Malaysian banks 'comfortably meeting' the set minimums for Basel III

The level of countercyclical buffer required will be the next closely watched milestone.

According to Nomura, Malaysian banks are off to a poor start this year, falling an average 3% YTD. Valuation wise, they trade at an average P/BV 1.7x (near their historical mid-cycle values), with an estimated ROE of ~15%.

Here's more from Nomura:

We maintain our positive stance on the sector – we believe once the election overhang is lifted, banks should see a positive re-rating.

Basel III has started off as scheduled in January ’13. Given the long lead time afforded to the banks (first year CET1 requirement of just 3.5% and fully phased in 7.0% by 2019), all are comfortably meeting the set minimums.

The next closely watched milestone will be the level of countercyclical buffer required, which will kick-in starting January ’16. A comfortable long-term CET1 ratio, in our view, would be at least 9.5%, which assumes a mid-point countercyclical buffer of 1.5% and a further 1% ‘regulatory’ buffer.

Maybank was the first Malaysian bank to raise its CET1 ratio to >9% via its MYR3.66bn private placement last October. CIMB announced its dividend reinvestment programme and will raise its CET1 ratio to 10% by end-2015. Public Bank reduced its dividend payout to 45%.

We estimate the CET1 ratios of the Malaysian banks currently average c.8.8%. Given an RoRWA of c.2.0%, a low effective dividend payout and an RWA growth of 10%, we think the banks will be able to raise their capital ratios, although this would mean that near-term ROEs are likely to be capped.