No immediate catalyst on the horizon for banking sector
KUALA LUMPUR: Malaysia’s banking sector has once again garnered a neutral rating from the research arm of Kenanga Investment Bank Bhd (Kenanga Research), with no immediate positive catalyst on the horizon that could further boost the sector’s growth.
Kenanga Research was neutral for the sector given the lack of positive catalyst ahead with structural challenges prevailing in the immediate horizon.
“Earnings growth will be hampered by moderate loans with the impact of MFRS9 threatening earnings,” the research arm said.
It noted that system loans in the fourth quarter of current year 2017 (4QCY17) have been on a downward trend, underpinned by moderate loans from the business segment.
In fact, Kenanga Research saw an upward momentum in corporate bonds (as corporates look to mitigate the prospect of interest rate hikes in 2018) which will mitigate the growth in business loans ahead.
While Kenanga Research maintained its conservative outlook for the sector, the research arm revised its financial year 2017 estimate (FY17E) numbers upwards by 220 basis points (bps) to 5.7 per cent year on year (y-o-y) mainly on upwards revision in earnings for CIMB Group Holdings Bhd (CIMB), Malayan Banking Bhd (Maybank) and Public Bank Bhd (Public Bank).
“For CIMB, topline will be driven by better income from Islamic banking, while for Maybank and Public Bank, it is on account of lower impairment allowances and better net interest margin (NIM), respectively.
“Affin Holdings Bhd’s (Affin) downward revision is due to the spike in opex due to the voluntary separation scheme (VSS) exercise.”
Coming from a higher base, Kenanga Research expected FY18E to be less than one per cent y-o-y.
The research arm viewed FY18E earnings challenging due to moderate loans ahead and the impact of MFRS9 with the exception of AMMB Holdings Bhd (AmBank), Alliance Bank Malaysia Bhd (Alliance Bank) and Hong Leong Bank Bhd Hong Leong Bank) where the impact will only be felt from their FY19 onwards.
Nevertheless, Kenanga Research revised downwards its earnings forecast for AmBank due to lower expected credit recovery and higher operating expenditure (opex) on account of the group’s ongoing strategic T4 initiatives.
It noted that for Maybank and RHB Bank Bhd, downward revisions are on account of slower loans (coming from a low base in FY17).
While Kenanga Research expected a challenging 4QCY17 and CY18 results ahead underpinned by moderate loans, the impending overnight policy rate (OPR) hike gave the industry hope in supporting earnings ahead albeit being short-term in nature.
“Our economist sees two interest hikes ahead in 2018 and banks with a higher mix of variable rates loans will be able to take advantage of these hikes,” it said.
Based on their 3QCY17 results, the research arm saw Alliance Bank, BIMB Holdings Bhd, and CIMB as the strongest beneficiary of these hikes as more than 80 per cent of their loans are float-rated and more than 30 per cent of their deposits are in the form of current account savings account (CASA).
“Negligible increases in costs relating to demand and saving deposits (CASA) also support the NIM expansion.
“However, this expected development is short-term in nature as NIM will expand following the almost immediate re-pricing upwards of float-rated loans and the lag in the re-pricing of fixed-rated deposits (FD).”
From Kenanga Research’s analysis, the top four banks (CIMB, Maybank, Public Bank and RHB Bank) weighting in the FBMKLCI have remained consistent since 2012 with the exception of Public Bank as the group’s weighting have increased by more than 200bps.
The research arm noted that CIMB, which weighting slide from 2013 onwards, have climbed up again to reach its 2012 levels.
Kenanga Research noticed also that weighting of AmBank in FBMKLCI has been declining since 2013. It registered at its five-year low of less than 1.6 per cent in 2017.
While the underlying downtrend may continue, the fact is that its market cap is now lower than some of the manufacturers, say Hartalega Holdings Bhd and Press Metal Aluminium Holdings Bhd that have much smaller earnings bases, hence the research arm believed the undemanding valuation of AmBank was unjustifiable.
“As such, from this angle, we would be contrarians and also anticipate a turnaround in index weighting just like for CIMB a few years ago.
“CIMB’s weighting recorded a low of approximately five per cent back in 2015 from the high of more than seven per cent in 2013.”