Analysts say Thai and Indonesian banks appear to be more ‘attractive’ to investors
In the absence of mergers and acquisitions (M&As) activities, the Malaysian banking sector appears to have lost its lustre while Thai and Indonesian banks are hogging analysts’ headlines.
“Thai and Indonesian banks are more attractive from the perspective of investment recovery and overall macro growth, respectively,” said Lim Sue Lin, senior banking analyst at HwangDBS Vickers Research.
As for Malaysian banks, she noted that apart from the lack of M&As that had fuelled interest lately, there was not much upside to earnings growth.
Nomura Equity Research, in its report, said: “From a valuation perspective, Malaysian banks do not appear cheap, trading at an average financial year 2011 forecast (FY11F) price-to-book value (P/BV) of 2.2 times on a return on equity (ROE) of 17%.
“By comparison, we find Thai banks trading at a P/BV of 1.8 times with an average ROE of 15%.
The Nomura report noted that political risk was rising in Malaysia as the country headed for the next general election, and it expected:
2011 loans growth to maintain last year’s momentum at 13%. But for 2012F, loan growths will fall back to trend levels of about 9%;
an absence of overnight policy rate hikes; net interest margin (NIM) compression has been more intense and prolonged than expected, leading to poorer average lending yields.
credit costs to fall more quickly than expected, cushioning pressure from narrowing NIMs.
Looking at the track record for the past 20 years, Nomura noted that for every 1% increase in the Government’s development spending, it would typically raise construction sector loans by 1%.
“However, we note that the multiplier effect was stronger in the 1990s (2.7 times) than in the 2000s (0.4 time), partly due to greater level of private sector construction activities in the 1990s and a lower level of gearing for construction companies in the 2000s.
“Even if the Government achieves its economic transformation programme-driven gross domestic product growth target of 6%, it may only translate to a further 0.7 percentage point upside to loan growth, which is negligible,” said Nomura.
DBS Vickers Research expects Thailand’s economy to remain resilient in 2011 and provide a solid base for an investment recovery cycle. Capacity utilisation has gradually improved from trough levels of 50% back in February 2009.
“We have seen further recovery since April 2010, when it stood at 58%, to 62% currently,” said DBS Vickers. “We expect to a strong 1H11 led by inventory re-building in manufacturing and a recovery in agricultural output, which was hit by adverse weather in 2010.”
Muted private investment since 2006 due to political instability has meant that capacity utilisation rates are elevated in fast growing export sectors.
Sectors such as vehicles and technology have seen capacity utilisation rates increase in 2010 from 2009, said DBS Vickers.
A Singapore-based banking analyst views the Indonesia economic outlook as resilient, fuelled by strong domestic demand which acts as a buffer against world economic uncertainties.
“In that sense, Indonesia stands out and investors are willing to pay a premium for that,” he said.
In an earlier report, DBS Vickers said: “Indonesian banks remain an attractive investment on a longer-term basis, based on potential growth prospects.
“Near-term, we see policies which will be implemented within the banking system derailing growth to some extent. The key risk lies in a potential decline in NIM, which will lead to lower ROEs.
“Despite potential competition in micro lending, we think lending yields will remain high (versus non-micro lending banks), given the large untapped business opportunities.
“The Indonesian market is largely domestic driven and is also awash with foreign liquidity.”
The booming economy and accelerating infrastructure spending are good for loan growth in Indonesia.
Also, Indonesian banks’ low loan-to-Gross Domestic Product ratio of only 28% represents one of the most promising growth prospects in the Asean region,” said DBS Vickers.
However, on the longer term outlook, Malaysian banks are not losing out.
Although the interest in domestic M&As may have dwindled, it is expected to be rekindled once market conditions returned to normalcy.
“Future M&A activity will be driven by the competitive intensity within the Malaysian banking sector, the existence of smaller commercial and Islamic banks, which are potential targets and the controlling interests, held by certain shareholders in the local banking sector,” said Malaysian Rating Corp vice-president and head of financial institution ratings Anandakumar Jegarasasingam.
On the regional front, Anandakumar said the main competitive threat for major Malaysian banks were the Singaporean banks.
“The Indonesian or Thai banks are unlikely to emerge as a regional force, at least in the medium term, as their financial sector and regulatory framework have not matured as much as that of Singapore or Malaysia.”
On whether Malaysian banks can compete with Thai and Indonesian banks, Maybank president and CEO Datuk Seri Wahid Omar said: “Absolutely. Malaysian banks are stable and there are solid companies in the region.”
At the same time, Wahid acknowledged the growing optimism in Thailand especially with the new government in place and Indonesia as the single largest economy in Asean.
The Star
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