Nov 29, 2013

Banking Sector: S&P Cuts CIMB, AmBank and RHB Bank’s Outlook

Reduced to “negative”

According  to  media  sources,  Standard  &  Poor’s  (S&P) has  downgraded  the  outlook  for CIMB Group Holdings Bhd, AmBank (M) Bhd, RHB Bank Bhd and RHB Investment Bank Bhd.  The  outlook  has  been  revised  to  “negative”  from  “stable.”  Credit  ratings  are maintained  at  BBB-  for  CIMB  Group  and  BBB+  for  AmBank,  RHB  Bank  and  RHB Investment.  Meanwhile,  the  long-term  Asean  regional scale  rating  on  CIMB  Group  has been reduced to axBBB+ from axA.

The  ratings  agency  cited  prolonged  run-up  in  housing  prices  and  household  debt  level posing  potential  exposure  to  economic  imbalances  as reasons  for  the  downgrade.  “The negative outlook recognises the potential for deterioration in the banks’ asset quality and financial  profile  if  the  consumer  debt  burden  proves  excessive  in  an  unfavourable economic scenario,” S&P said in a statement.

Downgrade in tandem with our neutral view on the sector

We  believe  the  downgrade  reaffirms  our  neutral  outlook  on  the  sector.  Our  recent downgrade  of  loans  growth, a  segment  which accounts for  close  to  60%  of  the  sector’s income is premised on BNM’s tightening policies and weak general sentiments. To recap, we forecast slower loans growth of 8.2% for 2014 from 9.6% expected for 2013. This will be  underpinned  by  a  7.6%  and  8.8%  increase  in  consumer  and  business  loans respectively  where  the  steeper  slowdown  in  consumer loans  is  attributed  to  recent measures introduced to curb household debt and reinin rising property prices.

Inflationary pressures puts asset quality at risk

In the meantime, we are also cautious on the outlook for the system’s asset quality. This is especially  so  given  expectations  of  inflationary  pressures  arising  from  higher  food  and energy  prices  along  with  further  subsidy  cuts  and  the  implementation  of  GST  in  2015. Expectations  of  an  increase  in  the  OPR  would  also  add  burden  to  already  dwindling disposable income. While guidance from banks suggest that asset quality remains healthy with  no  indications  of  systemic  risks  at  this  juncture,  we  do  not  foresee  any  material improvement as seen in the past 10 years where BNM reports stable and sound impaired loans ratio of 1.4% as at September 2013.

Further foreign sell down possible for CIMB
We believe this S&P downgrade will not bode well for banking stocks especially CIMB and AMMB given their high foreign shareholding levels. We note that cost to raise funds in the debt  market  would  also  increase.  Based  on  latest  data  provided  by  CIMB,  the  group’s foreign  shareholding  stood  at  30.8%  (excluding  Mitsubishi  UFJ  Financial  Group’s  5% stake).  This  is  the  lowest  point  since  August  2009. In  comparison,  the  group  achieved highest foreign shareholding level of 53.8% in June2007. Excluding ANZ’s 23.8% stake, AMMB also attracts sizeable foreign interest of around 34%.

Valuation and recommendation

Going  forward,  we  do  not  envisage  any  major  catalysts  to  drive  growth  in  the  banking sector.  Earnings  growth  visibility  is  further  dampened  by  the  weak  global  macro backdrop.  Hence,  we  reiterate  our  NEUTRAL  stance  on the  banking  sector.  In  terms  of stock  picks,  we  have  BUY  calls  on  Maybank  and  Affin.  HOLD  AMMB.  Here,  we  take  the opportunity  to  downgrade  CIMB  from  buy  to  HOLD  premised  on  concerns  over  a potential  selldown  by  its  foreign  shareholders.  Furthermore,  we  note  that the  potential
upside from the stock’s last close has reduced to less than our 15% buy threshold. SELL maintained on RHB Cap, HLBB, Alliance Financial Group and PBB.

below: Peers Comparison (click to enlarge)

Malaysia banking stocks comparison by: TA Securities