Impaired loans could rise as market sentiment weakens

Subdued economic outlook for 2020 expected, loan growth target to remain unchanged at 3%: Affin Hwang

PETALING JAYA: The banking sector, which registered a 3.9% loan growth in December 2019, may see a further increase in impaired loans as market sentiment deteriorates, said Affin Hwang Capital.

“As we foresee a more subdued economic outlook in 2020, our loan growth target remains unchanged at 3% (despite the recent 25bps cut in the OPR),” the research house said in a note yesterday.

Affin Hwang is maintaining a “neutral” stance on the banking sector, with AMMB Holdings Bhd and Aeon Credit Service (M) Bhd as its top picks.

Meanwhile, AmResearch is keeping its “overweight” call on the banking sector as valuation and dividend yields of banks remain compelling.

In a sector update report, the research house said its top picks for the sector are Malayan Banking Bhd, RHB Bank Bhd and Hong Leong Bank Bhd, respectively.

According to Bank Negara Malaysia’s (BNM) December statistics, industry loan growth rose to 3.9% year-on-year (yoy) in December 2019, compared to 3.7% seen in November 2019.

This was slightly lower than AmResearch’s expectation of a 4-5% growth for 2019, but it noted that the improvement was contributed by a stronger non-household loan growth of 2.7% yoy while the household loan growth remained stable at 4.7% yoy.

“Disbursements for non-household loans outpaced repayments in December 2019. For 2020, our loan growth projection is unchanged at 4% against a GDP growth assumption of 4.6%,” it said.

December 2019 saw a stronger growth in loan applications from households, while approvals for both household and nonhousehold loans also picked up pace.

The industry’s outstanding impaired loans in December 2019 fell by 4.6% month-onmonth (mom) or RM1.29 billion.

“By loan purpose, the decline was largely driven by lower impairment of loans for purchase of transport vehicles, personal, construction and working capital loans.

“Nevertheless, the industry’s total gross impaired loans decreased slightly to 1.5% while the net impaired loan ratio was reduced to 0.96% versus 1.02% in the previous month. Total provisions for the sector fell by 4.4% mom or RM1.1 billion,” AmResearch said.

The sector’s weighted base rate and average lending rate were unchanged at 3.68% and 5.16% respectively. Also, the base lending rate remained at 6.71%.

“We expect margins of banks in the Q4’19 results to continue improving from the reprising of deposits to lower rates after the May 2019 OPR cut of 25 bps. Nevertheless, margins of banks will be compressed again in Q1 20 owing to the recently announced OPR cut of 25 bps on Jan 22, 2020. The impact of the OPR will be mild on the net interest margins and net profits of banks,” the research house said.

Industry deposit growth rose to 2.9% yoy in December 2019 against 2.6% yoy in November 2019, mainly due to an improvement in the growth of deposits from both individuals and business enterprises.