1MDB jitters abated, banks up

From the Edge:

Malaysian bankers will trigger an event of default (EOD) if state strategic investor1Malaysia Development Bhd (1MDB) fails to repay RM2 billion loan for its power unit taken in May 2014, say sources.

The loan has been rolled over twice with the last deadline being last month and is part of a RM5.5 billion debt taken by a unit of the company wholly owned by the Finance Ministry.

 A few banks were on the hook for loans, namely RHB bank, Maybank, Alliance bank, Malaysian Builder society, and Hwang DBS investment bank.  These few banks provided the 2 billion loan for 1MDB to repay.

On the plus side, these companies won't go into receivership as they won't have to write down the loan as per accounting rules.  Even the Malaysian central bank commented how auditors are to handle the bank's accounts if the loan if the principal is not paid back by February 18.

As a consequence.  All the stocks are up for these companies, and so is the market.

RHB and CIMB abandon the merger

From The Edge

CIMB Group Holdings Bhd. ( Financial Dashboard) and RHB Capital Bhd. ( Financial Dashboard) are planning to scrap the three-way merger that would have created Malaysia’s largest banking group, said people with knowledge of the matter. 

Terms for the deal, announced in October, no longer make sense as the industry outlook worsens, said the people, who asked not to be named because deliberations are private. 

An announcement could come as soon as this week, one person said. The proposed combination also included the acquisition of smaller lender Malaysia Building Society Bhd ( Financial Dashboard).

The news that RHB and CIMB have abandoned the merger is good news for CIMB in particular, the shareholders.  Now, the only way to get those two entities to merge is for the EPF to offer an MGO for the shareholders, but that won't be cheap.  Shareholders have voted, leave them to their own devices.

From day one, the RHB and CIMB mergers were seen as rough for CIMB shareholders, especially in the view that RHB would take over the banking business.   The merged entity would mostly be merged from CIMB to the RHB banking entity.  Thus the reason why arbitrageurs  decided CIMB should gravitate towards RHB's book value.

CIMB is known as a relatively high performing bank culture.  Merging is all and well, but most shareholders would rather not do the merger considering CIMB already has their plate full with integration of banks from overseas.

Indonesia to Foreign banks: we be rolling, we be scammin

I believe CIMB was the first to report dismal earnings in the form of its Indonesia operations not performing so well. More will be coming.   From the latest CIMB research report on Maybank:

The operating environment in Indonesia had been challenging since the middle of last year, due to the rise in inflation and tight liquidity, which has exerted pressure on banks’ margins and asset quality. As such, the net profit of Maybank’s unit in Indonesia, Bank Internasional Indonesia (BII), plunged by 69% yoy to RM100m in 9MFY14.

Lets recall the time where buying large stakes in Indonesia banks were all the rage a couple of years ago.  Maybank purchased Bank International Indonesia for 3.8x book value.  Ridiculous price!  Now what has happened since then?  Joko has been elected president, he has cut fuel subsidies and cost of living has increased.  Indonesians *surprised* now find it hard to make payments on their loans.

Indonesia has more or less outsourced its risk in the banking industry while gearing up to settle their in house problems.  Score 1 for Indonesia, foreigners 0.  I'm sure Indonesia will be willing to buy the stuff back at a discount. 

CIMB and Maybank...ouch.

Dubai Debt default, Malaysian companies with exposure to Dubai

From Finance Yahoo(AP):

Sentiment in stocks has been dented by the news that Dubai World, which is thought to have debts totaling around $60 billion, has asked creditors if it can postpone its forthcoming payments until May. That has stoked fears of a potential default and contagion around the global financial system, particularly in emerging markets.

"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock on effect," said David Buik, markets analyst at BGC Partners.

Kit Juckes, chief economist at ECU Group, said the developments in Dubai and in the currency markets are related as the fall in risk appetite has pushed money into government bonds and into safe haven currencies such as the Swiss franc and the yen.

This, he said, is "testing the tolerance of central banks to see their currencies cause further damage to their economies."

Even if Dubai were to get a bailout from the UAE, the Dubai CDS would be paid in full. Malaysia is majorly affected by this debacle. A big part of the Nusajaya development is with Dubai World! Whoever said islamic debt was safe, weren't affected by the crisis must be really smoking something.

In addition to direct effect, Malaysia is the top country for Islamic Finance. The financial industry will surely be affected.

2010 budget reflections, property taxes, financial industry goodies

From the WSJ:

Malaysian Prime Minister Najib Razak promised to curb a burgeoning budget deficit while still supporting economic growth with a personal income-tax cut.

