The Star Online: Business
The Star Online: Business |
- Market caught in a downward cycle
- Will budget boost the stock market?
- Bank Islam focuses on consumer financing to propel profits
| Market caught in a downward cycle Posted: 23 Sep 2011 07:32 PM PDT REVIEW: Stock markets worldwide went through yet another bloodbath, as US Federal Reserve's warning of a "significant downside risk" to the world's largest economy exacerbated fears of investors who were already jittery about the worsening eurozone debt crisis. The local stock market was sent to depressed levels, as foreign investors liquidated their assets and the benchmark FBM Kuala Lumpur Composite Index (FBM KLCI) staged a deep plunge. Shares on Bursa Malaysia started the week in the red after shedding 17.81 points, or 1.24%, to 1,413.12 points on Monday. The sell down was in line with regional trend, as a highly anticipated meeting between European policymakers and US Treasury Secretary Timothy Geithner last week failed to produce a credible solution to deal with the eurozone debt crisis. Loser trumped gainers 496 to 218 on total volume of 724.4 million shares valued at RM1.35bil. Standard & Poor's downgrade of Italian sovereign debt rating prompted yet another sell off on Tuesday, with the FBM KLCI slipping another 2.48 points to close at 1,410.64. Losers trumped gainers again at 457 to 230 on higher volume of 784.6mil shares worth RM1.42bil. Technicals were already signalling a rebound even as stocks on Wall Street were little changed ahead of a US Federal Reserve meeting to announce further economic stimulus measure and a European policymakers' assessment of the risk of default by Greece. Shares on Bursa indeed staged a technical rebound on Wednesday, as did its regional peers. Sentiment somewhat improved after a gauge of economic indicators in China signalled growth could possibly withstand the effects of Europe's debt crisis and the faltering expansion of the US economy. FBM KLCI gained 8.4 points to 1,419.04 points. Gainers beat losers 350 to 289 on turnover of 708.1 million shares worth RM1.15bil. Overnight development in the United States gave global stock markets a nervous breakdown the day after. Downward correction in the US and European markets, following a disappointing "Operation Twist," sent Asian markets to a free fall. Shares on Bursa lost 31.23 points, or 2.2%, to 1,387.81, with 802 counters registering losses and only 85 gained. Volume traded improved to 874.1 million shares valued at RM1.7bil. The Malaysian market extended its fall on Friday, following heavy losses in the US and European markets overnight amid rising fears of a possible recession in developed economies. Signs of weakness in China added fuel to investor fear, as the country's Purchasing Manager Index (PMI) signalled that the manufacturing, the economy's growth engine, could contract for a third month in September. The preliminary HSBC China Manufacturing PMI fell to 49.4 in September from a final reading of 49.9 in the preceding month. A reading below 50 indicates contraction. FBM KLCI ended the week at 1,365.94, shedding 21.87 points from Thursday, with 187 gainers and 624 losers. Turnover stood at 848.31 million shares valued at RM1.85bil. Outlook: The International Monetary Fund and World Bank's constant reminder that the global economy is now in a new danger zone and that there's a spreading crisis in Europe will serve to cap risk appetite among investors. "The tone is very pessimistic; there are still many uncertainties surrounding the global economy and investors' confidence remained dampened," a dealer tells StarBizWeek. "I'm not sure who dares to enter the market now given the extremely bearish momentum ... everyone's thinking of selling," he adds. After breaking the psychological support of 1,400 over the week, analysts reckon there to be further downside risk for shares on Bursa. The next retracement support for FBM KLCI is tagged at 1,327-1,344, while the next downside target should be the 1,300-psychological support level. "Yes, there's a cheap sale in the stock market, but the meltdown will continue," an analyst says. "It's not yet time to bargain hunt. Investors should cash out on rebound and wait for the market to be more stable," he adds. With a dearth of fresh leads from the local economy, developments in the United States and Europe will continue to guide the market direction. Foreign sell down of ringgit-denominated assets are expected to continue, and that could bring down the local markets in general, and ringgit is expected to weaken further against the US dollar. |
