The most defensive bank stocks on earth

(From Mizuho Securities Asia Ltd)
The most defensive bank stocks on earth
Top picks for panic conditions
Given the historic sell off across global markets in the past few days, investors have to be thinking either exit or ultra-defensive as far as banks stocks are concerned. Following is our view of the most defensive bank stocks on earth.
As a rule of thumb, we are looking for bank stocks that offer a solid 3.5% dividend yield, with no doubt about the bank’s ability to maintain the dividend, and large cap/high market share institutions with better than average profitability and capital strength.
Our list of favourites is understandably quite short. We think investors could consider the following names:
Fig 1  The five most defensive banks are all in Asia

			Dividend			Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
HSB	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2

Source: Bloomberg, Mizuho research
Skip the major global banks
The major global banks have not yet fully recovered from the Wall Street collapse of 4Q08 and the ensuing global recession in 2009 and are at the epicentre of current economic concerns. As a result, most of these banks are in need of balance sheet repair and are not in a position to pay big dividends, which is key for defensive investors.
We would be wary about looking at valuations out of context for these banks. PBV multiples are generally below 1.0x for the global banks, which we consider to be a distress signal.
The major European banks rank as least attractive at this point, despite bargain basement valuations. In banking geography can often be destiny. The Europeans naturally have the highest exposure to the troubled PIIGS markets of Portugal, Ireland, Italy, Greece, and Spain. We are witnessing a slow motion sovereign debt default in this region. It is way too early to call the bottom for European banks.
The top US banks have made some progress since the dark days of 4Q08, but the weak US economy continues to drag financial performance. The recent scare about the US government debt limit does not add to investor confidence for these names.
Fig 2  Global bank stocks are not in a defensive position at present

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Santander	SAN SM	NR	5.5%	10.6%	9.20%	5.3
BNP Paribas	BNP FP	NR	5.0%	10.9%	9.20%	5.0
HSBC	5 HK / HSBA LN	NR	4.5%	9.5%	10.53%	4.6
Barclays	BARC LN	NR	2.1%	7.3%	10.80%	1.8
Deutsche	DBK GR	NR	2.1%	5.4%	8.70%	1.7
JPMorganChase	JPM US	NR	1.5%	12.3%	9.80%	1.0
Bank of America	BAC US	NR	0.4%	5.8%	8.60%	0.2
Citigroup	C US	NR	0.05%	6.6%	10.75%	0.0
UBS	UBS US	NR	-	17.2%	15.30%	-
RBS	RBS LN	NR	-	-1.5%	10.70%	-
Lloyds	LLOY LN	NR	-	-1.4%	10.20%	-

Source: Bloomberg, Mizuho research
China banks: More defensive than you might think
Despite market worries this summer about iffy loans to local government financing vehicles, we consider the Big 4 Chinese banks defensive stock plays. The combination of high dividend yields, high ROEs, and high Core Tier 1 capital strikes us as very appealing. Valuations may not be cheap compared to bombed out global bank stocks, but the H-shares are currently trading at 2.0x PBV, which is the all-time low.
Fears about a possible credit shock this year are overdone in our view, although we see a credit cycle downturn as inevitable. Provision costs will be on the upswing this year. Even so, we expect the H-share banks to report 23% earnings growth in 2011.
Dividend payouts are solid for the Chinese banks since earnings are not under pressure.
Fig 3  Big is beautiful and tends to be defensive in China

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2
BOC	3988 HK	BUY	4.2%	18.2%	10.09%	7.7
ABC	1288 HK	BUY	3.5%	22.1%	9.75%	7.5
Less defensive
Bocom	3328 HK	HOLD	2.3%	20.2%	9.37%	4.4
Merchants	3968 HK	HOLD	2.4%	22.7%	8.04%	4.3
Citic	998 HK	HOLD	2.6%	19.3%	8.45%	4.2
Minsheng	1988 HK	SELL	2.1%	18.3%	8.08%	3.1

Source: Bloomberg, Mizuho research
Rest of Asia: Mighty Malaysia
The top dividend payers in the rest of Asia include major banks in Malaysia, Hong Kong, and Singapore. Maybank is the most defensive bank stock in the region with its 6.1% dividend yield and high leverage adjusted ROE. Hang Seng Bank comes in second place on the same basis. Five major banks in the region offer dividends yielding 3.5% or more.
High dividend payouts could be under threat over the medium term for some Asian banks, including Hang Seng Bank. Hang Seng’s CEO Margaret Leung commented recently that increased capital requirements could force the bank to review its dividend policy. We see Hang Seng Bank, Maybank, and Public Bank as traditional plays. This is an issue well worth monitoring.
Fig 4  Selected Asian banks

