50bp NIM erosion projected for 2011 -- The main highlight of the call was management's 50bp NIM erosion guidance for 2011. Recall that Bank Asya successfully increased its NIM by 55bp qoq to 5.2% in 4Q10. However, management said that the NIM contraction guidance was with respect to the FY10 average (4.8%) and not the YE10 level. (source)
Lower profit sharing rates -- Bank Asya's sequential NIM improvement in 4Q10 was an outcome of reduced profit sharing rates in the final quarter. The Bank had tweaked the profit sharing scheme for TRL deposits from 80%:20% to 75%:25%.
The move seemingly paid off and the Bank's blended TRL time deposit yield improved 1pp qoq to 7.4% in 4Q10. However, the current level is considerably lower compared to conventional peers. We acknowledge the fact that participation banks have loyal deposit bases due to religious considerations. Nevertheless, the scope for further improvement in TRL deposit rates seems limited for the Bank. In response to our query, management said we might see a slight increase in deposit yields going forward.
In contrast to TRL deposits, the Bank can still deliver lower deposit costs on the FX side. According to our calculations, Bank Asya's blended FX time deposit rate came down by 80bp qoq to 3.7% in 4Q10, which is still considerably higher than the sector average. Management said that the profit sharing scheme for short-term FX loans was changed from 75%:25% to 65%:35%. We expect an improvement on the FX deposit yields frontever, its impact on the NIM should not be as high as that on TRL deposit yields, due to FX deposits 31% share in total deposits.
Flat non-cash fees -- Management prioritises profitability over growth in non-cash lending. Non-cash loans, and fees generated thereof, are expected to remain flat yoy in 2011. Responding to our question, management said they targeted to sustain their c.1.6% commission rate for non-cash loans (sector: c.0.6%). If this level fails to be sustained, non-cash loans might decline, as switching to cash loans with lower risk weightings would be more profitable, considering CAR constraints.
CAR expected to be flattish in 2011 -- Bank Asya guides for 20% asset growth and 25% loan growth. Taking into account the 50bp NIM contraction guidance, no significant ROE improvement should be in the cards for 2011. If so, sustaining the CAR ratio at 13% levels seems difficult to achieve. Management's explanation was that they intend to decrease the share of corporate loans (48%) in the loan book and give more weight to SME (36%) and consumer credits (8% ex credit cards). Since collateralisation of SME and consumer loans is higher than corporate loans, they have lower risk weightings. Hence, achieving growth in these loan classes may provide some cushion to the CAR. Moreover, Bank Asya said that the yields they get from SME and consumer loans are higher than their current blended loan yield.
In contrast to TRL deposits, the Bank can still deliver lower deposit costs on the FX side. According to our calculations, Bank Asya's blended FX time deposit rate came down by 80bp qoq to 3.7% in 4Q10, which is still considerably higher than the sector average. Management said that the profit sharing scheme for short-term FX loans was changed from 75%:25% to 65%:35%. We expect an improvement on the FX deposit yields frontever, its impact on the NIM should not be as high as that on TRL deposit yields, due to FX deposits 31% share in total deposits.
Flat non-cash fees -- Management prioritises profitability over growth in non-cash lending. Non-cash loans, and fees generated thereof, are expected to remain flat yoy in 2011. Responding to our question, management said they targeted to sustain their c.1.6% commission rate for non-cash loans (sector: c.0.6%). If this level fails to be sustained, non-cash loans might decline, as switching to cash loans with lower risk weightings would be more profitable, considering CAR constraints.
CAR expected to be flattish in 2011 -- Bank Asya guides for 20% asset growth and 25% loan growth. Taking into account the 50bp NIM contraction guidance, no significant ROE improvement should be in the cards for 2011. If so, sustaining the CAR ratio at 13% levels seems difficult to achieve. Management's explanation was that they intend to decrease the share of corporate loans (48%) in the loan book and give more weight to SME (36%) and consumer credits (8% ex credit cards). Since collateralisation of SME and consumer loans is higher than corporate loans, they have lower risk weightings. Hence, achieving growth in these loan classes may provide some cushion to the CAR. Moreover, Bank Asya said that the yields they get from SME and consumer loans are higher than their current blended loan yield.
However, this strategy prompts precise execution by the management to prove successful.
TRL16mn discretionary reserves -- Management says these reserves are not set aside for any specific reason. However, one should also consider that the Bank has TRL703mn restructured loans. We believe that these reserves may also be useful in 2011, if the CoR rises.
All in all -- Our 11E NI estimate of TRL278mn for Bank Asya is 8% below Bloomberg consensus. We were factoring in c.30 NIM erosion for 2011, which now remains milder than the management guidance. We will be making the necessary revisions to our estimates. Meanwhile, some estimates in the market that were based on the assumption of a NIM improvement may also be revised downwards. That said, Bank Asya has been a glaring laggard, having underperformed the index by 48% yoy. We may consider further slippage in the share price as an opportunity to accumulate the stock, going forward. For now, we stick to our HOLD call.
