Buying interest seen in banking stocks


BY P.W. THONG

CURRENT investor uncertainty over impending changes to the interest rate framework and implementation of a deposit insurance scheme can provide buying opportunities ahead of the next set of bank results reporting season in May. 

JP Morgan said in a report that on the backdrop of stronger Gross Domestic Product (GDP) numbers, the positive earnings momentum among banks should increase with higher loans growth as demand broadens out. 

It has forecast loans growth within the banking Industry to be in the region of 8% to 10% this year compared with 5% last year. 

In addition, stabilizing interest margins, higher other revenue streams such as increased fee income from better capital market conditions and transactional income, and lower loan loss provisions, should also contribute to a better set of earnings, the report said. 

“We maintain our positive outlook on the banking sector. In our view, the country's improving economic fundamentals and returning foreign investor confidence of Malaysia will form the basis of our more optimistic investment recommendation for the sector over the next 12 months,'' JP Morgan said. 

It said the banking sector, being the largest component of the KL Composite Index (CI) at a 24% weighting and being relatively liquid, had enjoyed the bulk of the increased foreign funds inflow into Malaysia. 

This was evidenced by the strong performance of the finance index, which had risen 14.2% year-to-date, compared with the KLCI's gain of 11.4%.  

“In our view, the sector's rally in the first quarter can be attributed to improving confidence in both the domestic economic outlook and the new Malaysian leadership,'' JP Morgan said. 

However, in recent weeks, share prices had drifted sideways as investors awaited the outcome of the upcoming UMNO elections and follow-through implementation of pre-election initiatives. 

Specifically for the banking sector, they are also awaiting announcement on the new interest rate framework and implementation of the deposit insurance scheme. 

It noted that investors had preferred to stay on the sidelines until uncertainty over the new interest rate framework was lifted.  

The key concern is that banks could potentially experience an interest margin squeeze, should lending rates adjust downwards as a result of the new framework while deposit rate do not adjust accordingly. 

JP Morgan viewed that concerns had been overplayed.  

It reasoned that the intention to introduce the new interest rate framework was already highlighted in Bank Negara's financial masterplan three years ago, as the current framework was a stop-gap measure to tide the banks through the financial crisis. 

“Although the banks did enjoy extremely wide interest spreads (as a result of this framework), this was offset by the huge carrying costs of non-performing loans (NPLs). As the banks addressed the issue of NPLs in their books, the wide margins have been competed away,'' the report said. 

JP Morgan also said an implementation of the deposit insurance scheme by Bank Negara would likely result in banks absorbing additional costs, as banks would not be allowed to pass these added costs to the depositors either explicitly or implicitly. 

It noted that Bank Negara's intention was to introduce differentiated premiums, which would reward banks with sound risk management framework and better credit ratings. 

However, the cost associated with deposit insurance will depend on the structure Bank Negara plans to adopt, such as whether it is funded or not, and the level of deposit protection which it will want for consumers. 

Currently, the central bank guarantees all deposits in the system.  

“Hence, we believe that Bank Negara will still want to ensure a high degree of protection for the consumers even when introducing deposit insurance.  

“Thus, the key issue is how much Bank Negara will want to subsidise the banks when determining the premiums to be paid,'' JP Morgan added.

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