Big Malaysian banks with diversified defensive qualities seen upside

IN view of the weaker loan growth this year, which banking stocks will prove to be winners?

From the softer loan growth reported in December 2012, moderating at 10.4%, analysts expect loan growth will continue to weaken this year.

The 10.4% loan growth in December compares with a growth of 13.6% and 12.8% in 2011 and 2010 respectively.

Most analysts estimate loan growth this year to be within the 9%-11% range. “Together with the ongoing interest margins headwind, there are limited opportunities to drive earnings growth for banks materially beyond our current expectation of a high single-digit to low-teen growth,” says a Kenanga Research analyst.

However, Alliance Research banking analyst Cheah King Yoong sees loan growth falling within 7%-9%.

“I suppose our 7%-9% forecast is lower than other analysts’ 10%-11% forecasts due to our assumption that the Economic Transformation Programme (ETP) related loans may not be a key loan driver this year, given that significant amount being disbursed in 2012 could be repaid this year, which could drag the business loan growth momentum for 2013,” he says.

However, Cheah expects housing loans to resume its reign as key loan drivers this year, on the support of the continued robustness in property loans and recovery in hire-purchase loans.

Lending indicators turned negative in December with loan applications falling flat with a 14.6% year-on-year drop at RM53.6mil while approvals and disbursement activities dropped by 21.1% and 7.9% on a year-to-year basis respectively.

“The fall in lending indicators support our investment case that both lenders and borrowers are turning cautious with the impending 13th general election, which has to be called by the first half of 2013, and is now widely expected to be held in March,” says Cheah.

As at end-2012, business loans outstanding expanded by 9% year-on-year due to slower disbursements and base effect. Meanwhile, household loans continued to expand by 11.5% from a year ago.

“Drilling deeper into the business segment, the slowdown in year-on-year loan growth was mainly caused by transport, storage and communications as well as other sectors, with loans to these sectors contracting by 8.2% and 17.4% year-on-year respectively,” RHB Research analyst David Chong says.

He adds that it is possibly a reflection of lumpy repayments or refinancing via debt capital markets.

Key loan growth drivers came from real estate, construction, wholesale and retail trade, hotels and restaurants, and primary agriculture sectors.

CIMB Research banking analysts Winson Ng says the weak lending loan indicators do not point to a strong rebound in loan growth in the coming months. “On the other hand, we think that the erosion of net interest margin will be less drastic this year as banks will be more rational in their pricing of loans after the stiff rate competition in the past two to three years,” he says.

Ng reiterates his “neutral” rating on Malaysian banks. He adds that asset quality is expected to remain intact, which alleviates fears of a spike in credit costs for new impaired loans. “There are still some positives for Malaysian banks including financing opportunities from ETP projects, undemanding calendar year 2013 price-earnings of 11.5 times, and an attractive net dividend yield of 4.5%,” he says.

The banking sector could face two potential de-rating catalysts, which could pose further downside risks to analysts’ loan growth forecasts for 2013.

“Lending activities could decelerate in the first quarter of 2013 with slowing corporate loan disbursements and consumers turning cautious pending the upcoming general election,” Cheah says.

Another catalyst would be if the Government were to implement the goods and services tax (GST) and resume the subsidy rationalisation programme and raise the electricity tariff to close its budget deficit. “This fiscal tightening policy could have an adverse impact on consumer spending and consumer loans in the later part of the year,” says Cheah.

CIMB notes its preference for big banks that have better defensive qualities. “Maybank’s diversified business portfolio with top-three ranking in all business segments will enable it to reap the greatest benefits from the implementation of the broad-based ETP,” Ng says.

He adds that Maybank’s key earnings catalyst will be its rapid expansion in Indonesia which will enable the group to gain market share in the region and fuel its fee income growth.

Fundamentals

Meanwhile, Public Bank Bhd’s fundamentals remain unrivalled, with a return on equity in the mid-20 percentage point range, the best asset quality with an impaired loan ratio of below 1% and a cost-to-income ratio of 30%.

“We expect the group to keep its credit cost low in 2013 to 2014, thanks to its superior asset quality, especially with the full adoption of FRS (Financial Reporting Standard) 139. Loan growth is projected to be a decent 11%-12%. The push for fee income growth, primarily from wealth management and bancassurance, will provide a further fillip to topline growth,” Ng says.

However, Alliance Research believes that Public Bank’s future risk-reward dynamics are less appealing.

“With the election uncertainties expected to be cleared by the first half of 2013, we believe that Public Bank may underperform its higher beta banking peers post-elections,” Cheah says. This is coupled with its rich 2013 price-to-book valuation of 2.8 times and declining asset growth trajectory.