| Will budget boost the stock market? Posted: 23 Sep 2011 07:30 PM PDT RETIREES Peter Tan, 60, and Anand Raj, 58, have been spending the last three weeks in a local securities company monitoring the electronic stock board, and trying to calculate their losses from their respective equities portfolios. Both men, who claim to have lost at least RM10,000 each as a result of the recent stock market carnage, are hoping to find a way out to minimise or recoup their losses. "It's unfortunate I couldn't get out in time," Tan says. "I can still hold on to some of the good stocks that I have and wait for them to recover. But for some others, I just want to sell at the right price' to minimise my losses as much as possible," Tan says. His friend Anand agrees, saying: "Hopefully, our stocks will rebound soon. Much of our investable money is now tied down and we can't carry out new investments. "But really, even if we have the money in hand now, I wouldn't dare to invest because the market is so volatile. We're not sure how much more it will fall. There's a lot of uncertainties, so we are more cautious, as we certainly don't want to get burnt again." Indeed, the mood is sombre at this juncture, given the ongoing debt crisis in the eurozone and persistently weak economic fundamentals of western developed nations, especially the United States. Tan and Anand's response somewhat underscores the prevailing sentiment in the equity market, but like many they are hoping that a pre-budget rally could act as a balm to soothe their losses. Many will be keeping their fingers crossed that initiatives in Budget 2012 could provide a catalyst for the local market, but some financial experts are not too optimistic. Indifferent view Budget measures often act as fundamental drivers for the market. Technical analysis show the Malaysian equity market to be oversold and this essentially means the stock market is currently trading at very attractive valuations. But indicators, according to experts, still suggest a bearish momentum for the broader market over the short to medium term. Unless the budget offers measures that will help navigate Malaysian equities through the global market nervousness, further downside is expected as the local stock market, like its regional peers, still has to grapple with the effects of nagging fundamental problems in the global economy. "Buying interest is unlikely to pick up anytime soon given the prevailing mood in the market and I'm not sure about the upcoming Budget 2012 being a game changer," an analyst from a foreign research house tells StarBizWeek. Budget 2012 will be tabled by Prime Minister Datuk Seri Najib Tun Razak in parliament on Oct 7. Najib has promised that the budget would be an "inclusive and people-centric scheme that would spur Malaysia towards a high-income economy by 2020". "There could probably be some boost to the local market in the run up to the budget announcement, but I don't expect to see any significant movement," he adds. His sentiment is shared by most analysts. CIMB Investment Bank head of equity research Terence Wong says: "Even if there's a pre-budget rally, it would likely be short-lived, and would likely happen a day or two before the budget is announced." "While we're still positive on the local stock market over the long term, we think there's probably further downside ahead, short-term wise," Wong explains, adding that his team is looking at the benchmark stock index, FTSE Bursa Malaysia (FBM) KLCI, trending towards a range of between 1,280 and 1,350 points in the short term. The FBM KLCI closed on Friday 21.87 points lower at 1,365.94 points, representing a loss of 14% from this year's high of 1,594.74 points on July 8. Traditionally, in the run-up to the budget, the Malaysian stock market would rally. But this time round, that tradition could well be broken, as depressing external factors are casting a shadow on any positive measure that could be announced. "We struggle to see how the budget can have any significant impact on the market," OSK Holdings director/head of research Chris Eng says. For one thing, the downtrend of the market is unlikely to be reversed, at least not in the short term. Even by trying to be as positive as he could, Eng, by assuming a "non-recessionary environment", thinks the FBM KLCI could stabilise within the range of 1,350-1,378 points. But based on current trends, Eng says "the market seems to be pricing in a recessionary environment", which means further downside ahead. OSK Research on Friday published a report stating that the FBM KLCI could be moving towards 1,335 points soon. The researh house also had a report stating its expectations of a moderate hike in tobacco duty in the budget, while the brewery sector would likely be spared. With that, it has a "neutral" stance on the tobacco industry, while maintaining an "overweight" call on brewery. In any case, Eng says the potential wage hike for civil servants that could be incorporated in the "people-friendly" Budget 2012 will remain supportive of consumer spending and benefit the domestic economy. The bull is dead Perhaps one thing will not change. A "people-friendly" budget means politically-linked stocks will likely gain this budget season, as