Banking Sector - Well-positioned to absorb possible lower vehicle prices OVERWEIGHT

- Press reports highlight possible changes to tariff and tax structure for auto vehicles. The press recently reported there may be a review of tariff and tax structure for the auto industry, which could result in a cut in excise duty on vehicles.

- Banks are generally not overly concerned. If car prices were to decline, we foresee some impact to loan loss provisioning for the banks. Most banks hinted that any adjustments to loan loss provisioning, if required, are not expected to be substantial given that auto impaired loans are low. In addition, floor stocking financing to car dealers do not make up a substation portion of working capital loans.   

- Average industry LGD rate for auto impaired loans is already high at 48%. The loss given default (LGD) rate for the banking industry for vehicle loan portfolio averaged 48% in 2011, meaning that for example, RM100k auto loan if in default, will lead to an average loss of RM48k.

- Worst case scenario – higher LGD by 20ppt? We foresee car prices to be adjusted downwards on a gradual basis of between 5% to 10%. Our checks with the banking industry indicate that most banks also expect car price declines, if any to be on a gradual basis. Thus, on a worst case scenario, we expect further loss of say another 20%, on top of the already higher LGD assumption of 48% for the industry, with LGD perhaps being revised to 68%. 

- Banks’ earnings well-placed to absorb additional loan loss provisioning.  Our sensitivity analysis show that banks’ earnings may decline by 4.5% to 11.2%, on this basis. However, this is based on conservative assumptions, particularly in terms of impact to the working capital loans. 

- On a more positive note, this will also address high household debt issue. Overall we would conclude that banks’ earnings are well-positioned to take a one-off adjustment to loan loss provisioning, if required, should excise duties on cars be adjusted. On a more positive note, the banking industry believes that lower car prices will likely stimulate higher loan volume as well as lower overall household debt in the longer term.  

- Maintain overweight. In conclusion, we thus do not expect a major reaction to banks’ share prices, if there were to be any adjustments to taxes for the auto industry. We maintain overweight on the sector.     

Source: AmeSecurities