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: CIMB Equities Research continues to rate banks as a Neutral given the expected contraction in margins (from the levels in 1Q18) and weak loan growth.
It said on Monday it also envisages a weaker net profit growth of 7%-8% year-on-year in 2H18F vs. around 10% year-on-year in 1H18.
“Potential upside/downside risks to our call include an improvement/deterioration in loan growth and fee income growth,” it said.
CIMB Research said although banks’ core net profit growth softened from 12.8% year-on-year in 4Q17, the momentum remained healthy at 9.7% year-on-year in 1Q18.
The key drivers for 1Q18 earnings growth were (1) wider expansion of 8.3% year-on-year in non-interest income vs. 7.7% year-on-year in 4Q17, (2) a 9.4% year-on-year drop in loan loss provisioning, and (3) a smaller increase of 1.8% year-on-year in overheads in 1Q18, vs. 8.1% year-on-year increase in 4Q17.
“The market expected the rate hike in Jan 18 to lift banks’ margins in 1Q18. Ironically, banks’ net interest margin shrank by 9bp year-on-year, causing 1Q18 net interest income (from conventional banking operations of the local banks and Islamic banking operations of BIMB) to fall 0.7% year-on-year. In our view, this was mainly due to the increased competition for deposits,” it said.
CIMB Research said Malaysian banks’ 1Q18 net profit was below its expectations as three banks, i.e. Public Bank, AMMB and Alliance, missed its forecasts, compared to only one bank (BIMB Holdings
) outperforming its expectations.
“The variance in 1Q18 to our forecasts mainly came from lower-than-expected topline growth,” it said.
Loan growth picked up from 4.1% year-on-year at end-Dec 17 to 4.4% year-on-year at end-Mar 18, mainly driven by the improvement in non-core segments, i.e. construction, financing for purchase of securities and “other” loans.
For core loan segments, the growth in residential mortgages was stable at 8.9% year-on-year at end-Mar 18 while the growth in working capital loans remained lethargic.
“We are forecasting net profit growth of 8.9% for 2018 (vs. 8.3% in 2017), which is below the 10.4% we had projected after the 4Q17 results season in Feb 18. At the topline, we are forecasting an expansion of 6.3% in net interest income (vs. 6% in 2017) and 12.7% in non-interest income (vs. 1.6% in 2017).
“Cost-wise, we expect a wider increase of 7.7% in overheads in 2018 compared to a rise of 4.8% in 2017 while loan loss provisioning is projected to increase by 53.3% in 2018,” said the research house.
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