Affin Investment Bank head of retail research Dr Nazri Khan sees it. But Nazri says any so-called rally by the broader market will likely be muted, as huge selling resulting from an increasingly gloomy global economic outlook will continue to overwhelm any feel-good factor in the domestic market. "If past trends are of any indication, the selling climax will happen in October," Nazri says. "From then on, we will have to see how stable the global market is to chart the next course," he explains. Every action that global policymakers take to resuscitate the world economy seems to have failed to re-ignite investors' risk appetite. "The bull is dead. Any life' is merely a rebound within a downtrend, giving investors, who are still stuck with their bad investments, an opportunity to come out of the market and cut losses," a local analyst says. "I don't think the market is talking about the upcoming budget at all. It is more concerned about what's going on in overseas markets, and if the market did indeed rebound, that would merely be a technical correction of an oversold market that so happens to coincide with a so-called pre-budget rally," he explains. Echoing a similar sentiment, Maybank Investment Bank head of retail research Lee Cheng Hooi expects further "blood-letting" by the market in the days ahead, especially since the FBM KLCI broke through a critical level of 1,400 over the week. He had earlier expected a mini pre-budget rally to take place. A worsening global market outlook and US Federal Reserve's recent warning of "significant downside risks" nevertheless threw his earlier judgement out of the window, and Lee is now expecting a continuous slide of the FBM KLCI towards the 1,249-1,344 range. "Markets are very bad globally. We're seeing a meltdown here," Lee explains, adding that the chance of a pre-budget rally is extremely remote. Sell on rallies and keep a larger cash pile for now, is what he advises, amid the present market turbulence. Related Stories: |
| Bank Islam focuses on consumer financing to propel profits Posted: 23 Sep 2011 06:37 PM PDT Bank Islam, which embarked on a transformation programme following steep losses in 2005 and 2006, is set on an aggressive growth path. With a targeted financing growth of 18% this year, the business will be led by consumer financing, managing director Datuk Seri Zukri Samat tells StarBizWeek. However, the long term strategy is to balance 70% of its exposure to consumers and the rest to business entities especially among high-end small and medium enterprises (SMEs). Underscoring this push for lending, the financing to deposits or lending ratio, which is currently at 55% , will be raised to 70% by 2013. Realistic targets? Drawing from the industry's projected loans growth of 11%-12% and Bank Islam's financing growth for the first six months at 8.6%, Zukri is positive of reaching the 18% target. "Financing growth for July and August was encouraging," he notes. In terms of asset size, Zukri says deposits for the first six months of this year are allowed to dip in order to bring up the financing to deposit ratio which is below 50%. "We allowed it to dip on purpose," he says. "Some of the deposits have negative carry. We price ourselves out to avoid hot money and those depositors that look for high deposit rates and are not loyal to the bank." Acknowledging the uncertain operating environment, Zukri notes that many of the bank's forecasts are based on an inhouse growth forecast economic growth of 4% to 5% for 2011. Priority on domestic operations While inorganic growth and expansion into certain markets remain an option, Bank Islam's immediate focus is on strengthening its domestic presence. "It's a market we know. We are also aware of our strength and weaknesses. "We know the credit behaviour especially in distressed situations. We are well-equipped to deal with such situations," says Zukri who formerly helmed Pengurusan Danaharta Bhd, the national asset company set up after the 1997 Asian financial crisis to restructure debt-ridden companies. Another area being emphasised is non-fund based income for which earnings contributions rose from 5% in 2006 to 12% in June this year. The target over the next three years is for this ratio to hit 20%. The drivers of this income will be mainly from new consumer products such as TAP mobile banking. Since its launch in October last year, it has attracted 150,000 customers. Debit cards which were launched six months ago already have 350,000 subscribers. In wealth management, the bank has started selling unit trusts at its branches, recording sales of RM6mil a month compared with just RM1mil a few years back. In addition, Bank Islam, which is the only Islamic bank on the Securities Commission's approved advisor status list, intends to leverage on this status to grow its corporate investment banking business. "We have done a couple of listings such as for a