Cheah expects high beta banks that underperformed in 2012 to outperform its competitors in 2013.

“RHB Capital Bhd serves as our top pick of the banking sector since we believe that its current low valuation is no longer justified,” he says.

In the mid-cap section, Cheah has cast his eye on the often-overlooked Affin Holdings Bhd due to its turnaround story and good proxy to the merger and acquisition theme.

For investors looking for a direct and pure exposure to the fast-growing Islamic banking sector, BIMB Holdings Bhd is the way to go, says CIMB’s Ng.

“Re-rating catalysts include the best loan growth among the Malaysian banks under our coverage, the potential to venture into the under penetrated and fast-growing Indonesian financial market, brisk fee income growth, primarily from its takaful operations, and expected expansion of its net interest margin by optimising its loan-to-deposit ratio which is currently only 50% plus,” he says.

RHB Research and Kenanga Research remain “overweight” on the banking sector, while Alliance Research and CIMB Research maintain their “neutral” stance.

By WONG WEI-SHEN weishen.wong@thestar.com.my

Singapore Home Sales Rise 43% and stocks up

Singapore home sales rose 43 percent in January from the previous month as buyers rushed to purchase homes right after the government announced cooling measures to ease residential prices.

Home sales increased to 2,013 units in January from 1,410 units in December, according to data released by the Urban Redevelopment Authority today. Sales reached 22,699 units in 2012, according to calculation by Bloomberg News based on the government data, which dates back to 1996.

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People walk dogs past a house in Telok Kurau district in Singapore. Singapore has been attempting to rein in prices since 2009, when the government barred interest-only loans for some housing projects and stopped allowing developers to absorb interest payments for apartments still being built. Photographer: Sam Kang Li/Bloomberg

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Traffic travels along the Benjamin Sheares Bridge past a condominium development in Singapore. Photographer: Munshi Ahmed/Bloomberg

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A jogger runs past people with dogs in Telok Kurau district in Singapore. Photographer: Sam Kang Li/Bloomberg

“This is a bit of an abnormality and the increase was a bit of a surprise,” said Nicholas Mak, the executive director at SLP International Property Consultants, who said developers extended the hours of their sales office on the eve of the curbs. “February will be lower than January because this is when the effects of the cooling measures will be felt.”

Singapore home prices reached a record high in the fourth quarter amid low interest rates, raising concerns of a housing bubble and prompting the government to introduce its seventh round of cooling measures on Jan. 11.

Singapore has been attempting to rein in prices since 2009, when the government barred interest-only loans for some housing projects and stopped allowing developers to absorb interest payments for apartments still being built.

Mak said the curbs were also partly offset by price cuts by developers, some offered through rebates. He expects prices for so-called mass-market homes to increase between 1 percent and 5 percent this year. For high-end homes, or those in prime districts, prices may rise 2 percent or decline as much as 8 percent depending on buyers’ reactions to the measures, he said.

Shares Rebound

Singapore’s property index rose 0.3 percent at the close to the highest in almost five years. The measure has climbed 2 percent since the curbs were announced last month, recovering from a 1.6 percent decline on the first trading day after the measures.

Knight Frank Pte cut its estimates for new home sales for 2013 by 20 percent after the measures and expects sales to range between 12,000 and 14,000 units this year.

“Despite the strong sales volume in January, there could be a potential decline in demand for private homes for the next two months in first quarter this year by about 10 to 15 percent, as the private residential market fully absorbs the impact of the seventh round of property cooling measures,” property broker, Knight Frank, said in an e-mailed statement today.

The latest measures include an increase in the stamp duty for homebuyers by between 5 percentage points and 7 percentage points, with permanent residents paying taxes when they buy their first home. Singaporeans will also have the levy starting with their second purchase.

The government also tightened loan-to-value limits for buyers seeking a second mortgage, referring to the amount they are allowed to borrow relative to the value of their properties. The cash down payment will also rise to 25 percent from 10 percent starting from the second loan, it said. -- Bloomberg

Singapore property stocks up after Jan sales data



SINGAPORE - Singapore property stocks rose, bucking the decline in the broader stock market, after data showed private home sales soared in January.

According to the Urban Redevelopment Authority (URA), developers in Singapore sold 2,013 new private homes in January, up 43 per cent from December's 1,410 units. The jump came about despite new cooling measures announced by the government on Jan 11.

Around 0715 GMT, shares of Southeast Asia's biggest developer CapitaLand were up 0.8 per cent at S$3.93, while City Developments rose 0.3 per cent to S$11.45.

