Will Maybank follow suit to raise its base rates?
KUALA LUMPUR: CIMB Equities Research is retaining its Overweight call on banks, premised on the potential re-rating catalyst of expected recovery in earnings per share (EPS) growth in 2016 and attractive valuation/dividend yields for most banks.
“We believe the expected slowdown in 2016 loan growth would be partly cushioned by the rise in base rates (BRs), which would help the banks to minimise margin contraction. RHB Bank remains our top pick,” it said on Friday.
CIMB Research said after plateauing in January-April 2016, the industry’s loan base grew by 0.7% on-month in May 2016.
On the on-year basis, loan growth inched down from 6.3% on-year in April 16 to 6.2% on-year in May 2016.
The growth in major loan segments eased – from 6.3% on-year in April 16 to 6.2% on-year in May 2016 for household loans and from 5% on-year to 4.5% on-year for business loans.
“We see prospects for recovery in loan expansion in 2H16, given the better GDP growth projection of 5.2%. For now, we maintain our loan growth projection of 7%-8% for 2016,” it said.
To recap, on May 17, 2016, Public Bank raised its BR by 10 basis points (bp) but cut the housing loan (HL) spread to maintain its HL rate. As such, the industry’s BR increased by 2bp on-month to 3.81% in May 16 but the average lending rate fell by 5bp on-month to 4.55%.
The BR hike would catalyse banks’ earnings, as it would lead to higher interest income earned from existing variable-rate loans, which accounted for more than 50% of total loans for most banks.
“We think that loan growth will trough soon given the improvement in leading loan indicators,” it said.
CIMB Research pointed out the on-year growth leading loan indicators turned positive in May 2016, with 8.9% on-year for applications and 2.2% on-year for approvals, compared to declines of 6% on-year and 17.2% on-year respectively in April 2016.
These were underpinned by the 9%-12% on-year rise in working capital loans and the growth in applications of residential mortgages rebounding to 7.1% on-year in May 2016 versus the 3.1% on-year drop in April 2016.
Gross impaired loan (GIL) ratio rose marginally from 1.6% in April 2016 to 1.65% in May 2016 (versus its projection of 1.8% at end-16).
In May 2016, GIL increased by RM766.5mil (US$190.5mil), mainly due to the rise of GIL for construction (+RM301.5mil/+US$74.9mil) and working capital (+RM344.2mil/+US$85.6mil) loans.
The steeper increase in individual assessment makes us believe that the rise in GIL came primarily from the corporate loan segment. Meanwhile, loan loss coverage fell from 93.9% in April 2016 to 91.2% in May 2016.
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