In its analysis of the banking sector, MIDF Research said “significant downside risks” still existed, with a possibility of similar bank runs occurring in countries which have experienced steep interest rate hikes.
“We believe the real threat is exposure to regional markets which have experienced sharp interest hikes: namely Singapore, the Philippines and Hong Kong.
“Thus, caution should be exercised (regarding banks’) regional exposure to countries with (high) interest markets, though risk is largely sentiment-based.
“We urge investors to be wary of the possibility of downside repricing risk that is associated with banks with large diversified regional exposures,” said MIDF, citing Maybank, CIMB and RHB as examples, in its report yesterday.
Despite the risks for banks with a regional footprint, MIDF said it is still “positive” on the banking sector as a whole.
“From our analysis, we can surmise that the situation is very much different for Malaysian banks. Malaysian regulators are ‘stricter’ and Malaysian banks are well-capitalised and have varied depositors’ base,” it said.
It added that governance from Bank Negara Malaysia (BNM) was strict and relatively uniform, with the appointment of a chief risk officer (CRO) and a risk committee being mandatory.
MIDF’s top picks for the sector included Public Bank Bhd, with a “buy” call and a target price (TP) of RM5.08, expecting its defensive nature and low regional exposure to push its share price by a tier.
As for mid-size banks, AMMB Holdings Bhd was favoured for its minimal regional exposure, resumption of regular dividends and good progress in diversifying its deposit base. The house maintains a “buy” call with TP of RM5.24.
It is “neutral” on Maybank (TP: RM8.94), and has “buy” calls on CIMB (TP: RM6.55) and RHB (TP: RM6.74).
A steady ship
MIDF found that the local banking system was currently not experiencing any sort of distress, and with high liquidity coverage ratios, local banks were expected to have stronger short-term liquidity in stressed positions.
“Local banks take a much more prudent approach to their bond portfolio. With lending services having more priority, banks have fewer funds to devote to bond holdings,” it noted.
The collapse of Silicon Valley Bank (SVB) was largely attributed to the erosion of the value of its bond portfolio as the US Federal Reserve embarked on an aggressive cycle of monetary tightening.
SVB’s annual report for FY2022 revealed held-to-maturity investments such as bonds made up almost 45% of total assets in both FY2022 and FY2021.
MIDF noted that local banks displayed uniformity in investment portfolio duration selection, opting for shorter-term bonds to weather interest rate hikes.
“The same can’t be said for other banks – SVB, for example, purchased long-duration treasury bills and mortgage-backed securities almost exclusively,” it said.
Comparing the loan-deposit (LD) ratios of the banks revealed a stark difference. SVB’s loan-deposit ratio was 43%, whilst the average Malaysian bank’s was 94%.
“Higher values translate to lower liquidity buffer against shocks, while lower values equate to inefficient allocation of funds, resulting in the bank not earning as much loan-based interest income as it could be,” said MIDF.
The high industry average reflected that Malaysian banks’ activities were skewed towards lending.
On top of this, MIDF found that the depositor diversity of Malaysian banks outstripped SVB’s, being much less sector specific. On average, 38% are individuals and 43% are businesses, whereas SVB’s depositors were predominantly businesses.
However, the local industry is not perfect. The research house believed there could be more granularity in local banks’ depositor base, noting several banks had been actively trying to diversify their funding base.