Horizon.my

Last week the Association of Banks in Malaysia (ABM) said that the country was not experiencing any credit crunch. The banking sector remains strong and well-capitalized in the face of global financial turmoil -commercial banks are not putting any brakes in lending and it is “business as usual”.

As at the end-August 2008, the industry’s loan to deposit ratio stood at 74.5% compared with close to 100% during the 1997 financial crisis.

A quick look at the latest balance sheets of leading banks support the ABM’s assertion.

See in particular the Net Loans/Deposits and the Net Assets/Total Assets line highlighted in red.

One of my favourite indicators is the Net Assets/Total Assets figure which is so simple to use. Anything over 8% is exceptionally high as I’ve learned from looking at Australian banks since 10 years back. In those days the Big 4 in Australia (National, Commonwealth, ANZ and Westpac) were running ratios of between 5-7% and were in their strongest financial position ever. As the economy grew and banks became more aggressive, the ratio declined to the 4% mark and we are now starting to see a credit crunch over there with banks announcing significant profit drops for the first time in 10+ years.

The Malaysian banks are probably where the Australian banks were 10-15 years ago. Despite the many gloomy forecasts out there, I personally believe we are at the threshold of a major growth phase here. This is also accompanied by improved practices across the industry, particularly so (I believe although I don’t have any proof) in AMMB (AmBank) and COMMERZ (CIMB Bank) where you need only walk into a branch to experience the improved level of service compared to 2 years ago.

Having said that COMMERZ is probably licking its wounds over the recent bond trading losses and its Thai acquisition. But this is a fraction of MAYBANK’s Indonesian woes, a foolish deal that has enriched a few while costing shareholders more than RM10 billion in lost market cap. What was once Malaysia’s leading retail bank is now (sorry to say) a little bit of a laughing stock in the industry. Just look at the recent launch of its new Maybank2u website and what some leading tech bloggers had to say about it.

There are some serious lessons here for Corporate Malaysia. And hopefully COMMERZ management will be forthright in their upcoming quarterly report….we shall see in the next 2 weeks

As I am writing this RHB Research has just published its Research Report. Some key points are:

1. Industry loan growth has slowed slightly in Sep 08 to 11.6% YOY (mainly at the business & SME segment), and is expected to slow further to 5% by 2009.

2. Despite the difficult operating environment, Non-performing Loans (NPL) continues its downtrend showing that the sector is well positioned to cushion the impact of the economic downturn, given its “solid asset quality as well as increased discipline of adopting improved risk management policies and credit scoring systems”.

3. RHB is still Neutral on the sector but is reviewing its recommendation following the sharp share price plunge recently:

“We are inclined to switch out from defensive stocks to companies with strong fundamentals which have suffered significant price depreciation. Stocks in the latter category are likely to outperform when the market resumes a more sustainable uptrend. Moreover, defensive banking stocks have outperformed the market which would limit their upside potential in the event of a rebound in the market.”

Hmmm… I’m not sure which defensive stock they meant but it’s probably Public Bank and Hong Leong Bank. Their recent price dips have been relatively minor and they still trade at large premiums to NTA. Think I would be inclined to agree with RHB Research on this one.

Note: In case you thought it took ages for me to compile the beautiful table above, think again! Learn how to do this quickly

Disclosure: The author holds shares in AMMB and COMMERZ.