The benchmark Straits Times Index was 0.2 per cent lower.

"The number of transactions indicates clearly that demand for private properties is still there, especially when you take into consideration the advent of the January cooling measures,"said PropNex Realty CEO Mohamed Ismail.

Mohamed Ismail said many home buyers rushed to make purchases on the evening before the new measures kicked in, and most developers extended their opening hours to facilitate last-minute purchases.

By Kevin Lim  Reuters

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China has ways to tap shale gas riches

CHINA'S aspiration for a US-style gas bonanza that will reduce its dependence on imported energy must confront three key scarcities -- water, shale gas expertise and pipelines -- before it can become a reality. 
 
As well, Chinese authorities must manage the social and environmental frictions likely to arise when drilling companies seek access to farm land and use hydraulic fracturing, or fracking -- the technique that is an integral part of shale gas exploitation.



Fracking involves injecting a mix of sand, water and chemicals into rocks deep beneath the surface to crack them open and get access to the shale.

In the US, large-scale shale gas extraction in the past five years has revolutionised its energy, transport and manufacturing landscape to the point where the US is likely to become an exporter of liquefied national gas by 2015.

Last year, for example, the US produced 220 billion cubic metres of shale gas, or more than a third of total natural gas output. Over the next two decades, shale's share is likely to rise to 50 per cent. The US Energy Information Administration estimates the country's recoverable shale gas reserves at about 14 trillion cubic metres.

Now China, with potential shale gas reserves of 25 trillion cubic metres in areas such as Sichuan province and the Tarim Basin in Xinjiang, wants to emulate the US experience, setting a goal in its latest State Council energy white paper of extracting 6.5 billion cubic metres of gas a year by 2015, and as much as 100 billion cubic metres a year by 2020.

But the US shale bonanza has been more than three decades in the making, and draws on the experience and infrastructure of a well-established oil and gas industry.

North America has thousands of kilometres of gas pipelines and receiving points, its geological survey records are extensive, its exploration companies have pioneered the key techniques of horizontal drilling and fracking, its rig crews are the best in the business and have good access to water for fracking, and there is a strong service sector covering finance, distribution, processing and marketing to support the industry. Even so, the industry has had to contend with vigorous opposition from environmental and farming groups concerned over water and land usage.

For China to achieve anything like the US success over the next decade, it will have to address these key issues. Much of its northern half is water-stressed already, while in the south, shale exploration will have to compete for water now used to grow food.

Certainly, China has the scale to be a big shale player, and state-controlled entities such as CNPC (whose listed arm is PetroChina), CNOOC, China Petrochemical Corporation (Sinopec) and Sinochem are keen to deploy domestically the shale skills that they hope to pick up from recent investments in North American shale plays and in joint ventures with oil majors ExxonMobil, Shell, ConocoPhillips, BP and Total within China.

While these technological skills are crucial, each shale gas field is unique, meaning there is no "one size fits all". That is why many of the North American fields were developed initially by smaller, independent oil and gas companies such as Devon Energy, Anadarko Petroleum and Chesapeake Energy.

When China held its first round of bidding for shale gas blocks in 2010, only six state-owned energy companies were invited to take part, and the blocks were limited to southern China, where water is more easily available than in the arid north and northwest of the country.

The second round of bidding on October 25 last year drew a much bigger field and was open to non-state players. A total of 152 bids from 83 companies were received for the 20 blocks, covering about 20,000sq km in Chongqing municipality and the provinces of Guizhou, Hubei, Hunan, Jiangxi, Zhejiang, Ahui and Henan.

Sinopec, one of the first-round invitees, began drilling China's first shale gas production wells in Sichuan province near Chongqing in June last year. Sichuan is one of China's biggest grain growing areas, and some farmers there are wary of the impact shale exploration will have on their land and water.

China is already the world's biggest energy consumer and uses a prodigious amount of domestic and imported coal and oil to run many of its power stations. It also has massive capabilities in wind, solar, hydro and nuclear power.

But it is natural gas that offers the potential to really change China's energy equation, particularly in the form of its domestic shale resources, coal-seam gas and coal-to-gas conversion. For now, much of China's gas is imported via pipeline from Central Asia or as LNG from the Middle East, Southeast Asia and Australia.

In its latest World Energy Outlook released last month, the International Energy Agency says it expects unconventional gas -- which covers shale and CSG -- to account for nearly half of the increase in global gas production out to 2035, with most of the increase coming from China, the US and Australia.

