DBS Regional Industry Focus ASEAN Banks

Easing concerns on capital
Proposed modifications of Basel III capital and liquidity reforms soften the blow on capital impact to banks. Most positive for OCBC.
Leverage and liquidity ratios proposed but will only be fully implemented in 2018.
Top picks are unchanged – OCBC, Bank Mandiri, Kasikornbank and Maybank.

Capital rules appear more watered down. At the very least, the impact is muted compared to the original Dec 09 proposals. With script dividends, lower dividend payouts, reduced risk weighted assets and accumulation of retained earnings, we believe banks will be able to accumulate
sufficient capital to meet the necessary requirements, unless the end game is stricter than expected. However, this would depend on the ultimate definition of the Basel Committee’s Tier-1 capital ratio, which has yet to be determined. The countercyclical capital buffer proposal is due for comments by 10 Sep 10. Finalization of these rules would give a clearer picture of banks’ dividend policies and whether there is a need to raise additional capital buffer. As of now, Tier-1
capital only drops by 0.4%pt compared to 1.4%pt based on the Dec 09 proposals. Indonesia banks are not impacted by these changes.

Changes for treatment in minority interest and unconsolidated investments: Positive for OCBC. While the Basel Committee retained most of the definition of capital proposal set out in Dec 09, the treatment of minority interest and unconsolidated investments in financial institutions to
Tier-1 for other financial investments has been relaxed; this is positive for OCBC. Minority interest comprises 0.1%pts of Tier-1 capital while the unconsolidated investments take up 0.2%pts. So far, the Basel Committee has remained silent on
the grandfathering and transitional arrangements for the innovative and non-innovative Tier-1 capital instruments. From our checks, these are likely to be allowed as Tier-1 capital. If so, the eventual impact to capital for ASEAN banks
will be largely neutral; positive for Maybank and Public Bank.

Leverage ratio to be tested while liquid assets definition expanded but only due in 2018. The Basel Committee is proposing to test a minimum of 3% Tier-1 leverage ratio. Based on our estimates, ASEAN banks easily meet the 3% Tier-1 leverage ratio. The Committee expanded the definition of liquid assets composition with more details will be updated in a Sep 10 meeting. The Committee remains committed to a net stable funding ratio but proposals will be
modified and finalized by year end. Both the leverage and liquidity ratios would only be implemented in 2018.

Our ASEAN bank picks are based on fundamentals. Our picks are based on fundamental reasons and valuations and not based on the impact of capital rule changes. Top picks for the region are OCBC, BMRI, KBANK and Maybank.