Banking sector improving, driven by uptick in banks’ provision
KUCHING: Malaysia’s banking sector’s prospects are improving, driven by gradual improvement in provisions of banks as external economic conditions are expected to turn better progressively, analysts observed.
AmInvestment Bank Bhd (AmInvestment Bank) in a report, projected that the sector’s core earnings could grow by 8.6 per cent year-on-year (y-o-y) in 2017 from a flat earnings growth in 2016.
“The improvement in earnings is anticipated to be driven by higher non-interest income from a stronger capital market and lower provisions for loan losses.
“The improvement in capital market activities will bode well for non-interest income of banks. We anticipate a gradual improvement in provisions of banks as external economic conditions are expected to turn better progressively,” it opined.
It pointed out that most banks reported better net interest margins (NIM) in the first quarter of 2017 (1Q17), mainly from management of liquidity and due to lower funding cost.
Nevertheless, it cautioned that competition for deposits would likely to remain keen in the second half of 2017 (2H17).
“In 2H17, we continue to expect a mild pressure on banks’ NIM, as banks are still offering higher rates for longer-term deposits in preparation for the implementation of net stable funding ratio requirement in 2018.
“For 2017, we project a lower NIM contraction of three basis points (bps) in 2017 compared to four bps in 2016,” it added.
The research team opined, “Our view is that liquidity for the sector is expected to gradually improve as seen from the recent stronger deposit growth in the sector with an improvement in momentum for business deposits.
“Also, banks are doing well in regards to current account and savings account (CASA) growth with CASA ratios continuing to trend higher.
“All these are anticipated to lead to a more stable NIM for banks in 2018.”
For 2H17, AmInvestment Bank maintained a view that the asset yield of banks is expected to remain stable as the overnight policy rate (OPR) is likely to be maintained at three per cent.
“Our house view is that the OPR is most likely to stay unchanged with only a modest chance of an increase of 25bps in 4Q17 as a result of negative returns due to the inflation growth,” it added.
As for the performance of the banking sector’s loan segment, the research team maintained its loan growth expectation for the industry of five to six per cent for 2017, supported by modest growth in retail loans especially in mortgage loans for affordable homes and improvement in business loans from infrastructure, higher exports and firmer commodity prices.
“Our loan growth projection is on the back on a domestic GDP expansion of five per cent for 2017. This will translate into a loan-toGDP multiplier of between one and 1.2-folds. We are seeing improvement in the demand for business loans. Domestically, business loans have picked up pace in March and April 2017, and this is positive on the industry’s loans,” it added.