Cautious on banking sector

PETALING JAYA: The sector’s outlook is challenging due to external concerns while clarity and direction on the domestic front remain murky, according to Kenanga Research, which maintained a neutral stance for the sector as no fundamental change is expected and that the sector lacks concrete catalysts.

“We view the industry with caution as uncertainties and headwinds still prevail. The industry remains unexciting, dragged by moderate loans growth and soft capital markets. Prevailing negative sentiment both globally and domestically will continue to drive volatility and uncertainty in the industry. Caution will still prevail due to the soft economy outlook globally,“ the research house said in a note yesterday.

It said banks with healthy asset quality (hence low impairment allowances) will still be the favour due to their defensive quality.

“As such, selective asset growth will still be the focus for the banks. Despite a stable economic outlook in the domestic environment coupled with low unemployment, we opined that cautiousness and selective assets growth will still prevail in the industry,“ Kenanga explained.

It said loans growth moving forward will still be moderate (as uncertainties prevail) with fee-based income expected to be soft with the volatile capital market. However, with the stable outlook, this will support a moderate and stable credit charge for the industry.

“We expect impairment allowances (credit costs) to be stable and consistent (as it had been generally in 2018) which will lend support to the banks’ bottom-lines. We do not discount another potential up-cycle of impairment allowances, especially those highly exposed to the energy sector (CIMB, Maybank and RHB Bank) as energy prices have been under pressure due to the perceived economic slowdown both domestically and globally.”

It also expects mild compression for net interest margin (NIM) as most of the banks (LDR) and -to-fund ratio (LTF) are over 90% and 80%, respectively, as compression will be mitigated by soft credit demand. The deferment of NSFR into 2020 plus the absence of high credit demand will support the outlook for a stable to mild compression in NIM.

“However, looking at the slowing momentum in household demand, we do not discount the likelihood of competitive lending rates in the short term ahead as banks strive to achieve their loans growth target. This competition will ultimately lead to further downside pressure on NIM.”

Its 2018/2019 earnings estimates are revised downwards, 80bps/30bps to +6.7%/+5.6% respectively. 2018 will be driven by lower credit charge at 0.35% (from 0.46% previously), NIM at 2.2% (down by 5bps) due to the absence of additional rate hike and pausing of deposits intake (due to strategic reasons) and deferment of NSFR9; as well as lower fee-based income at +1.4% (from +3.5% previously) to take into account positive of soft and volatile capital market activities in Q2 and Q3.

The research house toned its outlook on loans growth for FY18 at +4.7% (from +4.9% previously) on account of revision of prevailing headwinds.

“For 2019, earnings are slower at +5.6% year-on-year (yoy) as we based from these assumptions of credit charge at 0.33%; and slight compression on NIM by 3bps and a higher pace from fee-based income (+6.6% yoy due to a lower base).”

It reiterated its outperform call for BIMB Holdings Bhd, as its financing portfolio (70% of total financing) is skewed towards household (75% first-time buyers for residential property) with focus on growing its personal financing will minimise NIM compression.

Kenanga said another preferred pick is Building Society Bhd (MBSB) and maintained that its 3-4% growth for FY18 is achievable driven by corporate loans/financing as another RM950 million is expected to be disbursed in 4Q18.

Source: The Sun Daily

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