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)
by: TA Securities
