PETALING JAYA: The compression in net interest margins (NIMs) being shouldered by banks is becoming a pressing issue amidst interest rate cuts.
While banks were starting to see the impact of the first overnight policy rate (OPR) cut on Jan 22 normalising, Bank Negara brought it down by another 25 basis points (bps) to 2.5% last Tuesday.
Given the dovish sentiment by the central bank, Maybank Investment Bank Research (Maybank IB) said another rate cut in May cannot be ruled out, and that it has since factored in a total OPR cut of 75bps for 2020.
“We see little catalyst for the sector this year, the pressing issue being the compression in NIM that banks will have to overcome. Aggregate 2020 earnings are expected to be flat year-on-year (y-o-y), having factored in three rate cuts this year, ” it said in a research report, adding that it estimated an average NIM compression of six bps to 2.17% in financial year 2020 (FY20) and a further three bps to 2.14% in FY21.
There was also no relief in loan growth, which slowed further to 3.5% y-o-y in January. The industry loan growth for the whole of 2019 was 3.9%, down from 7.7% in 2018.
Household loan growth moderated to 4.5% in January from 4.7% at the end of 2019 versus 8.3% in 2018, while non-household loan growth was just 2% as at January from 2.7% at the end of 2019, against 6.8% at the end of 2018.
“We do, nevertheless, take cognisance of the possible festive season effect on loan growth, given that Chinese New Year was on Jan 25 and 26 this year as opposed to Feb 5 and 6 in 2019, ” Maybank IB said.
Loan applications saw a contraction of 11% in January from a growth of 5.5% in December last year. On a three-month moving average, loan application growth remained in positive territory, rising 6.9% in January versus 11.7% y-o-y in December 2019.
The average loan approval rate on a three-month moving average basis was a higher 50% at end-January 2020 versus 46% at end-December 2019.
The research house has forecast an operating profit growth of only 1.1% in 2020 and a net profit growth of 0.9%, as compared to 4.8% and 2.4% respectively in 2019. Cumulatively, it expects the return on average equity for the sector to average lower at 9.8% and slide further to 9.7% in 2021, as compared to 10.3% in 2018.
The research house added that banks generally saw their 2019 earnings being bolstered by realised and unrealised investment gains, which could continue at least into the first-half of FY20. It said Maybank, RHB Bank Bhd and AmBank had large fair value through other comprehensive income reserves as at end-2019, which could potentially be realised should they choose to do so and this could provide support to earnings in FY20.
On a more positive note, Maybank IB is of the opinion that payout ratios are likely to be sustainable.
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