This article first appeared in The Edge Financial Daily on November 2, 2017

Banking Sector
Maintain neutral on banks due to the potential negative impact from MFRS 9: As flagged in our report dated Oct 2, 2017, the industry’s year-on-year (y-o-y) loan growth trended downwards from 5.8% at end-August 2017 to 5.2% at end-September 2017. We believe the drag mainly came from the business loan segment as the household loan momentum was sustained at 5% y-o-y at end-August 2017 and end-September 2017.

Slower growth was recorded in the major business loan segments in September 2017, that is manufacturing and general commerce loans.

Growth in leading loan indicators deteriorated for the second consecutive month in September 2017. Expansion in loan applications eased from 4.1% y-o-y in August 2017 to 0.3% y-o-y in September 2017, while approvals fell 1.7% y-o-y in September 2017 compared to a 9.9% y-o-y rise in August 2017. Both indicators had seen poorer performance in the residential mortgages and auto loan segments.

This dims the hope for a recovery in the y-o-y loan growth in fourth quarter of forecasted financial year of 2017 (4QFY17F).

In view of the weak leading loan indicators, we expect the y-o-y loan growth to trend downwards in 4QFY17F, from 5.2% at end-September 2017 to 4%-5% for 2017F. Beyond that, we do not see any imminent catalysts for loan growth in 2018F and hence, we expect the industry’s loan momentum to remain weak at 4%-5% in 2018F.

The industry’s gross impaired loan ratio inched down from 1.67% at end-August 2017 to 1.66% at end-September 2017 while loan loss coverage was largely stable at 81.2% at end-September 2017 (versus 81.4% at end-August 2017). We are projecting a gross impaired loan ratio of 2% for end-2017F.

We retain our “neutral” call on banks given the potential negative impact from the adoption of MFRS 9 in 2018, and the unattractive valuations. Potential upside risks to our call are a pickup in loan growth and expansion in margins. On the other hand, the potential downside risks to our call include a rise in banks’ loan loss provisioning upon the adoption of MFRS 9 in 2018. — CIMB Research, Nov 1