PETALING JAYA: Contraction in net interest margin (NIM) and increasing credit costs remain major concerns for the banking sector in the country.
In addition, the downside risks to loan growth are increasing for domestic lenders amid an uncertain economic environment.
CIMB Research has expressed concern about whether the industry could achieve its loan growth target this year.
“The industry’s total loans expanded by a dismal 1.4% in the first seven months of 2019, causing us to have second thoughts about the achievability of our projected loan growth of circa 5% for 2019, ” CIMB Research wrote in its report.
“Based on our estimates, every 1% point reduction in the projected loan growth for banks would reduce our 2019 net profit forecast for banks by a circa 0.8%, ” it added.
Bank Negara has announced that the industry loan growth slowed to 3.9% in July from 4.2% in the preceding month, due to a slowdown in both the household and business loan segments.
The gross impaired loan (GIL) ratio, meanwhile, increased to 1.6% in July from 1.57% in June.
“The negative takeaway from July banking statistics was the deterioration in loan growth and asset quality, ” CIMB Research said.
The brokerage, nevertheless, continued to rate the sector as “neutral” on concerns over margin contraction (due to the cut in the overnight policy rate) and an expected uptick in credit cost in 2019.
On the flip side, it said, banks’ dividend yields were attractive at 4.2% for 2019. Its top pick for the sector is RHB Bank Bhd.
Meanwhile, TA Research has lowered its 2019 loan growth projection to a range of between 4.5% and 5.0% from its original target of 5%.
The brokerage has reiterated its “neutral” stance on the sector, but has downgraded MALAYAN BANKING BHD (Maybank) to a “sell”.
It has maintained its “buy” call on CIMB GROUP HOLDINGS BHD, RHB Bank, Alliance Bank Malaysia Bhd and Affin Bank Bhd; “hold” on HONG LEONG BANK BHD and AMMB HOLDINGS BHD; and “sell” on PUBLIC BANK BHD.
Similarly, Affin Hwang Capital Research said it was currently reviewing its 2019 loan growth target of 5%, amid the cautious business and consumer outlook in 2019.
Nevertheless, the brokerage noted that the sector’s downside risks were largely cushioned by the broad-based economy, while over the longer term, consumer sentiment should gradually improve and drive consumption spending.
Affin has maintained its “neutral” stance on the sector, with RHB Bank and AEON CREDIT SERVICE (M) BHD as its top picks.
AmBank Research remained “overweight” on the banking sector, as valuation and dividend yields of banks remained compelling.
Its top pick are Maybank and RHB Bank; and following the recent reporting season, it has upgraded Hong Leong Bank to a “buy” and downgraded Alliance Bank to a “hold”.
AmBank Research has also maintained its loan growth assumption for the sector at 4% to 5% in 2019.
While MIDF Research was “positive” on the sector, the brokerage said it was turning cautious due to increased uncertainties.
“We have observed that external events especially the recent escalation of the trade tension between the United States and China have caused concerns on the direction of global growth. This in turn will have an impact on local growth and indirectly on the banking sector, as businesses grow more cautious, ” it explained.
“However, Malaysia’s domestic demand especially private consumption remains robust and this will continue to support loan growth. Hence, we are maintaining our 2019 loan growth estimate of 4.7%, ” it added.
Its top picks for the sector are Maybank and Public Bank.