But the IEA also warns that the unconventional gas business is "still in its formative years" and that there is uncertainty in many countries about the extent and quality of the resource base, and about the environmental impact of producing this gas.

The IEA's outlook supports the view of British industry analyst Wood Mackenzie that China's shale gas development, while potentially substantial, will be a long-term story. At the World Gas Conference in Kuala Lumpur, Wood Mackenzie's head of Asia-Pacific gas research, Gavin Thompson, said the focus should be on China's gas import options to meet rapidly increasing demand. This, he said, presented opportunities for pipe suppliers in Central Asia and Russia, along with LNG suppliers.

"We remain positive that China's domestic shale gas will be a major boost to supply growth, producing approximately 150 billion cubic metres (bcm) per annum by 2030, largely accounted for by the Sichuan and Tarim basin production.

"However, shale gas growth will only accelerate after 2020, staying under 30bcm before then. Meanwhile, China's gas demand will increase from just over 150bcm to more than 600bcm from now to 2030."

Wood Mackenzie believed that both coal-to-gas projects and coal-bed methane (CBM) would each deliver more output to the Chinese gas market than shale right up to 2024.

"By 2020, we see CTG and CBM producing 27bcm and 17bcm respectively against only approximately 11bcm of shale production. These sectors are therefore far more significant through the medium-term, but are not receiving the appropriate level of attention outside of China."

Thompson said there was a need for a much deeper geological understanding of China's shale potential and the know-how to exploit it. As well, land access issues, environmental challenges, a lack of supply chain services and infrastructure, and decisions on the best allocation of capital all cloud China shale gas outlook.

China's energy white paper says the government will "actively promote" the development and use of unconventional oil and gas resources by speeding up the exploration of coal-bed gas and selecting favourable exploration target areas for shale.

By Geoff Hiscock is the author of Earth Wars: The Battle for Global Resources, published by John Wiley & Sons

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Euro zone economy shrinks, worst since 2009

The euro-area recession deepened more than economists forecast with the worst performance in almost four years as the region’s three biggest economies suffered slumping output.

 The recession in the 17-nation euro zone deepened sharply in the fourth quarter of 2012 as the debt crisis continued to sap growth and confidence as jobs are lost. Photo: AFP

Gross domestic product fell 0.6 percent in the fourth quarter from the previous three months, the European Union’s statistics office in Luxembourg said today. That’s the most since the first quarter of 2009 in the aftermath of the collapse of Lehman Brothers Holdings Inc. and exceeded the 0.4 percent median forecast of economists in a Bloomberg survey.

The data capped a morning of releases showing that the economies of Germany, France and Italy all shrank more than forecast in the fourth quarter.

European Central Bank President Mario Draghi said last week that confidence in the 17-nation bloc has stabilized and the ECB sees a gradual recovery beginning later this year, though the situation is “fragile.”

“The outlook for 2013 remains subdued,” said Peter Vanden Houte, an economist at ING Group NV in Brussels. “While a gradual improvement of the world economy is likely to support European exports, domestic demand is bound to remain very weak as fiscal tightening and rising unemployment will take their toll on household consumption.”

The euro extended its decline against the dollar after the data were released. It fell 0.9 percent to $1.3328 as of 10:34 a.m. London time. The single currency also weakened versus the pound and the yen. European stocks erased gains, U.S. equity- index futures fell, and German bunds advanced.

Japanese Surprise

The European data chimed with statistics in Japan, where the economy unexpectedly shrank last quarter as falling exports and a business investment slump outweighed improved consumption. GDP fell an annualized 0.4 percent, following a 3.8 percent fall in the previous quarter. That bolsters Prime Minister Shinzo Abe’s case for more monetary stimulus to end deflation.

The euro-area economy shrank 0.9 percent in the fourth quarter from a year earlier, the statistics office said. In 2012, it contracted 0.5 percent.

Data earlier today showed the German economy, Europe’s largest, shrank 0.6 percent in the fourth quarter, while French GDP fell 0.3 percent. Both contractions exceeded the median forecasts of economists. Italy’s economy shrank 0.9 percent, also more than expected and a sixth straight contraction.

Ninth Contraction

Other releases today showed that Portugal’s GDP fell by 1.8 percent in the ninth successive quarter of contraction, while in Austria and the Netherlands, it dropped 0.2 percent. In Greece, which doesn’t publish quarter-on-quarter data, GDP fell 6 percent in the fourth quarter from a year earlier.

Measures by the ECB to stem the debt turmoil have eased the worst strains and helped to reduce sovereign bond yields. The yield on Spain’s 10-year debt is about 5.2 percent, down from more than 7.5 percent in July.

