AmWatch - Banking Sector : Anosognosia over capital NEUTRAL, 7 May 2014

SECTOR FOCUS OF THE DAY

Banking Sector : Anosognosia over capital            NEUTRAL

With Public Bank (PBB) recently announcing a RM5bil rights issue, we are looking at the other banks to determine which may potentially need capital.

To recap, most banks currently appear to have sufficient capital, but this is mainly because of Bank Negara Malaysia’s (BNM) phase-in arrangements in relation to investments in the ordinary shares of subsidiaries and unconsolidated financial/insurance/takaful affiliates. While these are to be fully-deducted out in the calculation of common equity tier 1 (CET1) capital, BNM allows time for banks to only fully comply in 2018 under a phase-in arrangement. The phase-in arrangement allows for a portion to be deducted using the corresponding deduction approach: 20% in 2014, 40% in 2015, 60% in 2016, 80% in 2017 and 100% in 2018. On a fully-loaded basis, we estimate the banks with relatively low banking CET1 ratios to be Maybank at 8.52% and HLBB at 6.6% currently.

Assuming that a minimum CET1 ratio of 10% is a reasonably level, we estimate the shortfall to HLBB’s capital to be up to RM3bil, by 2018, implying a possible rights issue ahead. We estimate that Maybank may also need fresh capital of up to RM7.6bil, assuming the incorporation of its Singapore subsidiary. Both RHB Cap’s group and banking level CET1 ratios look adequate currently. The only issue for RHB Cap, we believe, is the ongoing deliberations to reduce the group’s double leverage ratio further from 134% as at end-FY13 (end-FY12: 136%) to probably around 120%. This implies that RHB Cap may need to retain additional capital of RM918mil.

AFG’s capital levels look comfortably high at more than 10%; thus we do not expect AFG to raise fresh capital. In a nutshell, other than an uncertainty over the direction of cost of funds, we think that there is a renewed focus on capital now. We remain NEUTRAL on the sector. 

Others :

Hong Leong Bank : Lingering uncertainty on capital           HOLD

Malayan Banking : A closer look at capital              HOLD

Dialog Group : 1-for-1 bonus and 1-for-125 share distribution      HOLD

Petronas Gas : Moving to a more stable earnings profile                HOLD

Hartalega Holdings : A flat FY14 HOLD

QUICK TAKES

Parkson Holdings : To own another 3 malls by 2017           SELL

Steel Sector : More imports, more debts, more grouses                OVERWEIGHT

NEWS HIGHLIGHTS

UEM Sunrise : JV with Mulpha to build roads in Iskandar Malaysia

Sunway : Sunway Putra Mall and Sunway Velocity Mall wiill have 10 mini-anchor tenants

Malaysia Airports Holdings : klia2 handles 6,140 passengers on 4th day of operation

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.

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