PETALING JAYA: In line with the central bank’s view of heightened downside risks in 2019 emanating from external uncertainties, analysts have turned cautious on the banking sector’s core net earnings growth in 2019.
Affin Hwang Capital currently pencils in a growth rate of 2.5% year-on-year against a stronger growth rate of 6.9% year-on-year as seen in 2018.
“We continue to see higher earnings downside risks arising from deposit competition within the sector itself, of which will drive up funding costs and erode bank’s net interest margin,“ the research house said in a report today.
It said market participants are currently worried about a potential cut in the overnight policy rate (OPR), of which will be negative for the banking sector earnings in the near term before the downward repricing effects of deposit start to kick-in in the next six to 12 months.
Despite that, Affin Hwang believes that the banking sector is underpinned by sound asset quality (as implied by a gross impaired loan ratio of 1.45% as at January), of which is also underscored by the high debt-servicing capacity of the business sector.
On the asset quality of household debts, it said the decline in aggregate impairment ratio to 1.2% (2018) from 1.4% (2017) implies that banks continue to be watchful of unproductive growth of household credits (especially for unsecured lending) and exercise stringent approvals only for borrowers with sound debt-servicing capacity.
It maintained its neutral stance on the sector, noting that business and consumer outlook in 2019 will be dampened by external uncertainties and a lack of domestic catalysts.
“For 2019, we have a loan growth target of 5%, against a higher target of 7-8% set by some key banking players in the industry. On a more positive note, our strong economic fundamentals – resilient consumer spending, business growth and low unemployment rate, are holding up. We expect consumer sentiment and business activities to gradually improve in 2H19 as trade tension may dissipate.”
Kenanga Research said loans growth will remain to be moderate, but valuations seem more attractive with most of the banking stocks under its coverage being rated as outperform except for CIMB, Hong Leong Bank Bhd, Public Bank and RHB Bank Bhd which are at market perform.
It warned that further external risks might put a dampener on business sentiments with softer demand and applications with higher risk perceived lowering approval rates. The dampening credit demand might be exacerbated by an increase in corporate bonds as upside pressure on interest rates lessens.
Meanwhile, AmInvestment Bank maintained its “overweight” call on the sector due to the anticipation of global liquidity into emerging markets from a slowdown in normalisation of the US monetary policy that is widely expected.
“The fund inflows are expected to benefit share prices of banking stocks which are liquid, offering decent dividend yields with banks still expected to deliver positive growth in earnings despite challenging conditions,“ it said.
Source: The Sun Daily