Will Maybank follow suit to raise its base rates?
KUALA LUMPUR: Despite the banking sector’s earnings weaknesses in fourth quarter 2015 and 2015, the banking system is still sound, according to Affin Hwang Capital.
“We believe that all is not gloom for our banking sector, which saw net earnings declining by 1.2% in 2014 and 4.3% in 2015, but on a normalised basis, earnings have been holding up well.
“This we believe, is attributable to our sound and robust banking system,” Affin said.
Affin said the banking sector’s 2015 normalised net profit held up well - relatively flat year-on-year (yoy) and in-line with both Affin and market expectations.
This was possible as the banking sector’s 2015 normalised operating income had remained supportive and robust, at RM63.2bil underpinned by both normalised non-interest income in 2015 of RM18.5bil as well as fund-based income of RM44.6bil.
Affin said the weaknesses in banking sector’s earnings in 2015 and were mainly driven by kitchen-sinking exercises, normalisation in credit costs, higher operating expenses and net interest margin pressure.
“We are of the view that the banking sector remains sound, and continues to exhibit good asset quality, ample liquidity and a well-capitalised balance sheet.
“Meanwhile, we believe that the earnings downgrade cycle has peaked, and that the banking sector is on its way for a much stronger earnings growth trajectory in 2016-18 estimates. In this earnings season, the market had not cut forecasts significantly on the big banks namely Maybank and CIMB,” it added.
Affin believed that banking sector was poised for a recovery, hence, it forecast a sector normalised earnings growth of 3.5% yoy in calender year 2016 estimate (driven largely by a decline in operating expenses) while for 2017-18 estimate, it forecast an earnings growth trajectory of 7.5% and 5.8% respectively.
It added that an accommodative monetary policy in the system, supportive domestic demographic trends and ample infrastructure projects in the pipeline should continue to be in favour of the banking sector.
The research house has maintained an “overweight” on the banking sector while its top picks are Public Bank Bhd
, Alliance Financial Group Bhd (AFG) and CIMB Group.
“We note that the overall sector valuations for banks in 2016 remain fairly attractive at a 1.30x P/BV multiple against the 3-year average of 1.5 times, while a potential turnaround in the global economy, recovery in asset/commodity prices and the ringgit should henceforth, bring back confidence to our economy,” Affin said.
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