Airline:Caught in a pincer

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Higher crude oil price assumptions... Our regional oil and gas analyst Itphong Saengtubtim is raising his crude oil price assumptions by US$15-20/barrel to US$60 in 2009, US$75 in 2010 and US$80 in 2011(Figure 1). The new price assumptions are based on: (a) continued recovery in global economy; (b) US dollar weakness; (c) speculators buying commodities; and (d) continued tight supply from both OPEC and non-OPEC producers. …and jet fuel prices too. We will eventually factor into our airlines’ earnings models US$5-10/barrel increases in our jet fuel price assumptions to US$70 in 2009, US$85 in 2010 and US$90 in 2010 (Figure 2). The size of the revision for jet fuel is lower than the revision for crude oil because of the sharp reduction in crack spread. Our previous crack spread assumption was US$20/barrel, which we now trim to US$10. The crack spread has narrowed significantly from a high of US$45/barrel in mid-2008 to just US$6-7 currently, as demand for jet fuel sags under the weight of poor aviation demand and capacity cutbacks by airlines (Figures 3 and 4).

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Be cautious into 3Q. 1Q09 results of the six banking stocks we cover were generally in line, with combined net profit down 2.1% QoQ and 13.1% YoY. However, the weak 1Q09 GDP suggests growing stress in system loans over the coming months. We remain cautious on banks’ profits, especially from 3Q09. Underweight the sector. 1Q down a sharp 13.1% YoY. Other than AMMB’s positive surprise, results were generally in-line. The combined net profit of our banking universe was flattish QoQ but fell a sharp 13.1% YoY on lower treasury and FX income and higher loan loss provisions. Net interest income expanded, but the weak equity market continued to affect brokerage income, which contracted for the 5th to 6th consecutive quarter. Some signs of stress. Domestic loans continued growing at most banks. QoQ loan growth at the major banks (Maybank, CIMB Bank and Public Bank) outpaced system growth. Some loan segments, however, have begun showing stress. Domestic NPL saw upticks in the consumer (mortgage, autos) and working capital segments. Net NPL ratios continued to trend down due to the expanded loans base. Earnings to contract. There were no major revisions in our individual earnings forecasts except for AMMB (FY09: +16%, FY10: +7%). Our combined net profit forecast was upgraded by a marginal 0.1% for 2009 and 0.7% for 2010. We expect sector earnings to contract 9.9% in 2009, before recovering to 6.8% growth in 2010 (previously -10.1%, +6.1% respectively). This excludes further impairment in the value of long-term investments, merger costs and other one-offs. Asset quality concerns. 1Q09 GDP (-6.2% YoY, -7.7% QoQ) should be the weakest, suggesting that the worst may be over. However, we expect economic recovery to be slow, with real GDP to return to the 3Q08 high only in 4Q10. There is a 3-6 month interval from GDP trough to NPL peak. Hence, banks are set to report weaker profits on rising NPLs and higher credit charges from 3Q09. Mainly Sells. Against regional peers, the larger Malaysian banks are pricey. The current liquidity driven market has pushed valuations up but prospects for a strong economic recovery stay hazy. Sell into strength.

Bank NPLs yet to peak. Underweight

Airline:Caught in a pincer

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