Slower growth in banking sector’s core earnings seen

Brokerage has lower expectations for banks’ non-interest income

PETALING JAYA: The banking sector’s core earnings is anticipated to grow at a slower pace of 7.6% in 2018 compared with 10.6% in 2017 on the back of lower expectations for banks’ non-interest income, according to AmInvestment Bank Research.

The research house, which has an “overweight” rating on the banking sector, said growth for 2018 would come from an increase in revenue and improvement in operating expenses.

“For 2018, we retain our loan growth expectation of 5% for the Malaysian banking industry, supported by a GDP growth of 5.5% (loanto-GDP multiplier of close to one time).

“Domestic demand and improvement in external trade remain the drivers of economic growth,” it said in a report.

AmInvestment Bank Research said domestic loan growth in the first quarter of 2018 of most banks was above the industry rate, although dampened by the slower pace of overseas loans.

It pointed out that foreign exchange (forex) translation with the strengthening of the ringgit also affected the growth of international loans.

“We expect loan growth of banks to improve in the second half of 2018, underpinned by a pick-up in consumer loans.

“A stronger consumer spending is anticipated in the short-term period between the implementation of zero-rated goods and services tax (GST) and reintroduction of the sales and service tax (SST),” it said.

The research house expects business loan growth to also improve, supported by the absence of large corporate loan repayments and a non-repeat of the forex translation impact seen in the first quarter of 2018.

It expects loans to the manufacturing, wholesale and retail sectors to improve as they benefit from the improvement in consumer spending compared to loans to the construction and construction-related sectors.

This is in view of the fact that several major infrastructure projects have been terminated while some are under review.

In the second half of 2018, it anticipates the net interest margin of banks to taper from the first quarter of 2018 when it was boosted by a hike of 25 basis points in the overnight policy rate (OPR) in January.

The lagged repricing of banks’ deposit rates adjusting to the increase in OPR, coupled with keener competition for deposits compared to the first half of 2018 as the sector moves closer towards the implementation of net stable funding ratio, will be the contributing factors.

Also, the tapering of margin is expected to be partly attributed to pressures on the asset yield of banks’ subsidiaries in Indonesia (Maybank Indonesia and CIMB Niaga).

“We expect bank’s net interest margin to expand by 2 basis points (bps) for 2018 against a projection of a 3 bps increase previously,” it said.

As for the OPR, AmInvestment Research expects it to be maintained at 3.25% in the second half of 2018.

“This is based on the headline inflation, which is still expected to be low, thus sustaining a positive real interest rate. We expect the inflation rate for 2018 to be 2.0%-2.5%.

“The implementation of zero-rated GST effective June 1 until the reintroduction of SST in September provides a three months’ tax holiday, hence lowering the prices of goods.

“Meanwhile, the firm petrol prices (RON 95 and diesel) until the end of 2018 are likely to keep a lid on the inflation pressure,” it said.

However, the research house now expects the banks’ non-interest income to be more challenging than what it expected earlier.

“This is in view of softer capital market activities based on the rising Malaysian Government Securities’ yield trend, which is in line with the other Asian countries due to the tightening in the US with rising yields in the latter’s treasury securities.

“Meanwhile, the issuance of initial public offerings and capital raising under the equity market are likely to remain slow,” it said.

The brokerage expects the higher yields to also affect bank investment and trading income with a marked-to-market impact on securities, coupled with lower trading gains.

Domestic demand and improvement in external trade remain the drivers of economic growth.