Under the proposal, Tier-1 capital shall consist mainly of common stock & retained earnings. This would exclude innovative or non-innovative capital, which would be folded under Tier-2 capital. Also, minority interest & intangible assets (such as goodwill) would no longer be included.
By excluding hybrid capital, many of Malaysian banks would fall short of the 8% Tier-1 capital ratio requirement. Credit Suisse estimated the Tier-1 capital ratio of Malaysia banks to be as well as: PBB (5.6%), Maybank (5.8%) and CIMB (6.7%). If retained earnings for FY2010 to FY2012 are included, the Tier-1 capital ratio would rise slightly to PBB (5.8%), Maybank (6.9%) and CIMB (7.4%).
This means that Malaysian banks would soon be raising capital in order to comply with the higher Tier-1 capital ratio requirement. In addition, the higher capital requirement would obviously depress the ROE & overtime this would impact on bank valuation. As such, banks would no longer be able to command the kind of premium that they used to. The first casualty of this game change is the Hong Leong Bank's proposed acquisition of EON Bank. Hong Leong Bank has refused to raise its offer price of RM7.10 per share, which priced EON Bank at only 1.4 its book value (for more on this deal, go here). With this, I believe those having long positions in the banking sector should consider taking some profit on their investment.
Chart: Finance's daily chart as at 9/2/2010_11.10am (Source: Quickcharts)
Chartwise, we can see that the Finance index has now broken below the 50-day SMA line at 11000 & may soon test its 100-day SMA line support at 10660.
8 comments:
Will this affect LPI? Thanks.
Hi Cat,
LPI is not affected as it's not a bank. Nonetheless, it may have broken below the uptrend line (at RM13.80) which stretches back to March 17. However, if you were to draw a different uptrend line that begins on May 18, then that uptrend line is still intact. The second uptrend line support is at RM13.10-20. To be sure, I would take a break below RM13.00 as a bearish signal for this stock.
Your blog adds very good value with timely news flow. There's a similar article in The Economist Jan 23-29th 2010 issue which covers the subject more extensively, it also pointed out that short term trading losses in securities (unrealised)needs to be covered by Tier 1 capital.
Hi Geoff,
Thanks for the pointer. Unrealized losses & unrealized gains must be factored in when computing Tier-1 capital.
Good day Alex,
Happy early CNY to you before I forget.
Can you offer some insight to Premium Nutrient and Mulpha International?
Hi Solomon,
Thank you. Happy new year to you & your family.
Mulpha is drifting lower, with support seen at RM0.40-42. The present selling is probably being carried out by shareholders who do not wish to sink in any more funds into this stock, as called for by its 2-call Rights Issue of 1-for-1 at RM0.40 each.
Mulpha's financial performance has not been exciting for a long while. Its attempt to join the fray to acquire EON Bank strikes me as a desperate & silly move.
Premium's financial performance is equally as unexciting as Mulpha's. However, it differs from Mulpha from the technical perspective as Premium looks quite determined to challenge its strong resistance at RM0.35-36. While it had successfully overcome that resistance twice, it failed to stay above it. If it can succeed to overcome this resistance, it may test its next resistance at RM0.45.
Hi Alex,
Gong Xi Fatt Cai & Happy CNY 2 u n your family.
Cheers,
surewin1woh.
Hi surewin1woh,
Thank you. Gong Xi Fatt Cai to you & your family too.
May the Year of the Tiger be as kind as the Year of the Ox!!!
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