Slower half ahead for banks

The research arm also expected the impact of MFRS 9 to be more on banks’ balance sheet than profit and loss (P&L) as all increase in provisions on day one of the implementation will be charged off directly to banks’ shareholders’ funds.

All seven of the banks’ under AmInvestment Bank Bhd’s (AmInvestment Bank) coverage were within expectation for the second quarter of 2017 (2Q17) which led to analysts trimming the banking sector’s core earnings growth for current year 2017 (CY17).

According to the research arm of Kenanga Investment Bank Bhd ( Kenanga Research), all seven banks’ earnings were within expectation for 2Q17.

The results of Malayan Banking Bhd (Maybank), Public Bank Bhd ( Public Bank), RHB Bank Bhd (RHB Bank), Hong Leong Bank Bhd (Hong Leong Bank), CIMB Group Holdings Bhd (CIMB) and Alliance Financial Group Bhd came in within Kenanga Research’s expectation while AMMB Holdings Bhd’s earnings met consensus expectation.

After the conclusion of the 2Q17 results, Kenanga Research trimmed the sector’s core earnings growth for CY17 to 6.4 per cent from 8.6 per cent.

This was after the research arm’s adjustment of earnings to Hong Leong Bank net profit estimates by factoring in higher cost-income (CI) ratio and credit cost assumptions.

“For Maybank, we have also tweaked our credit cost and CI ratio estimates higher as well as fine-tuned our projection of its operating income,” the research arm said.

Meanwhile, Kenanga Research’s CY18 earnings growth estimate was at 10.2 per cent, up from 10 per cent previously.

The research arm will refine its projection of CY18 earnings after the release of further guidance by banks on the impact of the Malaysian Financial Reporting Standard (MFRS) 9 closer to the implementation date of January,1 2018.

Kenanga Research expected the ability of banks to utilise regulatory reserves to be crucial as this will knock off some provisions that banks will be required to raise under the new accounting standard, leaving a milder impact on their respective common equity Tier 1 (CET 1) ratios.

The research arm also expected the impact of MFRS 9 to be more on banks’ balance sheet than profit and loss (P&L) as all increase in provisions on day one of the implementation will be charged off directly to banks’ shareholders’ funds, hence this will affect capital ratios, particularly CET 1 ratio of banks.

“After day one of the implementation, banks have yet to provide guidance on the run-rate of their credit cost,” it said.

Nevertheless, Kenanga Research expected the P&L (if any) from the MFRS 9 implementation to be significantly lower than the balance sheet impact on day one implementation of the new standard.

The research arm noted that the larger capitalised banks, Maybank and CIMB, appeared to be comfortable with their early assessment impact of MFRS 9.

It further noted that on the early assessment impact of MFRS 9, Maybank indicated a decline of 60 to 90 basis points (bps) to the group’s CET 1 ratio (without utilising regulatory reserves to offset against the potentially higher provisions from the new accounting standard).

“Meanwhile, CIMB Group hinted an early assessment impact of a 50bps drop on its CET 1 ratio on the basis that its regulatory reserves be allowed to offset against the higher provisions under MFRS 9,” the research arm said.

Overall, Kenanga Research maintained ‘overweight’ on the sector with ‘buy’ calls on RHB Bank and Public Bank.