ASEAN banks' bad debt woes set to push valuations even lower

Krung Thai Bank PCL

25/11/2015 21:00

* Investors cautious on ASEAN banks as bad debts climb 
    * Rising NPLs, credit costs weigh on returns, valuations 
    * NPLs still below alarming levels, banks' coverage ratios 
healthy 
 
    By Nichola Saminather 
    SINGAPORE, Nov 26 (Reuters) - Stocks of Southeast Asian 
banks are at their lowest valuations since the global financial 
crisis, but analysts don't expect investors to jump back in for 
some time, fearing a further increase in non-performing loans 
(NPLs).      
    Most investors expect bad loans will continue to rise 
through the first half of next year as regional economies 
struggle, weighed down by weak export demand, falling commodity 
prices and China's slowdown. 
    That is pressuring returns and valuations, which are at 
six-year lows in Indonesia, Thailand, Malaysia and Singapore.  
    "We haven't seen the worst in banks' earnings yet in ASEAN, 
said Kum Soek Ching, head of Southeast Asia research at Credit 
Suisse Private Banking and Wealth Management in Singapore. 
    "Non-performing loans are a reflection of the growth and 
cashflow challenges that corporations are going through." 
    Shares of Thai, Malaysian and Singaporean banks have all 
underperformed their broader country benchmarks. Indonesian 
lenders were the exception, thanks to a raft of fiscal reforms 
announced in September.  urn:newsml:reuters.com:*:nL3N1201H5  urn:newsml:reuters.com:*:nL3N1202VO 
    Five of the 10 worst performers in October in Invesco's 
ASEAN fund were banks, including Malayan Bank  MBBM.KL , Bank 
Rakyat Indonesia  BBRI.JK  and Singapore's Oversea-China Banking 
Corp.  OCBC.SI   
    The top 10 holdings of United Overseas Bank Asset 
Management's Asian financials fund included only two Southeast 
Asian banks as of Oct. 31, Singapore-based DBS Holdings 
 DBSM.SI  and UOB  UOBH.SI . 
    "We have a cautious view on ASEAN banks due to the overall 
economic slowdown in the region," said Jolene Seetoh, director 
for Asia ex-Japan equities at the firm in Singapore.  
    "While credit costs may remain high as ASEAN banks continue 
to set aside higher provisions and restructure their loans, they 
should peak next year and gradually decline as economic growth 
stabilises," she said. 
    When "stressed" credit costs peak they could drive returns 
on equity lower and shrink price-to-book ratios by as much as 26 
percent, making that the time to buy, Citi analyst Robert Kong 
wrote in a Nov. 11 report.  
     
    BAD DEBT CHALLENGES 
    To be sure, sour loans are still well below alarming levels 
with Malaysia's NPL ratio at 1.6 percent, Indonesia's at 2.4 
percent, and Thailand's at 2.78 percent, according to 
AmResearch, PT Bahana and central bank data. Investors expect 
them to peak below 4 percent across the region.  
    However, many banks are also seeing more delinquent and 
restructured loans that could become bad debts. 
    A surge in provisions by Indonesian lenders this year linked 
to the troubled mining sector led to the first combined profit 
decline in almost a decade for its 10 biggest banks. urn:newsml:reuters.com:*:nL3N10B430 
    PT Bank Mandiri  BMRI.JK , the nation's largest lender by 
assets, is trading at 1.6 times forward book value, a 28 percent 
discount to its five-year median, according to Starmine. PT Bank 
Negara Indonesia,  BBNI.JK  is at 1.4, a 16 percent discount. 
    Two of Thailand's three biggest lenders, Krung Thai Bank 
 KTB.BK  and Siam Commercial Bank  SCB.BK , saw third-quarter 
profits plunge after NPLs surged, largely in connection with one 
steelmaker. Krung Thai is at 0.9 times forward book value, 28 
percent below its five-year median, and Siam is at 1.3, a 32 
percent discount.  
    In Malaysia, banks have recorded five straight months of 
impaired-loan increases, according to an AmResearch report.  
    Their loan loss cover was at 98.1 percent in September, 
indicating that not all newly impaired loans are provided for, 
analyst Rachel Huang wrote in the report.  
    Malaysian banks are "most at risk of earnings 
disappointment," Credit Suisse's Kum said.  
    Despite rising NPL ratios, particularly at OCBC and UOB, 
which are more exposed to the Malaysian and Indonesian resources 
sectors than rival DBS, Singaporean banks are among the region's 
most defensive, thanks to stronger balance sheets, Kum said.  
 
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GRAPHICS - ASEAN banks underperform benchmark stock indexes    http://reut.rs/1LyNEmn. 
  
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 (Reporting By Nichola Saminather; Editing by Nachum Kaplan & 
Kim Coghill) 
 ((Nichola.Saminather@thomsonreuters.com; +65 6870 3317)) 
 
Keywords: SOUTHEASTASIA BANKS/