CIMB Research sees residential mortgage growth falling to 7%

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 expects residential mortgage growth, which is the largest loan segment of the banking industry’s total loans, to slow down further in 2019 due to the cautious view of the market.

It said on Tuesday residential mortgage growth fell from 13.3% in 2014 to only 7.6% in 2018, due to the weak property market arising from the government’s cooling measures implemented between 2010 and 2013. 

“We expect residential mortgage growth to ease further to circa 7% in 2019F, given our property analyst’s cautious view on the property market,” it said.

Residential mortgage is the biggest loan segment, comprising 33.4% of the banking industry’s total loans at end-Dec 2018 and 45% of industry loan growth (5.6%) in 2018.

“We estimate that every one percentage point moderation in residential mortgage growth could trim the loan growth by circa 0.3 percentage point. In turn, every one percentage point slowdown in the industry’s overall loan growth would drag down banks’ net profit by 0.8% for FY19F and 1.5% for FY20F (based on our estimates),”  it said.

“Any drop in residential property prices would be negative for banks as this would reduce the value of collateral for residential mortgages, possibly leading to higher loan loss provisioning for banks.

“We estimate that additional 5% provisioning for residential mortgage impaired loans would reduce banks’ FY19F net profit by circa 0.6%. In our coverage universe, we expect the impact to be the least severe for Maybank and Hong Leong Bank at just 0.3%, and most significant for RHB Bank and Alliance Bank at 1.8%,” it said.

CIMB Research also said apart from the weak residential property market, other earnings risks for banks in 2019F include a possible slowdown in business loan growth and net interest margin erosion. In view of the above risks, it retained its Neutral call on banks. 

“We deem the current sector valuation unattractive, with one-year forward rolling P/E of 13.2 times above the historical five-year average of 12.2 times. However, we see CY19F dividend yield of 4.0% as enticing.

“RHB Bank is our top pick for the sector as its transformation programme has yielded positive results that pushed up its quarterly net profit close to the all-time high in 1Q-3Q18. 

“Based on our estimates, additional loan loss provisioning for residential mortgages could have a small negative impact of 1.8% on its FY19F net profit. This would lower our target price for RHB from RM6.38 to RM6.25 (upside of 12% to closing price of RM5.58),” it said.
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