Mr. Najib told Parliament in his 2010 budget speech Friday that the government will cut the individual income tax rate by 1 percentage point to 26%. But in addition to the surprise cut, he announced a 5% tax will be imposed from Jan. 1 on property gains. Mr. Najib also delivered an annual report that forecasts the trade-driven economy will contract 3.0% this year -- better than an earlier forecast of a 4.0% to 5.0% decline -- before rebounding next year to growth of between 2.0% and 3.0%, thanks to previous spending measures and low interest rates.

The government is in the final stages of studying a goods and services tax, Mr. Najib said, but offered no timetable.

The government will fund its 51.12 billion ringgit deficit entirely through domestic borrowings and a shortfall of 40.48 billion ringgit in 2010 will be met "primarily from non-inflationary domestic sources."

The report also predicts average consumer price inflation at 1.0% this year, slower than the forecast of 1.5% to 2.0% made by the country's central bank in March. Exports may shrink 19.2% this year, and may rebound to growth of 5.1% in 2010.

The budget also vows to let foreigners own 100% of Malaysian corporate finance and planning companies, up from 70% now, and relax rules on the sharing of commissions between stock brokers and commission-based dealer representatives.

The WSJ got most of the article correct, but failed to mention property gains are as much as 30% for the first year of ownership reducing gradually until 5% in the fourth year. Taxing unfortunately is quite a blunt instrument, but it will curb the rampant property speculation in Malaysia.

With the average household salary of malaysians being some RM4000 per month, I do not see how most could afford properties of RM300 per square feet. It just boggles the mind. A 300k place would cost about RM2000 in payments and that is not a reality for most Malaysians. 50% of household income is just nuts.

They say our housing markets are strong, but yet they come in with teaser rates just like options arms in the US. News flash, the housing industry encourages a lot of questionable loan practices in Malaysia as well! When the teaser rates adjust, will home buyers be able to pay? 2.5% adjusted to 7%...ouch. comes in at about 70% increase in monthly payments!

Ever since Najib won the election in April, I mentioned that given his affinity to the financial industry through personal ties as well as having a background in economics, the sector would benefit during his tenure. While the budget lacks any "big bang" policy movements for the financial industry, liberalizing regulations is always effective.

Public Bank nets RM639m profit in Q3, trouble brewing?

From the Business Times:

Public Bank Bhd (1295), the country's third largest bank, reported a 3.7 per cent higher third-quarter net profit as it earned more from loans, despite a weak economy and even as it has set aside more money to cover potential bad debts.

Net profit for the three months to September 30 2009 came in at RM639 million, although revenue fell 12.7 per cent to RM2.4 billion.

The bank has put aside RM176.4 million of allowances for loan losses, 65 per cent more compared to the same time last year.

Managing director and chief executive officer Tan Sri Tay Ah Lek said Public Bank is on track to achieve a 14-15 per cent loans growth target this year, driven by demand for loans to small businesses, mortgages and car loans.

Despite a difficult economy this year, Public Bank's net profit has expanded consistently in the first nine months this year.

Net profit in the second quarter grew 3.6 per cent to RM611 million from RM589 million in the first quarter, and improved further by 4.6 per cent in the latest quarter.

Loans grew by 14.3 per cent on an annualised basis, while deposits expanded by 19.5 per cent. This compares with the industry's 6.8 per cent growth for loans and 6.3 per cent for deposits.

Public Bank is considered the best bank in Malaysia and is substantially increasing allowance for bad loans. I loathe to see what the other banks in Malaysia have to say. Loan growth profits seem to be what is holding up the bottom line. I imagine that the loan growth will taper off as demand for houses, cars, and mortgages wane from the initial rebound after the financial crisis.

If loan growth profits were to come down and bad loans were to increase, this would not bode well.

Malaysia's economy needs only a mild increase in western countries' consumption to put the country on much better footing, but if that's not helping, I don't know what will.

Gross NPLs may hit 9%, says RAM

From The Edge:

RAM Rating Services Bhd expects the banking sector’s gross non-performing loans (NPLs) ratio to reach 9% this year at the worst-case scenario amid the global financial turmoil, said its head of financial institution ratings Promod Dass.

Currently, the sector’s gross NPL ratio stands at 4.1%, and net NPL ratio is at 2.2%, complemented by the financial institutions’ strong capitalisation and the industry’s risk-weighted capital-adequacy ratio (RWCAR) and Tier-1 capital-adequacy ratio at a respective 12.6% and 10.5%.

“Net NPL involves a lot of other calculations. Perhaps net NPL would be half of the gross NPL, but we will stick to gross NPL as it is the key indicator,” Dass said at the release of RAM Rating’s Banking Bulletin here yesterday.

RAM Rating said there had been a gradual shift from corporate to retail lending, as banks had been focusing mainly on residential property loans and lending to small and medium-sized enterprises (SMEs).

The major concern here is, will retail lending hold up? Will the consumer buckle under these conditions? Looking at the way jobs have been disappearing in Malaysia, I think not.