PETALING JAYA: Despite subdued loan growth, banks in Malaysia are seeing favourable underlying trends that could boost their earnings.
Affin Hwang Capital Research said an improving global economic outlook and relatively stronger commodity prices could set the stage for a further rebound in banking sector earnings this year.
The brokerage pointed out in its report that economic indicators were improving with Malaysia’s gross domestic product (GDP) growing at a higher-than-expected rate of 6.2% in the third quarter of 2017, even as import and export activities were expanding at robust pace, and labour market remaining stable, while commodity prices were strengthening.
“A robust labour market would be supportive of increased consumer spending and demand for both big and small-ticket items,” Affin Hwang explained.
“A recovery in commodity prices would help to justify a higher carrying value and writebacks in value to the related-loan account, which previously had been written-down and recognised as an impairment charge,” it added.
Affin Hwang maintained its “overweight” call on the local banking sector amid attractive valuations.
“Favourable domestic demographic trends (driving consumption and housing needs), ample infrastructure projects in the pipeline and accommodative monetary policy are supportive reasons for the growth in earnings.
“The sector’s overall valuation in 2017 still appears attractive at a 1.31 times price-to-book (on a forward basis) against the past-10-year average of 1.6 times and the past-five-year average of 1.5 times,” the brokerage said.
Affin Hwang project the an earnings growth of 8.7% year-on-year (y-o-y) for the banking sector in 2017, followed by a more modest 5.8% y-o-y growth next year and 3.7% y-o-y growth in 2019.
It expected potential upside for HLB, which reported a strong set of results for the first quarter ended Sept 30, 2017, on robust fund-based income growth and significant recovery in its 20%-owned Bank of Chengdu, would be driven by lower operational costs and increased income generation from digital initiatives and rationalisation of branches.
It expected a better year for Maybank underpinned by robust fund-based income generation and steady net interest margin (NIM), while asset quality would likely improve and dividend yields remain attractive.
Overall, loan growth for Malaysia banks eased to 4.6% in October from 5.2% in the preceding month. Annualised loan growth stood for the first 10 months of this year stood at 3.2%.
Analysts expected a full-year loan growth of about 4%-5% for 2017.
TA Research lamented that the fact that the strong GDP data and broadbased strength in the economy had not translated to better loan growth for banks. It noted that while consumer loans remained resilient, business loans continued to disappoint.
Nevertheless, the brokerage maintained its “overweight” stance on the sector.
“The banking system’s asset quality remains intact, backed by unchanged gross impaired loans ratio of 1.2% and liquidity coverage ratio (LCR) in excess of 100%. We believe the overall debt profile for the country remains healthy,” TA Research said.
“Other drivers for earnings growth include potential hikes in the overnight policy rate (OPR) in 2018, which would lead to margin expansion. We expect the increase in rate to augur well for the banking sector as margins are compressed by competitive pressures,” it added.
Meanwhile, Kenanga Research argued that there was not any favourable catalyst for the banking sector, hence its “neutral” stance.
“No favourable horizon ahead in the absence of concrete catalyst. We continue to see a moderating economy and moderate loan growth,” it said, adding that it expected the sector loan to be under 5% this year due to easing of business loans.
Kenanga Research said it maintained its “market perform” call for most of the banking stocks in its coverage with the exception of Affin Bank Bhd, Alliance Bank Malaysia Bhd, AMMB HOLDINGS BHD, CIMB Holdings Bhd and RHB Bank Bhd. The brokerage ascribed “outperform” calls on the four banks at their current share prices due to attractive proposition with a potential total return of more than 10% each.
Also neutral on its outlook for the banking sector was CIMB Investment Research.
The brokerage said its “neutral” call on Malaysia banks was premised on the lethargic loan growth and potential rise in credit cost upon adoption of the Malaysian Financial Reporting Standards (MFRS) 9 next year.
“Potential upside risks to our call are a pick-up in loan growth and expansion in margins. On the other hand, the potential downside risks include a rise in banks’ loan loss provisioning upon the adoption of MFRS 9 in 2018,” CIMB Research explained.
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