Higher profit seen for banks in Q2

Affin Hwang: Outlook improving, lenders’ net interest margin getting better

PETALING JAYA: The profitability of banks is expected to be stronger in the second quarter of this year due to lower credit cost following an improved first quarter ended March 31.

Affin Hwang Capital Research said earnings of banks within its universe came in mostly within expectations in the banking sector’s recently concluded first quarter calender year 2017 (1QCY17) financial results.

“There were no negative surprises and the outlook appears to be improving with banks’ net interest margin ( NIMs) getting better, while credit costs have declined sharply from the peak in 2016.

“The key risk relates mainly to operating expenses.

“We look for estimated earnings for 2017-2019 to grow by 10.6% year-on-year (yoy), 3.8% yoy and 4.1% yoy respectively,” the research firm said, maintainingan “overweight” call on the sector.

Affin Hwang Capital noted that banks and non-banks, which have not been reporting favourable operating results in the past one to two years, have started to show a rebound in net profit, for instance, CIMB Group Holdings Bhd and Malaysia Building Society Bhd (MBSB), which came in above expectations due to lower provisions.

In the Q1CY17 results, most banks reported a 10-20 basis points (bps) NIM improvement yoy on the back of higher loan yields and ease in funding pressure.

It noted that fund-based income was still the major driver of the banks’ earnings, at 76% of net income, while the balance of 24% was from non-interest income.

“Our key concern in Q1CY17’s results is mainly on the banks’ operating expenses, which have been higher by 4.8% (on an annualised basis) versus our projection for CY17 due to IT spending, investing in new talent, marketing costs and compliance costs.

“Meanwhile, the sector’s average credit cost of 32bps in Q1CY17 has been below our CY17 projection of 35.7bps.”

The research firm said favourable domestic demographic trends driving consumption and housing needs, ample infrastructure projects in the pipeline and an accommodative monetary policy with 2017’s overnight policy rate expectation at 3% should continue to drive earnings.

It said most banks are unlikely to experience a sharp dip in return on equity (ROE) in second half of this year, with the exception of

Alliance Bank Bhd and Affin

Holdings Bhd.

These two banks have transformation plans underway in FY18-19 to scale up their business operations, stepping up marketing/branding efforts and beefing up their IT and digital infrastructure.

It is forecasting a sector estimated ROEs of 10.5% for CY17, 10.2% for CY18 and 10% for CY19, while it believes that there is still much room for the sector’s fund-based income to grow from RM12.6bil in 1QCY17.

As for operating expenses, while there are some conservative cost-savings by the banks, it appears that cuts in spending have been constrained by relevant needs to upgrade the IT infrastructure, beef up business/marketing efforts, invest in new talent and to meet regulatory compliance-costs for the impending adoption of Malaysian Financial Reporting Standard 9.

Meanwhile potential merger costs in respect of the proposed merger RHB Bank Bhd and AMMB Holdings Bhd proposed could put a dampener again on cost-optimisation plans.

Affin Hwang Capital’s top big cap picks are Public Bank Bhd for being a strong defensive bank, CIMB for its turnaround story and Malayan Banking Bhd (Maybank) for its broad exposure to economic activities.

Share prices of banking groups have been on the uptrend on expectations of higher earnings.

CIMB is up close to 50% year to date, while shares of Maybank by 17% from the beginning of the year.