This is the latest report from Credit Suisse where it valuates Malaysian banks after the implementation of Malaysian Financial Reporting Standards 9 (MFRS 9).
With the recent rise in fuel prices albeit the whole world talking about major drop in crude. The chatter came onto social media saying that the government is rigging our petrol prices which makes it rise more than what it should.
Our analysis from historical data might disappoint you that it isn’t rigged. The chart below shows the plot from our expectation vs government determined pump prices.
As you can see from the plot, the variation was huge when the pump prices were determined monthly but the chart narrow its differences when the weekly mechanism came into place. The chart below shows RON95 determined by the government versus Brent instead.
Looks like the culprit is still our currency where Singapore Dollars are just getting stronger day by day. Our fuel prices are still determined using Mean of Platts denominated in SGD rather than USD. Just a quick disclaimer, our expected RON95 computed might have some discrepancies as we take our prices from Brent rather than Mean of Platts.
So remember this from now on, the pump prices are heavily pulled by the currency value and it gets worse if the economy of Singapore goes back to normal from their current slow growth.
Expected RON95 is calculated by using:-
RON95 price (last month) + (Brent price changes) + (Exchange rate changes)
= Expected Price for following month
The argument for the downgrade refers to the implementation of Malaysian Financial Reporting Standards (MFRS) 9. Somewhat similar to CET1 ratio, the provision methodology would change under MFRS 9.
It was estimated that under MFRS 9, it would negatively impact the net profit of banks in the future.
See the full report below including sensitivity analysis of respective banks.
I would try to represent this issue with simple supply and demand charts introduced in most Microeconomics 101 references. The movement in demand and supply lines always results in achieving an equilibrium price and quantity level where the market is comfortable with it.
We start ourselves in the year 2010 where the economy started rebounding after a major crisis and cheap financing is freely available to property buyers where banks are providing the longest term loan and the cheapest interest rates on the street.
Around this time the property market spike when the demand increases shifting the demand line to the right from D1 to D2. Prices spiked since the market only has the original amount of quantity to cater to the increase in demand. We can represent this in a chart like the one below.
Immediately, the housing prices raised quickly with limited quantity from P1 to P2. Looking at the market booming, developers took it as their chance to achieve more sales by providing more supply of houses. It would be ridiculous if developers aren’t catching this opportunity and that is where we see new projects started to pop out around the year 2011.
That moves the supply line to the right from S1 to S2 but prices still maintained at P2 in the short term since the property market has always delayed in adjusting since it’s rather illiquid as we can see from the chart below.
In fact, the developers would try their best to sell and provide the supply at demand price of P2 where it can squeeze the most revenue out of this property rally.
Sadly in the long term, prices would come back down to P3 to match with the long term equilibrium. Obviously this is nowhere near the ‘cheapness’ of P1 (around year 2007) but we wouldn’t likely see prices being ‘expensive’ at P2 (around year 2012) as well.
Since developers supplied the market with quantity based on P2 prices, this created a surplus when the market rebalance itself back to equilibrium. The surplus created due to exogenous pricing demand could explain a dozen or two empty properties in each project which we could clearly see it happening now.
The demand D2 line takes time to slowly creep up closing the surplus gap increasing the equilibrium price eventually which could be a factor of growing population or immigration but less likely the effect of inflation.
The situation gets a little complicated where the introduction of affordable housing increases the supply pushing the supply line from S2 to S3. Again the delay between demand creation versus supply generation present as the main culprit which causes this matter to get worse when more and more supply were added into the market.
As a matter of fact, the government can’t just scrapped the affordable housing program since it was part of the plan to allow the middle and lower income to buy houses. The plan was good and promote economic benefit but the timing was all wrong with house prices brittle as ever.
The availability of affordable housing increases the supply affecting prices of houses pushing it lower to P4 and home buyers are shocked to see a major adjustment in prices and lowered their demand towards any new property purchase. This explains the shift demand line from D2 to D3.
Prices coming down to P4 meant that it worsened the surplus on the original supply of houses initially provided between P2 and S2’s intersection. With a worsened surplus, recovery time gets extended and that is why we believe that it would remain stagnant for at least a couple of years. It takes 3 years to boom and it might take double the time to see prices moving upwards once again.
But what we fear most isn’t the problem with property prices maintaining stagnant but a recession that might appear in the near future would bring down the demand line even further creating a lower equilibrium price and once again widen the supply even more. We hope that this issue doesn’t happen but looking at how the market is currently, there aren’t that many catalyst ahead for a boom in the property sector a couple of years ago.