Banking sector earnings recovery to sustain into 2018 — Analysts

KUALA LUMPUR: Malaysia’s banking sector is expected to maintain its earnings recovery this year, but certain segments could pose a risk to the potential stablility of asset quality, analysts observed.

The research arm of Hong Leong Investment Bank Bhd (HLIB Research) in a sector outlook said overall, most banks ended the fourth quarter of 2017 (4Q17) on a positive note, with the exception of AMMB Holdings Bhd (AMMB).

It noted that loans growth grew at average by 1.3 per cent q-o-q compared with 0.4 per cent q-o-q in 3Q17 supported by BIMB Holdings Bhd (BIMB), RHB Bank Bhd (RHB) while Affin Bank Bhd (Affin) and Alliance Bank Malaysia Bhd (ABMB) reversed the negative trend.

It also noted that liquidity position improved at a muted pace of 0.7 per cent q-o-q compared with 1.5 per cent q-o-q, which tracked a slower loan growth and lifiting excess liquidity higher in 4Q17.

As for the sector’s net interest margins (NIM), the research team said it was flat at 2.2 per cent due to the absence of deposits competition and more stable COF but noninterest income (NOII) grew at a stabilised pace of 4.8 per cent q-o-q to RM5.4 billion due to higher fee income and stable forex income.

Credit costs improved to 39bps against 47bps in 3Q17 due to absence of large impairments while gross impaired loans (GIL) saw its overall sector asset quality unchanged at 1.64 per cent, the research team said, noting that overall capital position also remained robust and was well positioned to weather headwinds.

“We expect the sector’s earnings recovery to sustain into 2018 on the back of higher loan growth expectations, stable contribution from NOII, continued discipline on expenses, and ending of impairment programme.

“While we expect further stability in banks’ asset quality in 2018, certain segments may pose a risk to the potential stablility of asset quality,” it opined.

It also expected banks’ loan loss coverage (LLC) to improve given the slower trend of large provision.

It added that liquidity is on the mend since BNM implemented forex measures that cap further liquidity outflow.

All in, HLIB Research maintained a ‘neutral’ call on the sector.

“The encouraging signs in 4Q17 will ensure loan growth target of five to 5.5 per cent is achievable due to positive lending indicators.

“We view that the banking sector is poised to record a better year in 2018 due to improving returns on equity (led by earnings recovery), improving NOII income, stable asset quality, and less severe impact of MFRS9 impact.”

KUALA LUMPUR:The banking sector’s core earnings growth projection for current year 2018 (CY18) has been lowered by analysts to 9.3 per cent, compared to 10.1 per cent previously.

According to AmInvestment Bank Bhd, this was due to the higher earnings base of CY17 after the completion of the fourth quarter of 2017 (4Q17) results.

On banks’ net interest margin (NIM), AmInvestment Bank expected it to improve in 1Q18 compared to 4Q17 which had shed two basis points (bps) quarter on quarter (q-o-q) to 2.25 per cent, compared to 2.27 per cent in the preceding quarter.

The projected improvement was due to the increase in overnight policy rate (OPR) by 25bps to 3.25 per cent in January.

Meanwhile, AmInvestment Bank noted that the sector’s non-interest income (NOII)/total income rose to 28.8 per cent in 4Q17 based on reported income compared to 26.9 per cent in the preceding quarter.

The research firm thus continued to expect improvement in banks’ NOII in 2018 with the healthy investment banking (IB) pipeline of deals.

Overall, AmInvestment Bank raised its earnings projection for Malayan Banking Bhd (Maybank) and Hong Leong Bank Bhd (Hong Leong Bank) by 7.5 per cent and 2.5 per cent respectively after stronger-than-anticipated earnings.

For CIMB Group Holdings Bhd (CIMB), the research firm’s forecast earnings increased by 2.9 per cent after fine-tuning our assumptions for cost income (CI) ratio and credit cost.

As for the return on equity (ROE) guidance for 2018 from banks, AmInvestment Bank noted that Public Bank Bhd was at 14 to 15 per cent, Maybank at circa 11 per cent, CIMB at 10.5 per cent, Hong Leong Bank at 10 to 11 per cent, RHB Bank Bhd (RHB Bank) at nine to 10 per cent and Alliance Bank Malaysia Bhd at 10 per cent.

On Malaysian Financial Reporting Standards (MFRS) 9, the research firm continued to expect the day one impact to be manageable for banks’ capital ratios.

“Maybank is now guiding for a 40bps drop to the group’s common equity tier 1 (CET1) ratio (60 to 90bps decline previously) after adopting the new accounting standard.

“CIMB has guided for the day one impact of 70 to 80bps compared to a 50bps drop previously to its CET1 ratio,” the research firm said.

AmInvestment Bank noted that this was in view of the potential need to set aside higher regulatory reserves as the new guidelines will require collective allowances (for stage one and two loans) and regulatory reserves (RR) to be more than or equal to one per cent of total credit exposures (on and off balance sheet exposures).

“Meanwhile, RHB Bank hinted that the day one impact on its bank entity’s CET1 ratio would be a 50bps decline.”