Banks record second quarter of revenue decline, says CIMB Research

The 25 basis point increase in the Overnight Policy Rate (OPR) will benefit fixed deposit (FD) savers after the real rate of return on deposits will return to positive in 2018.

KUALA LUMPUR: Banks recorded a second consecutive quarter of revenue decline in 3Q18 (-0.8% on-year), says CIMB Equities Research.

It said  on Thursday at the topline, net interest income slid by 2.2% on-year in 3Q18 under the weight of margin contraction arising from stiff deposit competition. 

Also, non-interest income fell by 7.7% on-year in 3Q18 owing to weak investment and fee income. The lower revenue was the main drag on 3Q18 core net profit growth, which only came in at 2% on-year vs. 6.3% on-year in 2Q18.

“In light of the lower revenue, banks’ 3Q18 net profit growth was primarily supported by the 15.3% on-year decline in loan loss provisioning (LLP) and 2.8% on-year drop in overheads.
However, we forecast an upturn in the LLP trend in 4Q18,” it said.

CIMB Research said Malaysian banks’ 3Q18 net profit was in line with its and market expectations as the total annualised net profit was only 0.9% below its projection and the Bloomberg consensus estimate. 

Among the banks, only RHB Bank turned in better-than-expected 3Q18 financial results.

“If revenue remains weak, our net profit growth estimates could see downside risks. We project net profit growth of 8% in 2019 (7.2% in 2018), underpinned by the projected expansion of 5.2% in net interest income and 6.7% in non-interest income. 

“Cost-wise, we forecast an increase of 5.5% in overheads and 0.7% in loan loss provisioning in 2019. Maintain Neutral due to potential earnings risks,” it said.

CIMB Research said the declines in the sector’s revenue for two consecutive quarters in 2Q18 and 3Q18 underscore a challenging environment for banks’ topline growth due to pressure from margin erosion and weak fee income expansion. 

“LLP remained low in 3Q18 but we expect this to bottom in the next one to two quarters. In view of the concerns for topline growth and the expected upturn in credit cost cycle, we retain our Neutral call on banks. 

“The appeal of banks lies in the attractive CY19F dividend yield of 4.1% for the sector vs. 3.4% for the market. RHB Bank remains our top pick for the sector,” it said.