Research house: Banking sector shows slowing growth momentum

PETALING JAYA: There are indications that the banking sector will see a slowing growth momentum given the expected slowdown in the macroeconomic growth environment, according to UOB Kay Hian Research.

In its report, the research house maintained its market weight rating on the banking sector noting that there are several factors that would present a slight downside risk to the sector’s earnings.

They are the re-prioritisation of government spending, continued policy uncertainty and slower external growth environment.

The research house said the sector’s recent third quarter core earnings had expanded at a slower pace of 2.5% year-on-year (y-o-y) compared with the second quarter’s growth of 8.8% y-o-y due to weaker net interest margins (NIM) and non-interest income. Quarter-onquarter (q-o-q) earnings trend was up a marginal 3% due to an 8% q-o-q decline in provisions as Affin Bank saw a lumpy reversal in net credit cost, while other banks’ credit cost was also relatively benign.

“However, the sector’s revenue was weak, impacted by volatility in capital markets and NIM compression, declining 1.8% y-o-y while pre-provision operating profit remaining flat y-o-y.”

As such, lower provisions (minus 15% y-o-y) with net credit cost declining to 25 basis points in the third quarter (compared with 31 basis points in the same quarter of the previous year) and operating expenditures (minus 3.9%), partly attributed to staff cost rationalisation savings from AMMB Holdings Bhd, helped to underpin third quarter earnings growth,” it said.

Given the slower outlook, UOB Kay Hian said the investment thesis for the first half of 2019 would focus on banking stocks that are already trading at attractive valuations, which essentially implies that the market may have already priced in any potential earnings downside risk and hence should in theory outperform the sector.

“In this respect, we like CIMB Group Holdings Bhd, RHB Bank Bhd and BIMB Holdings Bhd with all three trading at a compelling return on equity-to-price to book metrics and at -1 standard deviation below their mean 2019 forecast price to book ratio,” it said.

Meanwhile, AMBank Research noted that the overall banking sector’s average NIM contracted by 3 basis points qoq to 2.27% in the third quarter due to higher costs at AMMB, Public Bank and Hong Leong Bank.

“For Hong Leong, cost of funds rose due to intense deposit competition over the past one year. Meanwhile, CIMB Niaga and Maybank Indonesia’s NIMs were compressed by interest hikes in Indonesia. The overnight policy rate is expected to remain unchanged at 3.25% for the rest of 2018 and 2019,” it said.

AMBank Research expected NIMs for banks to be slightly compressed or flat in 2019.

“NIMs could still be pressured by the slowdown in current account, savings account (CASA) growth and the decline in the CASA ratio despite the deferment in the implementation of the net stable funding ratio,” AMBank Research said.

The sector’s revenue was weak, impacted by volatility in capital markets and NIM compression.