Some reports have also pointed to an easing in the recession in the euro area since the start of this year. While industrial production fell 2.4 percent in the fourth quarter, it rose 0.7 percent in December, more than economists forecast. Surveys of manufacturing and services improved in January.

Downside Risks

Still, the ECB has predicted that the euro zone’s economy will shrink 0.3 percent this year. The appreciation of the euro, which gained 8.2 percent in the past six months, is also threatening to hurt exports.

The ECB said today that professional forecasters cut their growth and inflation estimates. They predict inflation of 1.8 percent in 2013 and 2014, down from the 1.9 percent estimated for both years three months ago, the central bank said, citing a quarterly survey. Forecasters foresee zero growth this year and expansion of 1.1 percent next year.

Heineken NV, the world’s third-biggest brewer, said yesterday it sees volume weakness this year in European markets “affected by continued economic uncertainty and government-led austerity measures.” ThyssenKrupp AG, Germany’s biggest steelmaker, said on Feb. 8 that it intends to make savings in its European steel business by cutting more than 2,000 jobs.

In the 27-nation European Union, GDP fell 0.5 percent in the fourth quarter from the previous three months and 0.6 percent on the year. The statistics office is scheduled to publish a breakdown of fourth-quarter GDP next month.

“While sentiment towards the region has improved, the hard news on the economy remains distinctly weak,” said Jonathan Loynes, chief European economist at Capital Economics in London. Surveys have pointed to an “improvement in sentiment and activity in the early part of 2013. But for now at least, they are not strong enough to suggest that the euro zone has pulled out of recession.” - Bloomberg

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Japan's economy contracts

Japan's economy contracts

Aggressive: Japan has been warned that its expansionary monetary policy could affect that country’s future growth as a weak yen could undercut Korean exporters’ competitiveness. — EPA

TOKYO: Japan's economy unexpectedly contracted in the fourth quarter, failing to escape a mild recession and playing into the hands of a government pushing for more aggressive monetary expansion that's drawn international criticism.

While a 0.1% drop in output defied expectations of a slight uptick after two quarters of contraction, economists expect the economy will slowly recover this year with the help of bolder monetary and fiscal stimulus and an improving global economy.

The Bank of Japan also struck a more positive note on the economy while keeping its policy on hold after it boosted its monetary stimulus and doubled its inflation target to 2% a month ago.

Markets, however, have no doubt that Prime Minister Shinzo Abe will keep pushing the central bank for more, given the still fragile state of the economy. A return to rising prices also appears far off after nearly two decades of low-grade deflation.

Those expectations for further easing have sent the yen into retreat, driving it down nearly 20% against the dollar since November and stirring an international debate over whether Japan was effectively using aggressive money printing to steer the yen lower.

Tokyo has defended its action, saying its policies are aimed at pulling the country out of deflation, not at nudging down the yen, and governor Masaaki Shirakawa is expected to reinforce that argument when he will attend his last Group of 20 finance leaders' meeting in Moscow this weekend.

Japan has said the Group of Seven rich nations accepted Tokyo's view when it declared in a statement on Tuesday that fiscal and monetary policies would not be directed at devaluing currencies.

But remarks from former BoJ governor Kazumasa Iwata yesterday are likely to rekindle the international debate on Tokyo's true motives.

The yen is still overvalued from a trade perspective and the reversal of the currency's strength is essential for the BoJ to achieve its 2% inflation target, Iwata was quoted as saying by a Japanese ruling party official.

Iwata, considered one of the leading candidates to replace Shirakawa when he leaves his post in March, said the dollar at 95 yen was appropriate. Iwata heads a private economics think-tank and now has no policymaking role.

Abe and his cabinet have the right to fill three top BoJ posts when Shirakawa and his two deputies leave on March 19 and is widely expected to pick advocates of more aggressive central bank action than the cautious outgoing chief, keeping downward pressure on the yen.

The dollar traded around 93.50 yen yesterday after hitting a 33-month high of about 94.47 yen on Monday.

South Korea's central bank has warned that Japan's expansionary monetary policy could affect that country's future growth as a weak yen could undercut Korean exporters' competitiveness.

As widely expected, the central bank maintained its overnight call rate target at a range of zero to 0.1% by a unanimous vote, and held off expanding its asset buying and lending programme, while offering a rosier view of the economy than just a month ago.

“Japan's economy appears to be bottoming out,” it said. In January, the BoJ said the economy was weakening.

The world's third largest economy contracted for the third consecutive quarter in October-December, showing Japan was taking longer to escape from a mild recession. - Reuters