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OSK: Banks likely to face immediate and medium-term challenge

Posted on: June 5, 2009

Bernama – Friday, June 5

KUALA LUMPUR, June 5 (Bernama) — OSK Equity Research, which has maintained a neutral call on the banking sector, said the recent share price appreciation had lifted the valuation of most banking stocks to near their post financial crisis historical mean price-to-book value (PBVs).

“Although, we believe that the share prices of banks will continue to edge up in tandem with the rising market, the risk-to-reward profile is certainly turning towards a downside bias.Banks are still likely to face immediate and medium-term challenges,” OSK said.

Among the challenges are lower loans growth, potential margin pressure as competition intensifies for the best credit, and rising non-performing loans and hence loan loss provisions,” it added.

OSK said that in the last two economic downturns — the Asian financial crisis 1997/98 and dotcom bubble 2000/2001 — banking stocks tended to bottom at least a quarter ahead of the gross domestic product (GDP) trough.

“Our earlier expectations were for the GDP to trough in the second quarter. As such,we had only expected a recovery in stock prices towards the end of May to June,” it explained.

However, OSK said, the aggressive stimulus efforts on a global scale have helped to fast-track the expected recovery.

“Based on our latest in-house expectations, the first quarter’s -6.2 percent GDP represents the trough, with economic recovery coming through in the fourth quarter,” it said.

OSK also said despite the steep plunge in the country’s first quarter GDP, domestic banks continued to reflect relatively resilient asset quality.

Although NPLs were a lagging indicator, several factors had contributed to the stronger than expected asset quality, it said.

Among these were a pro-active assessment and restructuring of loans,a record low interest rate environment, ample liquidity in the system, relatively low corporate leverage, lower exposure to lumpy corporate loans and the absence of a broad base property bubble.

“Given that banking stocks have outperformed the market, we believe that investors should turn more cautious as NPLs may not have peaked,” OSK highlighted. –BERNAMA


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