flight training school, APFT, and Focus Lumber," says Zukri. "We have a few mandates in hand with a submission for listing going in next week for a manufacturing company in Selangor." In the sukuk area, the bank has been appointed lead arranger for a RM5bil Islamic bond issued by a government-linked company (GLC). Bank Islam has a few more mandates that are in the pipeline. Treasury is another area of focus. "The team has doubled and income from foreign exchange transactions has gone up by 50%," says Zukri. On lending, emphasis is placed on priority sectors that have high growth potential and are resilient to any downturn. These are sectors such as oil and gas and palm oil while areas under the Economic Transformation Programme such as healthcare and education are also considered. Caution in lending, however, is exercised in the personal financing segment where only selected segments of the population are eligible or those working at GLCs and selected established institutions with repayments via salary deductions. With a current account savings account (CASA) ratio of 44%, Bank Islam is well-positioned to enjoy higher margins. One strategy to attract these funds is to open branches in new and vibrant townships, taking first mover advantage, in places such as Putra Heights and Saujana. The bank has strong ties with universities, enabling it to open branches in campuses. Demand for fixed financing Before floating rate products were introduced, the bank gave out only fixed rate financing, given the nature of Islamic banking which is based on sales contract. It realised that if the overnight policy rate goes up, margins get squeezed. In the relatively low interest rate environment at present, demand for fixed rate financing tends to decline. "That is good for us," says Zukri. "We pay less on our cost of funds on floating rates but still benefit from our legacy portfolio which is mainly comprised of fixed rates." He thinks interest rates are not expected to move until the middle of next year. In a stable interest rate environment, it is still good to offer floating rates, he says, adding that there is part of the bank's risk strategy to manage its books. Ready for Basel III? The adoption of Basel III will be effective by 2018 and involves the set of liquidity, capital and leverage ratios. In terms of liquidity, the bank's financing to deposit ratio is still low and its exposure to marketable securities is significantly skewed to government and AAA papers. The bank's risk weighted capital adequacy ratio is high at 16% as at June 2011. Banks are supposed to hold 6% of Tier I or core capital and 2.5% of a capital conservation buffer. At Bank Islam, 100% of its capital is Tier I. It can opt to raise Tier II capital for its business expansion and mergers and acquisitions deals. "A bank can leverage up to 33 times of its Tier I capital. Bank Islam's Tier I capital is RM2.26bil which allows us to grow our assets to about RM75bil." The bank's assets today amounts to only RM28bil. Rising from the ashes When Zukri first stepped in five years ago, Bank Islam had incurred a loss of RM1.8bil, its entire shareholders' funds were wiped out and its cost income ratio was high at 65%. The biggest problem stemmed from the poor credit standards and culture at the Labuan outfit which was exposed to the Middle East, Bosnia, Tanzania, Scotland, Tanzania and South Africa - places where the bank may not have a strong understanding of the business environment. Decisions were made in Labuan, often without the proper checks and balances. Following the announcement of a RM500mil loss in financial year (FY) 2005, Bank Islam engaged three independent parties to work out what should be the reasonable provisions for FY2006. They all came up with almost the same figure to write down which was RM1.7bil. By then, the bank had a deficit in capital of RM200mil. "I could not sleep," recalls Zukri. And then former prime minister Tun Abdullah Badawi was quoted in the papers as saying "do it (turn around Bank Islam) quick and fast." Under a turnaround plan from June 2006 to 2009, the bank had to recapitalise and restructure the balance sheet, revamp its IT infrastructure, underatke transformation for both business and operations, rationalise costs and develop its human capital. "We managed to get Lembaga Tabung Haji and Dubai Investment Group (DIG) to come in," he says. DIG injected RM828.22mil with another RM186.35mil from Lembaga Tabung Haji. Non-performing financing (NPFs) was a major issue. By February 2007, the NPF ratio had peaked to 13.6% based on a six-months classification. "We explored the possibility of carving out certain NPF assets. After six months, the NPFs were brought under control," says Zukri. "After a year, the situation had turned around. Given the good recovery rate, we decided not to proceed with the carve-out plan." |
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