This article first appeared in The Edge Financial Daily on March 30, 2018
Banking sector
Maintain overweight: In our view, there were not much upside or downside surprises based on the release of Bank Negara Malaysia’s (BNM) 2017 Financial Stability and Payment Systems Report. For 2018, we believe that favourable conditions such as receding household debt risks, ample liquidity and an ease in default risk will be positive factors for the domestic banking sector.
According to BNM, the banking sector’s profitability continued to increase by 12.3% year-on-year (y-o-y) to RM36 billion in 2017, reflecting slower growth in interest expense, higher fee-based income and lower impairment and other provisions. Meanwhile, for 2018, we continue to forecast a core net profit growth of 6.4% y-o-y, and 4.5% y-o-y in 2019.
The banking sector’s outstanding financing grew by 4.1% y-o-y to RM1.58 trillion in 2017, underpinned by households and small and medium enterprises. Though 2017 saw repayments for large businesses outpacing disbursements, we believe that there will be a recovery in business loans due to the need to invest in further capacity expansion arising from the increased capacity utilisation rate in 2017 versus 2016. At this juncture, we are maintaining our loan growth target of 5% for 2018.
Growth in household borrowings moderated for the seventh consecutive year and BNM considers the growth to be more in line with income growth. In 2017, household debt-to-gross domestic product (debt-to-GDP) ratio declined further to 84.3% (owing to the stronger GDP) from 88.3% in 2016. Accordingly, the underlying trends in household debt accumulation continued to improve.
We maintain our overweight call on the sector. We foresee sector core earnings growth of 6.4% y-o-y in 2018, followed by a more modest 4.5% y-o-y in 2019 and 3.8% y-o-y in 2020. The sector’s overall valuation in 2018 still appears attractive at a 1.43 times price-to-book value multiple on a forward basis against the past-10-year average of 1.6 times and the past-five-year average of 1.5 times.
Key risks include new non-performing loan formation, net interest margin compression, higher funding costs, weaker loan growth and much higher provisions on International Financial Reporting Standard 9 (IFRS 9) adoption. Our top picks are Hong Leong Bank Bhd and Malayan Banking Bhd. — Affin Hwang Capital Research, March 29