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 projects weaker net profit growth of 6.8% in 2019F for banks, compared to 8.9% in 2018.
It said on Monday that a larger increase in costs would drag banks’ 2019F net earnings growth.
“We expect banks’ overheads to increase by 8.8% on-year in 2019F (vs. a rise of only 1% in 2018), partly lifted by higher salaries for unionised staff under the new collective agreement between banks and the union,” it said.
CIMB Research also forecasts a 14.9% increase in banks’ loan loss provisioning in 2019F, due to the lower base at end-2018 following an 18.6% decline in 2018.
For the topline, it projects 5.9% growth in for net interest income and 11% growth in non-interest income, vis-à-vis an expansion of 1.6% on-year and 2.5% on-year respectively in 2018.
Our other assumptions for 2019F are (1) loan growth of c.5%, and (2) gross impaired loan ratio of 1.8% at end-2019F (vs. 1.45% at end-2018).
Commenting on the Q4FY2018 results, it was not overwhelmed by the strong recovery in Malaysian banks’ core net profit growth, from 1.5% on-year in 3Q18 to 9.5% on-year in 4Q18, as the 4Q18 net profit growth was primarily pushed up by a plunge of 64.3% on-year in loan loss provisioning (LLP).
“We think that the low LLP in 4Q18 will not be sustainable going forward,” it said.
In fact, CIMB Research are concerned about the weak topline growth for banks in 4Q18. The sector’s operating revenue fell by 1.4% on-year in 4Q18, the third consecutive quarter of declines.
“Although we can blame the lethargic investment income for the above, banks’ revenue was also affected by tepid fee income growth and the erosion of net interest margins at most banks,” it said.
The research house projects 6.8% net profit growth for the sector in CY19F, mainly supported by the forecasted 11% expansion in non-interest income (NOII) due to the lower base in 2018 which was affected by adverse investment income.
However, there could be downside risk to our projected growth in NOII in 2019F. Based on its forecasts, the strongest ne profit growth in CY19F would be c.9% for Public Bank and Alliance Bank.
“In view of the projected slower economic growth and weak property market, we expect the industry’s loan growth to ease from 5.6% in 2018 to c.5% in 2019. We also anticipate an increase in the industry’s gross impaired loan (GIL) ratio from 1.45% at end-2018 to 1.8% at end-2019 with potential soft spots in real estate and oil & gas sectors.
“We retain our Neutral rating on banks due to our cautious outlook for the sector, reflected in our slower net profit growth projection for 2019F (vs. 2018). Earnings risks in 2019F could come from a slowdown in loan growth and margin contraction.
"However, the sector’s dividend yield is attractive at a projected 4% for CY19F. RHB Bank remains our top pick for the sector,” it said.
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