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
Hang Seng Bk	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
UOB	UOB SP	NR	3.5%	13.2%	14.90%	6.8
BOCHK	2388 HK	NR	3.7%	13.6%	11.29%	5.6
Less defensive
CIMB	CIMB MK	NR	3.1%	16.3%	10.94%	5.5
SCB	SCB TB	NR	2.2%	21.0%	10.80%	4.9
OCBC	OCBC SP	NR	3.0%	10.5%	15.40%	4.9
DBS	DBS SP	NR	2.8%	11.0%	13.50%	4.1
BBL	BBL TB	NR	2.7%	11.8%	12.26%	3.9
Kbank	KBANK TB	NR	1.6%	17.9%	6.69%	2.0

Source: Bloomberg, Mizuho research

RAM Ratings reaffirms Media Prima's ratings

Published on 03 August 2011
RAM Ratings has reaffirmed the AAA(bg) rating of Media Prima Berhad’s (Media Prima or the Group) RM170 million Bank-Guaranteed Medium-Term Notes Programme (2007/2012) (BG MTN), with a stable outlook. At the same time, the P1 rating of the Group’s RM180 million Commercial Papers Programme (2007/2014) (CP) has also been reaffirmed. The enhanced rating of the BG MTN reflects the unconditional and irrevocable guarantee extended by Malayan Banking Berhad (Maybank), which enhances the credit profile of the debt issue beyond Media Prima’s inherent or stand-alone credit position.

Media Prima’s stand-alone credit profile and P1 rating reflect its strong market position in the media industry, as well as its solid financial profile. The Group’s business is highly diversified (with interests in a broad spectrum of media such as free-to-air television (FTA TV) broadcasting, newspaper publication, radio broadcasting, outdoor advertising, content creation and online portals) and it is the leader in almost every media sub-segment it operates in.



The Group’s financial profile had strengthened as at end-December 2010. Following the consolidation of The New Straits Times Press (Malaysia) Berhad’s contribution and the healthier operating environment amid stronger domestic economic growth, Media Prima’s top line surpassed RM1 billion while its operating profit more than doubled year-on-year in FYE 31 December 2010 (FY Dec 2010). As at end-FY Dec 2010, its adjusted funds from operations debt cover (FFODC) soared to 0.51 times (end-FY Dec 2009: 0.18 times). Supported by enlarged shareholders’ funds as well as a lighter debt load, its adjusted gearing ratio eased from 0.67 to 0.55 times as at the same time.

However, Media Prima is susceptible to economic cycles given its substantial reliance on advertising expenditure (adex), which tends to move in tandem with the country’s economic health. The Group also faces intense competition. Coupled with the emergence of new platforms, the media industry is getting increasingly more fragmented, which may erode Media Prima’s share of adex over the longer term. The Group is also vulnerable to volatile newsprint prices, which have been gradually rising.

Nonetheless, it has bought forward as much as 10 months of newsprint, thus affording it some flexibility when it comes to purchasing this commodity.

As Media Prima’s 5 media platforms (i.e. FTA TV, print, radio, outdoor and online) enable its contents to be platform-agnostic (i.e. can be read on various platforms, including mobile devices), we expect it to have an edge over its peers, at least over the medium term. “Apart from its ability to capture a larger slice of adex, its multi-platform capability also offers group synergies via content cross-promotions and effective associations across media platforms. In addition, Media Prima’s efforts to continue investing in quality and relevant contents are expected to help retain its dominance while broadening its operational statistics to garner higher adex,” opines Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Looking ahead, Media Prima has allocated RM100 million-RM120 million of capital expenditure (capex) per annum for the next 4 years, for replacement of broadcasting and transmission equipment that is partly in line with its migration to digital and high-definition equipment. “Despite this, its adjusted gearing ratio is expected to stay low at around 0.4 times over the next 2 years; its adjusted FFODC is envisaged to remain robust at around 0.6 times over the same span,” notes Kevin Lim.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my

USD in high demand - The Star Newspaper; August 1, 2011

Something that I said that was quoted in the papers on Monday 1 August 2011.

TheStar_010811

RAM Ratings reaffirms AAA(s) rating of Hana Bank's RM1 billion MTN Programme

Published on 02 August 2011
RAM Ratings has reaffirmed the AAA(s) rating of Hana Bank’s up to RM1.0 billion Nominal Value Multi-Currency Medium-Term Note (MTN) Programme (2009/2012), with a stable outlook. The issue rating is supported by a guarantee from the Government of the Republic of Korea (GoK). The GoK’s credit profile is considered healthy, supported by a large, high-income economy which has exhibited long and proven trends in economic stability and resilience. Hana Bank is the fourth-largest South Korean commercial bank and is wholly owned by Hana Financial Group Inc (HFG or the Group); the Bank has a strong franchise and is viewed to be systemically important in its home base.



