ROEs Fall as Margins Squeezed

Malaysia Banks: Consumer Business: ROEs Fall as Margins Squeezed

§ Aggressive Central Bank rate cuts present NIM challenge - Our recent channel checks show, post OPR cuts, the declines in lending rates for mortgages and auto loans have outpaced deposit rates. This will shrink the ROEs on mortgage and auto loans, even before accounting for the likelihood of higher credit losses as unemployment rates mount, in our view.

§ Mortgage ROEs to fall to 9% from 13% - NIMs have shrunk c20bps as the effective cost of funds decline of 60bps lagged the BLR cut of 80bps, on our estimates. If credit costs were to double, say from 20bps to 40bps, the effective ROE would collapse to just 4%. In spite of this, domestic banks continue to pursue this segment of the market and are willing to take on new loans at BLR minus 2.0-2.2%, near the historical low.

§ (Unadjusted) Auto ROEs fall to 14% from 24% - Our channel checks with car dealers and banks reveal that non-national car lending yields have fallen more than 150bps from the peak of 6.5% in August 08. By comparison, national car rates have fallen about 50bps over the same period. However, adjusting for 4-year cost of funds (using Government securities' yield as proxy) to match duration, auto ROE would be just 3%.

§ We have imputed an average NIM decline of 5bps this year - Banks with high exposure to housing loans (Public) and a high CASA base (Maybank, Alliance, RHBC) would see narrower margins, in our view. At the other end, AMMB should benefit from falling rates as >50% of its loans are on a fixed-rate basis. Even though auto ROEs will decline, we view positively AMMB's cautious stance and price discipline to minimize the squeeze in margins.

§ Maintain Underweight on MY banks - Despite the marked deterioration in global economic conditions, credit spreads in the mortgage and auto loan markets have not widened, which is surprising to us. We view that sector credit costs will rise this year to 137bps from 81bps in 2008, which will add pressure to bottom lines. AMMB remains our top pick in the sector as it benefits from interest rate cuts.

How are our stocks doing?

Reviewing our recent stock calls

Nothing has changed much in markets yesterday. The KLCI only corrected 2.6 points while the overnight US markets were closed. We still maintain our positive view on the KLCI. Meanwhile, let us review the progress of our recent batch of stock picks.


AMMB RM 2.52(Up 10.6% since 10th Feb)
Support : 2.30 | Resistance : 2.73
Since our buy call on this stock on the 10th of February, AMMB Holdings has risen 10.6% and seems poised to go up higher. We see it going higher and touching 2.73 soon which is its January high. If it can break 2.73, it will most likely be heading towards the 3.00 level. Volume remains healthy and increasing for this high beta stock while it is now trading above its short term and mid term lines.


ANNJOO RM1.28 (Up 12.2% since 10th Feb)
Support : 1.20 | Resistance : 1.32
On the 6th of February, we made a long term buy-call on this stock as it has dropped 72% from its peak. Since then, Ann Joo has rallied 12.2% in just one week.
Ann Joo remains a long term buy call and not a trading call as it is still a very thinly trade volume which indicates that this stock is still at a pre-interest and long term accumulation stage. We maintain our positive view on the stock and advise long term investors to accumulate this stock at these low levels as Ann Joo may have
already seen its ultimate bottom on the 28th of October (RM1.08).


TMI RM3.34 (Unchanged)
Support : 3.00 | Resistance : 3.45
Cut Loss Level : <3.00
TMI remains our worse performing stock and remains unchanged since our call on
the 10th of February. We are concerned over the fact that it is drifting below its short term 30-day MAV line but we still maintain our confidence in this stock pick. However, we would advise caution if TMI decides to drift lower and revisit its 3.00 critical support. Traders should cut loss if TMI breaks this critical 3.00 support as it will invite huge selling volume immediately.

Paul Schulte [Nomura] - Under the Hood

Multi-Strategy | ASIA
We offer our pair trade of Asian banks against Western banks. One has US$89bn to give and the other needs US$522bn, according to our calculations.

Under the Hood

We offer the ten banks most in need of capital and the ten most able to give it. Voila. Our pair trade for 2009.

The top ten banks globally with the most leverage (42.2x) need to raise US$522bn in capital (or shed US$10.5tn in assets) to arrive at a lower leverage of 20x. Seven out of these ten are in Europe.

The top ten banks globally with the least leverage (13.5x), have US$88bn of capital to offer. ALL OF THESE ARE IN ASIA. This has important implications for currencies, credit markets and assets values and explains the Great Shift we believe we will see over the coming years.

Imagine a world of barter! One year ago, one share of Citi bought 183 pounds of sugar. Now, it buys a mere 29 pounds. What if we only have a barter system? Citi shares, oil, HK property and palm oil are cheap. Gold, wheat and sugar are now expensive.

Deflation watch. Deflation/disinflation is on the march globally. US deflation expectations have lessened but remain at -2%.

Paul Schulte +852 2252 1409 paul.schulte@nomura.com
Mixo Das +852 2252 1424 mixo.das@nomura.com

Please go to http://www.nomura.com/research/GetPub.aspx?pid=309782 to view the full report

New Bear Frontiers

Traders’ Brief

New Bear Frontiers

New Low will drag KLCI down today
Last night, the KLCI charted a new low at 7,447.55, exceeding the November low by a mere 1.45 points. As a marginal 1.45 points cannot be considered a true break, we instead now have a new support band at the 7,447-7,449 level.

Dow may go places not gone before in 11 years
In yesterday’s report, we wrote about how the strength of the Dow bears are capped for now. However, hypothetically speaking, if the bears reign supreme, what are the next strong support levels after this 7,447-,449 support band? It appears the bears may bring the Dow to places where it has not gone before in 11 years.

Next Strong Support :
If the bears can break the 7,447-7,449 support band convincingly, the Dow may venture
towards the next strong support at 7,161.15 which was last reached 11 years ago in the month of October 1997.
If the 7,161.15 level can be breached by the bears, then the Dow’s next strong support level would be 769 points lower at the April 1997 low of 6,391.69.



Strategy : Dow’s new lows will be drag-down on KLCI
While we opine that the strength of the Dow is capped for now, we will be watching the Dow like a hawk tonight to validate the strength of the bears. If the Dow breaks the 7,447-7,449 support band convincingly, it will be revisiting the 7,161 level soon.

Meanwhile, the Dow’s charting of new lows will be a huge drag-down on the KLCI these few days. While we are bearish on the Dow, we however, still maintain our positive bias view of the KLCI in the short term as well as in the mid term as we are of the view that the correlation between the KLCI and the Dow is decreasing in the short term.