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: AmInvestment Bank Research expects the banking sector's core earnings to grow at a slower pace of 7.6% in 2018 compared with 9.2% previously as it lowered its expectation for banks’ non-interest income.
The research house, which has an overweight on the banking sector, said on Tuesday the growth for 2018 would come from an increase in revenue and improvement in operating expenses. However, the core earnings growth would be slower compared with 10.6% in 2017.
“For 2018, we retain our loan growth expectation of 5.0% for the Malaysian banking industry supported by a GDP growth of 5.5% (loan-to-GDP multiplier of close to one time). Domestic demand and improvement in external trade remain the drivers of economic growth,” it said.
AmInvestment Bank Research said domestic loan growth in 1Q18 of most banks was above the industry rate, although dampened by the slower pace of overseas loans.
It pointed out that forex translation with the strengthening of the ringgit also affected the growth of international loans.
“We expect loan growth of banks to improve in 2H18, underpinned by a pickup in consumer loans. A stronger consumer spending is anticipated in the short-term period between the implementation of zero-rated Goods and services Tax (GST) and reintroduction of the Sales and Service Tax (SST),” it said.
The research house expects business loan growth to also improve, supported by the absence of large corporate loans repayments and a non-repeat of the forextranslation impact seen in the first quatrter of 2018.
It expected loans to the manufacturing, wholesale and retail sectors to improve as they benefit from the improvement in consumer spending when compared to loans to the construction and construction-related sectors.
This is in view of the fact that several major infrastructure projects have been terminated while some are under review.
In the second half of 2018, it anticipates the net interest margin (NIM) of banks to taper from the first quarter of2018 when it was boosted by a hike of 25 basis points in the Overnight Policy Rate (OPR) in January.
The lagged repricing of banks’ deposit rates adjusting to the increase in OPR coupled with keener competition for deposits compared to the first half of 2018 as the sector moves closer towards the implementation of net stable funding ratio (NSFR) will be the contributing factors.
Also, the tapering of margin is also expected to be partly attributed to pressures on the asset yield of banks’ subsidiaries in Indonesia (Maybank Indonesia and CIMB Niaga).
“We expect bank’s NIM to expand by 2bps for 2018 against a projection of a 3bps increase previously,” it said.
As for the OPR, AmInvestment Research expects it to be likely maintained at 3.25% in the the second half of 2018.
“This is based on the headline inflation which is still expected to be low, thus sustaining a positive real interest rate.
“We project the inflation rate for 2018 to be 2.0%–2.5%. The implementation of zero-rated GST effective June 1 until the reintroduction of SST in September provides a three months’ tax holiday, hence lowering the prices of goods while the firm petrol prices (RON 95 and diesel) until the end of 2018 are likely to keep a lid on the inflation pressure,” it said.
However, the research house now expects the banks' non-interest income to be more challenging than what it expected earlier.
“ This is in view of softer capital market activities based on the rising MGS yield trend, which is in line with the other Asian countries due to the tightening in US with rising yields in the latter’s treasury securities.
“Meanwhile, the issuance of IPOs and capital raising under the equity market are likely to remain slow. We expect the higher yields to also affect bank investment and trading income with a marked-to-market impact on securities coupled with lower trading gains,” it said.
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