Asia has been one of the main hitting points of the recent market turmoil, not only do asset prices go down, but asset quality is also being affected by the sudden and vigorous downturn. Macquarie Research warns that the first order impact on banks’ revenues might have been discounted with the falling share prices. The second order impact on asset quality would be the key theme for the next 12 months. If there were no “normalization” in the near term, bank’s asset quality, growth, and liquidity or funding ability would all be affected.
Macquarie noted that many banks were making the mistake of regarding the recent market volatility as “noise” and just continue with their usual business, focusing on volume and growth and cost efficiency improvements. The report explains that the pace and magnitude of the deterioration across markets (credit, foreign exchange, equity, and commodities) is just too much to ignore. According to Macquarie’s research, it is impossible to believe that the recent market turbulences including the fall in commodities will not have a negative impact on asset quality of banks.
However, banks seem not to be taking any action to react to the market. The banks are “behind the curve” to adjust their cost given the slower growth environment. “While all leading indicators point to slower volume and topline growth, banks are reluctant to shift their strategic focus towards cost efficiency improvements. While costs are easier to manage than revenues, we expect to see negative operating leverage for some banks going forward given the reluctance to adjust to a lower growth environment,” says the report.
The firm will look for the followings in banks for investment in the next twelve months:
The firm would prefer low-growth and low-risk dividend stocks over topline growth focused banks. They remain constructive on Singapore banks with them turning into low-growth dividend stocks over the next few years. However, they remain guarded on Malaysia banks and expect further pressure on RoE. BM