While Hana Bank’s current gross non-performing loan (NPL) and credit-cost ratios are healthy, the weak South Korean property market had affected the construction and real-estate-related sectors, particularly real-estate project finance (PF) loans. The Bank’s gross NPL ratio had risen to 1.6% as at end-December 2010, although still broadly kept in check with a slight improvement in the gross NPL ratio of its household loans. Meanwhile, the Bank’s credit-cost ratio had eased to 0.6% in FY Dec 2010 (FY Dec 2009: 0.8%). We note that weaknesses in the construction and real-estate-related sectors are unlikely to ease in the near term. On balance, Hana Bank has one of the lowest PF exposures among the larger South Korean banks. With a recent sale of PF loans, the Bank’s residual PF exposure is estimated at less than 1.5% of its gross loans.

In FY Dec 2010, Hana Bank’s net interest margin almost revisited its pre-crisis levels, primarily due to a cheaper funding base. Larger net interest income was the primary driver of an almost tripling of its pre-tax profit to KRW1.3 trillion for the same year. Meanwhile, the Bank’s loans-to-deposits ratio stayed high at 136% as at end-December 2010, signalling its significant dependence on wholesale funding.

Notably, the Bank made a sizeable dividend payment of KRW1.9 trillion in relation to HFG’s proposed acquisition of a 51%-stake in Korea Exchange Bank (“KEB”) in December 2010. This had reduced Hana Bank’s tier-1 and overall risk-weighted capital-adequacy ratios to 10.7% and 14%, respectively as at end-December 2010, albeit still adequate.

HFG’s proposed acquisition of the controlling stake in KEB is currently in stalemate, pending regulatory approval; the timeline for the acquisition has been extended to end-November 2011. RAM Ratings will maintain close monitoring of the relevant developments pertaining to the proposed acquisition.

Media contact
Joanne Kek
(603) 7628 1163
joanne@ram.com.my

RAM Ratings maintains Musteq Hydro Islamic Bonds at A3, with a negative outlook

Published on 29 July 2011

RAM Ratings has maintained Musteq Hydro Sdn Bhd’s (“Musteq Hydro” or “the Company”) RM108 million Al-Bai’ Bithaman Ajil Fixed-Rate Serial Bonds (2002/2017) (“Islamic Bonds” or “ABBA Bonds”) at A3, with a negative outlook. Musteq Hydro, an independent power producer (IPP), has been licensed to build, own and operate a 20-MW hydro power plant at Sungai Kenerong, Kelantan (the Plant). Under a Power Purchase Agreement with Tenaga Nasional Berhad (TNB), Musteq Hydro is obliged to generate and sell electricity exclusively to TNB for 30 years until 19 December 2030.





In our press release dated 24 March 2011, RAM Ratings has noted the likelihood that Musteq Hydro will not be able to fully fund the debt service reserve account (DSRA) in late July every year throughout the Bonds’ tenure. In relation to this, we have been informed by management that the bondholders have agreed in principle to grant the Company a temporary 3 months waiver on the requirement to fill up the DSRA on 29 July 2011; pending the bondholders’ approval via a circular resolution to formalise the matter.

Elsewhere, we understand from management that plans to refinance the ABBA Bonds are in progress. In this regard, RAM Ratings reiterates that based on our sensitised projection, the Company’s weak debt-servicing ability in FYE 31 December 2016 (FY Dec 2016) and FY Dec 2017 still persists; as such, the rating would come under further downward pressure in the event the refinancing exercise is not completed in the near-term, or operational problems significantly hamper the Company’s cash-generating aptitude.

Media contact
Michael Ti
(603) 7628 1015
michael@ram.com.my

Apple now has more cash than the U.S. government

(CNN) -- Maybe the cash-strapped U.S. government should start selling iPads.

According to the latest statement from the U.S. Treasury, the government had an operating cash balance Wednesday of $73.8 billion. That's still a lot of money, but it's less than what Steve Jobs has lying around.



Tech juggernaut Apple had a whopping $76.2 billion in cash and marketable securities at the end of June, according to its last earnings report. Unlike the U.S. government, which is scrambling to avoid defaulting on its debt, Apple takes in more money than it spends.


