loan growth

 
 

Small-cap stocks are 2020’s best investment options, says expert

PETALING JAYA: Given the overall bullish outlook for next year, investors looking for a bargain would do well to look at small-cap stocks, according to MRR Consulting Sdn Bhd managing partner Ooi Kok Hwa.

In a recent interview with SunBiz, Ooi said he expected a rally in small-cap stocks next year, similar to what was seen in 2014.

“The Small Cap Index reached its peak of 19,334 points in August 2014. As of end-September the index was at 13,000 points, which is a drop of 33%, compared to the FBM KLCI. So if people are looking to buy small caps, they should do it now as they are currently undervalued.”

“If you are not confident in choosing particular stocks, then buy into any unit trusts that have a small-cap fund,” he said.

Blue-chip stocks are also a sound investment option, with Malayan Banking Bhd and CIMB Group Holdings Bhd being two of the safest options, according to Ooi.

Asked which sector investors should focus on, he said all sectors from construction to technology service providers have positive prospects next year, thanks to an expected uptick in the Malaysian economy and initiatives announced in the recently tabled Budget 2020.

The construction sector is expected to benefit from the number of development projects that were announced in the budget, such as the repair and maintenance of roads leading to Port Klang, the Kota Perdana Special Border Economic Zone logistics hub at Bukit Kayu Hitam and several other economic corridor development activities.

“The money that has been allocated to the construction sector is overall very positive as a lot of projects will continue to be developed. Overall spending will continue and stocks in the sector are already starting to see some trading interest,” Ooi said.

The plantation sector will benefit from the “Phase 1 deal” in which China will reportedly purchase US$40-50 billion (RM167-209 billion) in US agricultural products annually, which has prompted an uptick in soybean prices.

“This increase in soybean prices will lead to a recovery in crude palm oil (CPO) prices, and coupled with the B20 biofuel initiative coming in next year, stock levels will drop and overall prices will go up,” said Ooi.

As for the consumer sector, the increase in the minimum wage to RM1,200 a month, together with the incentives to boost employment should encourage higher consumer spending which will directly benefit stocks in the sector, Ooi explained.

The banking sector could, however, be impacted by an expected cut in the Overnight Policy Rate (OPR) by Bank Negara Malaysia next month, said Ooi.

“If you look at the KLCI trends, each time BNM cuts rates, our local market tends to go up about 1-2%. So, overall, it’s a positive thing. I also expect a higher loan growth for the banking sector, so that will help to offset the negative news of a rate cut,” he said.

Lastly, for technology stocks, the overall index is trending higher, said Ooi, driven by several initiatives and programmes being undertaken by the government to accelerate the digital economy.

The budget outlined a number of plans to improve the digital infrastructure of the country, such as the National Fiberisation & Connectivity Plan, introducing a 5G Ecosystem Development Grant and providing RM10 million to the Malaysian Digital Economy Corporation to train micro-digital entrepreneurs and technologists.


Small-cap stocks are 2020’s best investment options, says expert

PETALING JAYA: Given the overall bullish outlook for next year, investors looking for a bargain would do well to look at small-cap stocks, according to MRR Consulting Sdn Bhd managing partner Ooi Kok Hwa.

In a recent interview with SunBiz, Ooi said he expected a rally in small-cap stocks next year, similar to what was seen in 2014.

“The Small Cap Index reached its peak of 19,334 points in August 2014. As of end-September the index was at 13,000 points, which is a drop of 33%, compared to the FBM KLCI. So if people are looking to buy small caps, they should do it now as they are currently undervalued.”

“If you are not confident in choosing particular stocks, then buy into any unit trusts that have a small-cap fund,” he said.

Blue-chip stocks are also a sound investment option, with Malayan Banking Bhd and CIMB Group Holdings Bhd being two of the safest options, according to Ooi.

Asked which sector investors should focus on, he said all sectors from construction to technology service providers have positive prospects next year, thanks to an expected uptick in the Malaysian economy and initiatives announced in the recently tabled Budget 2020.

The construction sector is expected to benefit from the number of development projects that were announced in the budget, such as the repair and maintenance of roads leading to Port Klang, the Kota Perdana Special Border Economic Zone logistics hub at Bukit Kayu Hitam and several other economic corridor development activities.

“The money that has been allocated to the construction sector is overall very positive as a lot of projects will continue to be developed. Overall spending will continue and stocks in the sector are already starting to see some trading interest,” Ooi said.

The plantation sector will benefit from the “Phase 1 deal” in which China will reportedly purchase US$40-50 billion (RM167-209 billion) in US agricultural products annually, which has prompted an uptick in soybean prices.

“This increase in soybean prices will lead to a recovery in crude palm oil (CPO) prices, and coupled with the B20 biofuel initiative coming in next year, stock levels will drop and overall prices will go up,” said Ooi.

As for the consumer sector, the increase in the minimum wage to RM1,200 a month, together with the incentives to boost employment should encourage higher consumer spending which will directly benefit stocks in the sector, Ooi explained.

The banking sector could, however, be impacted by an expected cut in the Overnight Policy Rate (OPR) by Bank Negara Malaysia next month, said Ooi.

“If you look at the KLCI trends, each time BNM cuts rates, our local market tends to go up about 1-2%. So, overall, it’s a positive thing. I also expect a higher loan growth for the banking sector, so that will help to offset the negative news of a rate cut,” he said.

Lastly, for technology stocks, the overall index is trending higher, said Ooi, driven by several initiatives and programmes being undertaken by the government to accelerate the digital economy.

The budget outlined a number of plans to improve the digital infrastructure of the country, such as the National Fiberisation & Connectivity Plan, introducing a 5G Ecosystem Development Grant and providing RM10 million to the Malaysian Digital Economy Corporation to train micro-digital entrepreneurs and technologists.


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Mixed outlook for banks

PETALING JAYA: There are mixed prospects for the banking industry going forward, but Maybank IB Research said that due to a slowdown in loan application growth, the outlook is subdued at this stage.

“Loan applications contracted across all major consumer segments and even mortgage applications saw growth drop to just 2.7% year-on-year (yoy) in August 2019 after having expanded at a rapid double-digit pace over the past three months,” the research house said in a note today.

Loan growth for August was stable at 3.9% yoy. Household loan growth was 4.6%, while non-household loan growth was 2.9%. Annualised loan growth was 2.9% in August 2019.

Overall deposit growth continued to slow down largely due to a slower pace of deposits from business enterprises. Industry deposit growth slowed down further to 4.6% yoy from 4.9% yoy in the previous month.

The loan-to-deposit ratio for the sector was 87.9%. Industry current account, savings account (CASA) expanded by 5.2% yoy, marginally lower than the 5.3% yoy registered in the previous month. CASA ratio remained stable at 25.7%.

The industry’s gross impaired loans (GIL) ratio was slightly higher at 1.61% in August versus 1.6% in July. On an absolute basis, GILs rose RM337 million month-on-month, mainly due to an increase in manufacturing GILs.

Maybank is retaining a neutral outlook on the sector, with a buy call on the smaller to mid-cap banks such as RHB Bank Bhd, AMMB Holdings Bhd, Hong Leong Financial Group Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.

CIMB Research is keeping its neutral call on the sector on concerns over margin contraction, due to the cut in the OPR, and an expected uptick in credit cost in 2019.

“On the flip side, banks’ dividend yields are attractive at 4.3% for CY19F. RHB Bank remains our top pick for the sector.”

Meanwhile, AmBank Research said it is maintaining its loan growth assumption for the sector at 4-5%, as well as its expectation of another Overnight Policy Rate (OPR) cut of 25 basis points in the second half of the year, which will be supportive of economic growth.

“Meanwhile, should Budget 2020 turn out to be mildly expansionary in line with market expectations, this will be positive on loan growth as well as mitigating the downside risk on the sector’s asset quality.”

AmBank is maintaining its overweight call on the sector as valuation and dividend yields of banks remain compelling. Its top picks remain as Malayan Banking Bhd (Maybank) and RHB Bank Bhd.

MIDF Research is also keeping a positive outlook on the sector as it thinks banking stocks are currently undervalued.

“The impact of the OPR cut will normalise and there are still positives for banks such as the low credit cost which should be able to alleviate any weakness in income.

“However, we also remain cautious due to prevalent uncertainties coming from external events such as the ongoing trade tension between the US and China,” it said.

MIDF’s picks for the sector are Maybank, CIMB Group Holdings Bhd and Public Bank Bhd.


Downside risks to banking sector’s earnings forecasts

PETALING JAYA: Despite being backed by resilient and strong fundamentals, the Malaysian banking sector is expected to see downside risks from the impact of higher external risks (moderating economic growth) and a more cautious business/consumer sentiment.

Affin Hwang Capital said these two key factors may pose downside risks to its 2019-2020 earnings forecasts.

The research house highlighted some downside risks factors to its earnings forecasts, including the risk of another 25bps interest rate cut – resulting in an aggregate 1.7% reduction in sector earnings; a 1% decline in loan growth – resulting in a 1.1% decline in sector net profit; as well as a 10bps increase in net credit cost could result in a 6.3-6.4% decrease in net profit.

The research house said potentially, the commercial/residential property sector could pose some risks to the system, though impaired loans remain minimal to total loans.

However, it noted the resilient and strong fundamentals of the banking sector, such as adequate capital ratios, ample liquidity, a relatively low gross impaired loan ratio and healthy loan loss cover.

“We maintain our sector neutral call, noting that business and consumer outlook in 2H19-1H20 will likely stay cautious due to external uncertainties and a lack of domestic catalysts,“ it said.

For 2019, after some earlier revisions to its universe’s loan growth forecasts, Affin Hwang now set a 3.8% target for 2019’s system loan growth.

It is currently projecting a core net earnings per share growth rate of -0.9% for 2019 and a 1.2% and 1.6% expansion for 2020 and 2021, respectively.

“Our slightly negative growth rate in 2019 is underpinned by the negative impact of the OPR cut, which moderated banks’ fund-based income; a 2.2% increase in operating expenses; and a 15% increase in impairment allowances.”

On stock picks, Affin Hwang remains selective and prefers RHB Bank Bhd for banking exposure.

“For non-banking stocks, we like Aeon Credit Service (M) Bhd and ELK-Desa Resources Bhd due to their higher receivables growth and attractive return on equities.”

Meanwhile, Kenanga Research said while it sees moderate loans growth ahead, the resilient asset quality translates into stable credit cost, sustaining profitability.

“Valuations are attractive and undemanding with most of the banking stocks under our coverage rated as ‘outperform’ with top picks being CIMB Group Holdings Bhd and Alliance Bank Malaysia Bhd.”


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Banking asset quality remains strong despite higher GIL

KUALA LUMPUR: The Malaysian banking system’s asset quality remained strong despite higher gross impaired loan ratio (GIL), according to RAM Ratings.

GIL increased to 1.6% as at end-July 2019 from 1.48% as at end-December 2018.

RAM co-head of financial institution ratings Wong Yin Ching said the weakness largely stemmed from a couple of lumpy impairments from the agriculture and manufacturing sectors.

“The rise in impaired loans is idiosyncratic in nature and we do not foresee industry-wide deterioration emerging in these two segments. The GIL ratio at the end of 2019 may slightly exceed our initial expectation of 1.6% but should stay below 1.7%. At this level, the domestic banking industry’s asset quality continues to compare favourably with regional peers,” Wong said in a statement in conjunction with the release of its Banking Quarterly Roundup – Q219.

The rating agency noted that the Q2 financial results also showed that the eight anchor banks’ average credit cost ratio remained modest at 27 basis points in 1H19, even after excluding a one-off MFRS 9-related adjustment by one institution.

“In addition, banks have maintained healthy loss absorption buffers with an average GIL coverage ratio of 131% (including regulatory reserves) and a common equity tier-1 capital ratio of 13.9%.”

Nonetheless, it said the profitability indicators of the majority of the eight anchor banks are still under pressure, with an average pre-tax return on assets of 1.33% and return on equity of 12.9% in 1H19 (1H18: 1.39% and 13.7%, respectively).

Meanwhile, domestic loan growth skidded to 3.9% year-on-year (yoy) while already-thinning net interest margins (NIMs) were crimped further subsequent to the May 2019 Overnight Policy Rate (OPR) cut.

However, RAM said lower net interest income was moderated by improved investment and trading income in 1H19.

It cautioned that NIMs may suffer another blow as the probability of an OPR cut later in the year is higher now, given that the worsening trade outlook could heighten downside risks to growth.

Loan applications only increased 0.8% yoy (three-month moving average) in July 2019. On a month-on-month basis, there was a 19.5% rebound in loan applications, primarily from households.

However, the rating agency said it remains to be seen whether the momentum can be sustained, particularly in view of the external uncertainties weighing on business and consumer sentiment.

“As such, our 5% loan growth projection for 2019 continues to carry some downside risk.”


Banking sector remains resilient despite uptick in impaired loans, says RAM ratings

KUALA LUMPUR, Sept 4 — The Malaysian banking system’s asset quality remained sturdy although the gross impaired loan ratio (GIL) edged up to 1.60 per cent as at end-July 2019 from 1.48 per cent as at end-December 2018, said RAM Ratings Services…


Banking sector remains resilient despite uptick in impaired loans, says RAM ratings

KUALA LUMPUR, Sept 4 — The Malaysian banking system’s asset quality remained sturdy although the gross impaired loan ratio (GIL) edged up to 1.60 per cent as at end-July 2019 from 1.48 per cent as at end-December 2018, said RAM Ratings Services…


Banking sector inexpensive, go for selective stock picking

PETALING JAYA: Despite negative developments in the banking sector and a modest growth outlook for banks, investors can draw comfort from the sector’s inexpensive valuations.

HLIB Research said the sector is trading at -1.5 standard deviation (SD) to its five-year mean price-to-book (P/B), retaining its neutral call and advocating selective stock picking rather than blanket exposure to the sector.

“Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields, still eking out healthy growth, and valuations got bashed down to -2SD and trough P/B valuations.”

Its preferred pick is Malayan Banking Bhd (Maybank). Other buys are RHB Bank Bhd, Alliance Bank Malaysia Bhd and BIMB Holdings Bhd.

MIDF Research opined that banking stocks in general are currently undervalued given its fundamentals remains intact. Hence, it is maintaining the positive stance on the banking sector at this junction.

The banking system saw a lower loan growth of 3.9% year-on-year (yoy) in July 2019 compared with the 4.2% in June.

Despite the weak business sentiment, Affin Hwang Capital noted that the loan disbursement of RM102.4 billion in July 2019 remained higher than the average monthly disbursement from 2014-18 of RM93 billion.

Business loans grew at a more subdued pace of 2.5% yoy in July (from 3.4% in June 2019), partially affected by loan repayment activity in the finance/insurance sector, wholesale/retail trade and manufacturing sectors.

Household loan growth was up 4.7% yoy in June (June: 4.9% yoy) driven by residential mortgages and personal financing.

“We are currently reviewing our 2019 loan growth target of 5%, amidst cautious business and consumer outlook in 2019. On the other hand, downside risks are largely cushioned by the broad-based economy while over the longer term, we expect consumer sentiment to gradually improve and drive consumption spending,“ said Affin Hwang.

It said the banking system liquidity remains healthy and ample, and expects banks’ funding costs to ease over the next six months following the Overnight Policy Rate cut, as most banks have an average fixed deposits’ maturity of between six to nine months.

“We expect the overall banking system NIM to edge down by 6bps in 2019 to 2.22%, stemming from weak asset yields and overall higher funding cost.”

Affin Hwang Capital maintained its neutral sector stance, with RHB and Aeon Credit Service (M) Bhd as its top picks.

“We maintain our neutral sector view as we foresee a sector core earnings growth of 1.0% yoy in 2019, followed by 4.3% yoy in 2020.”

HLIB said with limited positive catalysts to spur stronger borrowing demand, it has toned down 2019 loans growth estimate to 4-4.5% from 4.5-5%.

The research house believes sustaining net interest margins (NIM) would remain as an uphill challenge, given that the slower loans growth environment should encourage banks to engage in price-based competition to chip share away from one another.