Banking:Foreign banks share the pain

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Foreign boys not spared a 20% 1Q earnings decline. The combined net profit
of the five major foreign banks in Malaysia fell 19.7% yoy to RM824.6m in 1Q09,
worse than the 14% slide recorded by the local banks. Clearly, the foreign boys
are not spared the impact of the economic downturn, with earnings dents coming
primarily from (1) a 1.3% yoy drop in net interest income, (2) 25% slump in non-
interest income, and (3) 23% jump in loan loss provisioning (LLP).
• Foreign banks’ loan growth trailing local banks’. As expected, foreign banks
recorded slower net loan growth of 3.1% yoy in Mar 09 compared to 12% for
local banks’ domestic lending. The performance of foreign banks was pulled
down by a 6.8% contraction in Citibank’s loan base, due primarily to a drop in
property and business loans. Other major foreign banks registered single-digit
loan growth ranging from 3.3% (for UOB) to 8.7% (for OCBC).
• Higher NPL ratios and credit costs. Against the backdrop of a grim economic
climate in 1Q09, all major foreign banks saw a rise in their net NPL ratios. The
blended net NPL ratio of these five banks increased from 1.68% in Dec 08 to
1.81% in Mar 09, lower than the industry’s 2.2%. The hike in NPL ratios led to a
23% yoy surge in 1Q09 LLP.
• Better performance by local banks. In 1Q09, local banks outperformed their
foreign peers in the areas of (1) net profit – 14.2% yoy drop vs. 19.7% for foreign
banks, (2) non-interest income – down 7.1% yoy vs. 25.3% for foreign banks
despite their higher exposure to poor investment banking income, and (3) NPL
ratios – a few local banks, i.e. Maybank, Public Bank, AMMB and Alliance
managed to contain their NPL ratios while qoq rises were evident for all the
major foreign banks.
• Maintain NEUTRAL. Foreign banks’ poor 1Q09 financial results reflect the
adverse operating environment. We take heart in the outperformance of the local
banks during these difficult times as it suggests that the improvements in local
banks’ operations, especially in the area of risk management, have helped them
to weather the economic downturn. On this note, we are maintaining our
NEUTRAL stance on Malaysian banks as local banks may trump our and market
expectations in countering the slowdown in loan growth and the uptick in NPLs.
Our top pick for the sector remains Public Bank.

Published in: Economy & Finance
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