PETALING JAYA: A potential better-than-expected loans growth and gross impaired loan ratio for the banking sector in 2018 could be largely offset by downside risks from margin erosion, said analysts.
CGS-CIMB Research said this was based on the fact that most banks saw a contraction in their margins in the third quarter (Q3).
“Given the concerns over margin compression and the expected deterioration in asset quality (to 1.8% in 2019), we continue to rate banks as neutral,” the research house said in a note.
Loans growth in the banking sector expanded by 6% year-on-year (y-o-y) in October, underpinned by an improvement in non-household loans growth.
Household loans growth was up 0.4% month-on-month and 5.9% y-o-y, driven by residential mortgages and personal financing.
Compared to the preceding month, the sector’s loans growth was up 0.3%, while between January and October 2018, total loans expanded by 4.5%.
MIDF Research, which maintained its positive stance on the sector, noted that margins for banks came under pressure as expected, but the impact was moderated by strong loans growth.
“With the strong loans growth continuing in October 2019, we expect that banks’ performance will continue to be robust.
“We also believe that loans growth may continue its momentum albeit at a slower pace in 2019,” it said.
Given the current volatile market conditions, the research house said its top picks for the sector were Maybank, CIMB and Public Bank.
It also noted that October 2018 saw industry loan applications decline 0.4% y-o-y due to the drop in working capital loans and purchase of passenger cars, which fell 15.6% and 15.4%, respectively.
Loan demand for the year-to-date, however, remained higher than during the same period last year.
During the first 10 months, loans applied grew 5.1% compared to 4.2% in 2017, while loans approved during the period were also higher at 7.6% y-o-y.
Affin Hwang Capital Research also reiterated its overweight stance on the sector, expecting core earnings to grow 3.3% y-o-y in 2018, followed by a more modest 3.7% growth in 2019 and 4.7% in 2020.
It noted that the sector’s overall valuation in 2019, at a 1.3 times price-to-book value multiple (on a forward basis), was still below the 10-year average of 1.47 times and five-year average of 1.5 times.
Its top picks for the sector are Maybank and Aeon Credit.
On October loans growth, the research house said the annualised year-to-date growth rate of 4.5% translated into a loans growth of 5.4% for 2018, which was above its 2018 full-year target of 5%.
“At this juncture, we keep our loans growth target of 5% unchanged, on the back of the strong growth trend in third-quarter 2018, while noting that business loan disbursements are also picking up.
“With new government policies after the Budget 2019 announcement, we expect consumer sentiment to gradually improve and hence, drive consumption spending,” it said.
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