Muted outlook for banking

Neutral stance: The banking sector is facing a challenging operating environment, according to brokerages.

PETALING JAYA: Despite the recovery in loan growth, the outlook for the banking sector in Malaysia remains relatively muted due to net interest margin (NIM) compression.

Several brokerages expected industry earnings growth to remain under pressure amid the challenging operating environment.

Affin Hwang Capital Research noted commercial banks’ average lending rate has edged down to 4.98% in May against 5.02% in April and 4.97% in May 2018, following the 25 basis points (bps) cut in overnight policy rate (OPR) in May.

“We expect banks’ funding costs to ease in the next six to 12 months following the OPR cut, as most banks have the average maturity of fixed deposits in between six and nine months.

“We expect the overall banking system NIM to edge down by six bps in 2019 to 2.22%, stemming from weak asset yields and deposit competition,” the brokerage wrote in its report yesterday.

Affin maintained a “neutral” view on the sector, which it forecast would post a core earnings growth of 0.5% year-on-year (y-o-y) this year before accelerating to 4.1% y-o-y in 2020.

It maintained a loan growth target of 5% for the sector this year.

CIMB Bank Research and TA Research also had similar projection, and a “neutral” stance, for the sector.

Data from Bank Negara showed the industry’s loan growth rebounded slightly to 4.6% y-o-y in May from 4.5% y-o-y in April, ending the five-month downtrend. This was underpinned by household loan growth, while business loans remained soft.

Encouragingly, leading loan indicators registered double-digit growth in May, with loan applications up 14.8% y-o-y and loan approvals up 24.7% y-o-y.

“In view of the strong loan applications/approvals in May 19, we expect loan growth to continue recovering in the next two to three months. We think the improvement would mainly come from the residential mortgages, given the strong applications/approvals in this segment,” CIMB Research said.

However, it said, concerns over margin erosion and the uptick in loan loss provisioning were the reasons it retained its “neutral” call on banks. Nevertheless, it regarded banks’ estimated dividend yield of 4.1% for 2019 as attractive.

Conversely, AmInvestment Bank Research and MIDF Research were more optimistic on the banking sector.

AmInvestment said the surge in loans approvals was expected to translate into stronger loan growth.

The brokerage maintained “overweight” on the sector, citing compelling valuation and dividend yields of banks.

MIDF was cautiously optimistic and maintained its “positive” view on the sector.

“We noted that banking income performance in the first quarter had been slightly muted due to NIM compression. This came mostly from deposit competition and may be exacerbated in later quarters by the OPR cut,” it explained.

“However, we believe that this issue has been overplayed. The impact of the OPR cut to NIM will normalise as deposits were also repriced lower. Besides, we believe that there are still positives for banks such as the downtrend of expenses and the low credit cost. This should be able to alleviate the weakness in income,” it added.