Strong fourth quarter seen for loan growth
PETALING JAYA: Following the banking industry’s loan growth increase of 5.8% yearon-year in August, analysts see the possibility of a strong fourth quarter where loan disbursements could ramp up.
According to Affin Hwang Capital Research, the banking system’s loan disbursement in August came in higher at 9.7% month-onmonth (m-o-m) versus a decline of 5.4% m-o-m in the previous month. Key sectors driving loan growth were households, retail and trade, construction, real-estate and transportation.
But while it foresees a downside risk to its 6% loan growth target for 2017, the fourth quarter may potentially see more robust demand, the research house said in its report yesterday.
The research, which has an “overweight” call on the sector, foresees sector-earnings growth of 10.5% year-on-year (y-o-y) in 2017, followed by a more modest 4.4% y-o-y in 2018 and 3.8% y-o-y in 2019.
Valuation-wise, Affin Hwang Capital is of the opinion that the sector’s overall valuation in 2017 still appears attractive at a 1.33 times price to book value multiple on a forward basis against the past 10-year average of 1.6 times and the past five-year average of 1.5 times.
Nonetheless, on a year-to-date (ytd) basis, the banking system loan growth is still at a subdued 2.4% (with an annualised growth rate of 3.5%) versus our full year forecast of 6% due to several factors, it said.
Despite the subdued loan growth ytd, the research house noted that banks continued to see robust expansion in its fund-based income in the first half of 2017 (1H17) as a result of the lower overall funding cost and repricing of loans, as reflected in 1H17 net interest margin (NIM) which was up 7 basis points y-o-y to 2.32%.
TA Research, which also has an overweight call on the sector, noted that banking system’s asset quality remains intact, backed by unchanged gross impaired loans ratio of 1.2% and liquidity coverage ratio in excess of 100%.
“We believe the overall debt profile for the country remains healthy. Other drivers for earnings growth include potential hikes in the overnight policy rate, leading to margin expansion.
“We expect the increase in rate to augur well for the banking sector as margins are compressed by competitive pressures,” it said in its report.
Meanwhile, UOB Kay Hian said the relatively high system loan-to-deposit ratio of close to 90% coupled with the eventual implementation of net stable funding ratio beyond Jan 1, 2019 will cap overall funding cost elevation.
This is compounded by the expectation of a rising provision trend with the upcoming implementation of MFRS9 come this January.
“Recent industry data suggests a mixed bag of data points. In the recent 2Q17 results, loans growth and non-interest income remained weak with positive y-o-y NIM being one of the very few growth drivers.
“Even then, we noted that NIMs for most banks are starting to reverse downwards on a quarter-on-quarter basis. Loan loss coverage ratio continues to decline for most banks while provision trend has to normalise upwards especially with the upcoming implementation of MFRS9.
“On a positive note, the healthy CET1 ratios for most banks (averaging 11%) will ensure that they should be able to absorb the capital impact of higher Day One MFRS9-fuelled provision in the balance sheet without having to top up capital buffers via additional equity capital.”