% and 13%, respectively.


This article appeared in The Edge Financial Daily, December 14, 2009.

Top pick in banking sector

http://www.theedgemalaysia.com/business-news/153473-top-pick-in-banking-sector.html

Analysts bullish on Malaysian banking sector

Analysts bullish on banking sector
By Goh Thean Eu
Published: 2009/11/06

Analysts believe the war to attract more customers to take up loans by lowering interest rates has come to an end, if not near to an end, as lenders are beginning to raise interest rates.


ANALYSTS and fund managers are generally bullish on the banking sector next year, as economic recovery, higher interest rates and lower non-performing loans (NPL) are expected to lift banks earnings.

"This year, people were worried about how the economy would shape up, and on the banking sector, people were concerned about banks' NPL. A lot of these concerns were addressed and we are now more optimistic about next year.

"We believe asset quality would not deteriorate significantly next year and we are also expecting the central bank to increase the OPR some time next year, which would offer a good earning driver and higher margin for the banks and we believe earnings and margins to be better next year," said a TA Securities analyst.

For more than a year, banks were in a fierce competition to attract more customers to take up loans by lowering interest rates. Analysts believe the war has come to an end, if not near to an end, as lenders are beginning to raise interest rates.



"Moving forward, the competition landscape would not be as bad as we expected earlier, thanks to the revision of interest rates. It will certainly help increase the net interest margins of banks.

"As long as the economic recovery story remains intact, we expect banks provision will eventually come down and we expect most local banks to post a double-digit growth on revenue and earnings next year," said an analyst from a local research house.

Aberdeen Asset Management managing director Gerald Ambrose thinks likewise.

"Companies must meet a set of criteria before we invest in them. From our company visits so far, I must say, a lot of companies that met our criteria are banks," he said.

He said companies that meet the criteria are companies that are well-managed, has a long-term business plan, good corporate governance, transparent and willing to return excess cash to minority shareholders as dividend, among others.

Although the Kuala Lumpur Financial Index rose by more than 55 per cent this year alone, compared with the 42 per cent year-to-date increase of the benchmark FTSE Bursa Malaysia KLCI, analysts still believe that it's not too late to invest in banks.

"We are maintaining our overweight call on the sector on the grounds that NPLs are likely to be benign while the downtrend in provisions and strong capitalisation positions will provide future earnings and capital management upside surprises, which may not have been fully reflected in banks' valuation," said OSK Research Sdn Bhd analyst Keith Wee in a report.

OSK placed a "buy" call on CIMB and EON Capital, while TA Securities has a "buy" on Public Bank and Hong Leong Bank.

Banks top gainers on Bursa

Banks top gainers on Bursa

Tags: AMMB Holdings Bhd | Banking deals | banking stocks | CIMB Group Holdings Bhd | FBM KLCI | HLBB | Macquarie Research | Malayan Banking Bhd | PBB | RHB Capital Bhd | Wong Chew Hann

Written by Yong Yen Nie
Thursday, 22 October 2009 11:41

KUALA LUMPUR: Banking stocks, led by CIMB Group Holdings Bhd and HONG LEONG BANK BHD [] (HLBB), have emerged as top gainers on the FTSE Bursa Malaysia KUALA LUMPUR COMPOSITE INDEX [] (FBM KLCI) since Sept 30.

Analysts said the rise in the prices of banking shares was an indication of the market’s confidence in the performance of banks. It could also point to the absence of near-term downside surprises.

HLBB was ranked first among the top 10 gainers on the FBM KLCI after advancing 14.16% since Sept 30, while CIMB ranked second with a gain of 13.7%, according to Bloom-berg data.

Six of the top 10 gainers on the benchmark index were financial institutions. AMMB HOLDINGS BHD [] came in fourth with a gain of 11.03%, RHB CAPITAL BHD [] sixth (7.1%), PUBLIC BANK BHD [] (PBB) eighth (4.9%) and MALAYAN BANKING BHD [] ninth (3.76%).

The Kuala Lumpur Financial Index has outperformed the FBM KLCI by 2.9 percentage points since Sept 30. As of yesterday, it had risen 7.7% to 10,712 points compared with a 4.8% gain to 1,260.06 points for the FBM KLCI.

Analysts said banking stocks had been “running” since August, following improved results in the second quarter of calendar year 2009, which acted as catalysts for more earnings upgrades in the banking sector.

Maybank Investment Bank Research banking analyst Wong Chew Hann said most banking stocks might have soared mainly due to market confidence that banks would not be hit by any significant charges over the near term.

“Investors are also keen on CIMB, as they believe the banking group will clinch more lucrative investment banking deals in the future, as the global economic and market outlook improves,” she told The Edge Financial Daily yesterday.

Commenting on HLBB’s performance, a banking analyst with a foreign research house said the counter might be playing catch-up, given that the valuation of the bank was one of the lowest among local financial institutions.

Given that the reporting season for banks was near, investing interest in financial institutions might have heightened, especially as the lenders were expected to show positive results in the third quarter of calendar year 2009.

Together with positive news of the economy recovering, financial institutions, being proxies of the economy, were also bound to be beneficiaries, the analyst said.

PBB had already given investors a “feel” of what to expect from the other banks after its net profit in the third quarter of the financial year ending Dec 31, 2009 (3QFY09) rose 3.68% year-on-year to RM639.05 million on the back of strong loans and deposit growth and stable asset quality.

PBB’s net profit had come in slightly above analysts’ expectations of a 2%-3% growth. Revenue, however, fell 12.5% to RM2.44 billion in 3QFY09 from a year earlier, while earnings per share grew to 18.52 sen from 18.37 sen.

Nevertheless, Macquarie Research believed that the group’s ability to outperform its peers in loan growth, as well as maintain its pristine asset quality would remain its key strengths.

In a research report, Nomura Securities Malaysia Sdn Bhd said it was bullish on banks, with positive catalysts of better loan growth and falling bad debt provisions going forward.

It said CIMB was the preferred banking pick, given that its return on equity, as guided by management, was on positive trajectory to reach 18% over the next two to three years.

Its corporate and investment banking business was also expected to benefit from the government’s move to raise the profile of domestic capital markets with foreign investors, Nomura said.

Meanwhile, in the mid- to small-cap segment, investors were largely positive on AMMB, underpinned by vastly improved asset quality and undemanding valuations at 1.5 times price-to-book.

Several banking counters had closed at their 52-week highs in the past two days.

HLBB and PBB closed at a 52-week high yesterday, with HLBB rising 12 sen to RM7.50 with 2.51 million shares done and PBB adding four sen to RM10.70 on a turnover of 2.21 million shares.

CIMB, AMMB and Maybank had achieved the same feat on Tuesday. CIMB closed unchanged yesterday at RM12.62 while AMMB slipped two sen to RM4.73 from its 52-week high of RM4.76 with 11.58 million shares done.

Maybank closed at RM6.98 on Tuesday and gave up eight sen yesterday with 5.6 million shares changing hands.


This article appeared in The Edge Financial Daily, October 22, 2009.