MFRS 9 more likely to affect balance sheet

Ambank Research: Increase in impairment losses provision will be charged to retained earnings

PETALING JAYA: The new accounting standard that will come into effect next year will have less impact on banks’ earnings compared with their balance sheet.

According to AmBank Research, the impact of MFRS 9 will be greater on banks’ balance sheet because any increase in impairment losses provision will be charged to retained earnings.

“We expect the impact of MFRS 9 to be more on banks’ balance sheet than profit and loss (P&L), as all increase in provisions on implementation will be charged off directly to banks’ shareholders’ funds, hence this will affect capital ratios, particularly CET 1 (common equity tier 1) ratio of banks,” AmBank Research said in its report.

“After the implementation, banks have yet to provide guidance on the run-rate of their credit cost. Nevertheless, we expect the P&L (if any) from the MFRS 9 implementation to be significantly lower compared with balance sheet,” the brokerage added.

In its early assessment of the impact of MFRS 9, AmBank Research pointed out that larger capitalised banks, such as Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, appeared to be in a more comfortable position.

It noted for Maybank, the early-assessment impact of MFRS 9 indicated a decline of 60 to 90 basis points to the group’s CET 1 ratio without utilising regulatory reserves to offset against the potentially higher provisions from the new accounting standard.

As for CIMB, the impact could be a 50-basis-point drop on its CET 1 ratio on the basis that its regulatory reserves be allowed to offset against the higher provisions under MFRS 9.

“We expect the ability of banks to utilise regulatory reserves to be crucial, as this will knock off some provisions that banks will be required to raise under the new accounting standard, leaving a milder impact on their respective CET 1 ratios,” AmBank Research explained.

The brokerage maintained its “overweight” recommendation on the Malaysian banking sector, with “buy” calls specifically for RHB Bank Bhd, with a fair value of RM6, and Public Bank Bhd, with a fair value of RM22.20.

AmBank Research said it favoured RHB Bank for the stock’s undemanding valuation as well as the latter’s improving asset quality, strong pipeline of investment-banking deals and growth of non-interest income, and Public Bank for the group’s strong asset quality and high level of regulatory reserves which would be beneficial to offset against the higher provisions under MFRS 9 if allowed by the regulatory authority.

AmBank Research has cut its coreearnings-growth forecast for the banking sector for 2017 to 6.4% from 8.6% previously following the conclusion of the second-quarter (2Q) result season after imputing higher credit cost and cost-to-income (CI) ratio estimates for Maybank and Hong Leong Bank Bhd.

However, the brokerage raised its 2018 core earnings growth estimate for the banking sector marginally to 10.2% from 10% previously. It said it would refine its projection of 2018 earnings after the release of further guidance by banks on the impact of MFRS 9 closer to the implementation date next year.

AmBank Research noted that for 2Q2017, the earnings of all the seven banks under its coverage – namely, Maybank, CIMB, Public Bank, RHB, Hong Leong Bank and Alliance Financial Group Bhd – came in within expectations.

The sector’s 2Q2017 core earnings slipped 2% from the preceding quarter largely due to higher provisions for loan losses and an impairment of RM108mil on RHB Bank’s corporate bonds in Singapore.

The sector’s gross-impaired-loan ratio rose to 2.04% in 2Q2017 from 2% in 1Q2017 and 1.97% in 4Q2016, largely contributed by Maybank which had stress in retail and corporate banking loans in Indonesia and Singapore.

“There continued to be weakness in the asset quality of oil and gas (O&G) sector loans in Singapore,” AmBank Research said.

This was evidenced by the loan impairment of Maybank’s O&G loans and the impairment of RHB Bank’s corporate bonds in Singapore for the same segment. CIMB also had stress in its Singapore O&G loans albeit a small exposure.

Quarter-on-quarter (q-o-q), all banks reported a rise in impaired loans, including domestic loans of Public Bank and Hong Leong Bank.

Provisions rose 31.8% q-o-q, driven largely by Maybank and CIMB’s higher allowances for loan losses. Credit cost in 2Q2017 rose to 0.42%, compared with 0.34% in 1Q2017.

The sector’s loan growth slowed, while net interest margin (NIM) remained stable.

In 2Q2017, the aggregate sector’s loan growth slowed to 5.9% yearon-year (y-o-y) from 8% y-o-y in 1Q2017, due to the slower pace of loans in the local and most international markets. The overall sector’s NIM remained stable at 2.29% in 2Q2017, compared with 2.30% in 1Q2017.

AmBank Research expected pressure on NIM to continue in the second half of 2017 due to keen deposit competition in the market.