CLICK ON THIS LINK TO SEE FULL ARTICLE FROM CNN

Obama announces US deficit deal between party leaders

US President Barack Obama says Republican and Democratic leaders have reached an agreement on raising the US debt limit and avoiding default.




He said the deal would cut $1tn of spending over 10 years, and set up a committee to report by November on a proposal to further reduce the deficit.

CLICK ON THIS LINK TO SEE FULL ARTICLE FROM THE BBC

MARC AFFIRMS SPORTS TOTO MALAYSIA SDN BHD’S RM800 MIILION MTN PROGRAMME RATING AT ‘AA-’

Jul 29, 2011 -

MARC has affirmed its AA- rating on Sports Toto Malaysia Sdn Bhd’s (Sports Toto) Medium Term Note Programme (MTN) of up to RM800 million with a stable outlook. Maintenance of Sports Toto’s rating is premised on the strong cash flow generating ability of its gaming operations and its entrenched market position in Malaysia’s numbers forecast operations (NFO) industry. MARC notes Sports Toto’s longstanding operational track record and its ability to respond to competitive threats in the gaming industry by varying prize structure and offering new variations to its games. Nonetheless, MARC notes a slight weakening in its market share in recent years. Moderating Sports Toto’s credit strength is a high dividend payout policy which constrains cash retention at the company level and exposure to regulatory risk, including the potential impact of changes in gaming taxes.



Sports Toto is a wholly-owned subsidiary of Berjaya Sports Toto Berhad (BToto), a member of the Berjaya group of companies and is one of a select few licensed gaming companies offering number forecast operations (NFO). Sports Toto has the largest branch network among its peers and offers the highest number of games. At the same time, MARC takes note of the competitive inroads that its nearest rival, Magnum Corporation Berhad, has made into its leading market share with its 4D jackpot game introduced in September 2009. Sports Toto responded to this competitive challenge by introducing an identical game on June 9, 2011, the earnings impact of which has been positive and would be visible to a greater extent in fiscal 2012 earnings.

For financial year ended April 30, 2011 (FY2011), Sports Toto posted a flat revenue while pre-tax profit declined by 11% year-on-year (FY2010: -4.9%). In addition to the stiff competition, the company’s weaker financial performance is attributed to the higher pool betting duty of 8% introduced in June 2010 from 6% previously. Operating profit margin fell to 15.2% in FY2011 (FY2010: 16.6%). The recent imposition of higher pool betting duty and the annual licence renewal process underscore MARC’s concern that NFO players will continue to be susceptible to government regulatory risk. However, MARC believes that licence renewal risk is somewhat mitigated by Sports Toto’s longstanding operational track record. MARC believes that the sizeable tax revenues generated by the NFO gaming segment lessen the risk of unfavourable government policy shifts. MARC notes that following the pool betting duty hike of 2%, the government had acceded to a reduction in prize structure for a specific prize category, which has helped NFO players mitigate the impact of the duty hike on profit margins.

Sports Toto retains a strong level of cash generation ability as reflected by cash flow from operations (CFO), which remained a resilient RM340.4 million in FY2011 from RM405.4 million in FY2010. MARC expects the strong liquidity position to be maintained in the near-term given the lack of upcoming short-term obligations or major capital expenditure. The company has drawn down RM550 million under the RM800 million MTN facility, of which RM380 million was utilised to retire the debt of its holding company, BToto. MARC observes that significant intercompany loans to BToto have been a recurrent feature of Sports Toto’s balance sheet, constituting about 60.8% (or RM742.7 million) of its total asset composition as at unaudited FY2011 (FY2010: 61.9% or RM529.8 million). Under the terms of the MTN issuance, any new loans to holding companies are to be structured with acceptable repayment schedules that support timely repayment of the notes.

Sports Toto continues to maintain a high dividend payout policy; dividends paid amounted to 149.3% of its unaudited profit after tax of RM342.4 million in FY2011 (FY2010: 69.9%). Sports Toto’s debt service cover ratio (DSCR) of 5.62 times as at FY2011 (FY2010: 2.72 times) provides a comfortable covenant compliance headroom vis-à-vis the minimum covenanted level of 1.50 times. Nonetheless, MARC notes that the strong DSCR was achieved in FY2011 in the absence of any debt repayment. While there are no debt repayments due under the MTN facility until 2013, MARC expects dividend payouts to be at levels which would allow Sports Toto to preserve prudent levels of cash.

The stable rating outlook takes into consideration MARC’s expectations that the company’s credit profile will remain in line with the current rating band.

Contacts:
Darrell Lim, +603-2082 2261/ darrell@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .