This article first appeared in The Edge Financial Daily on May 3, 2018

KUALA LUMPUR: With year-to-date (YTD) loans growth of 1.2%, implying annualised growth of 4.9%, Nomura Group Global Equity Research said its 5% forecast for 2018 is increasingly achievable.

The loans growth target is faster than 2017’s 4.1%.

In a report on Malaysia banks yesterday, Nomura said with loans demand likely to pick up after the 14th general election next week, and also given the seasonality where the second half is generally stronger than the first half, there might even be upside risk to its numbers.

“The household sector is still the biggest contributor to loans growth (up 1.3% YTD) helped by residential mortgages (up 2.1% YTD),” it said.

On the other hand, Nomura warned that automotive and non-residential mortgages are still anaemic, posing some downward pressure to loans growth. “These two segments are likely to prevent system growth from breaching double-digits in the next two years,” it added.

Bank Negara Malaysia’s March data release shows that after four years of slowing, system loans growth is finally on track for acceleration in 2018. Banking system deposits were up 2.7% YTD, implying annualised growth of 11.3% for 2018, mainly led by fixed deposits and savings accounts.

However, a decline in current account balance YTD implies current and saving accounts ratio for the system fell marginally to 26.9% from 27.8% at the beginning of the year, said Nomura.

Following the 25 basis points (bps) rate hike in January, the spread between weighted average lending and deposit rates has been rising, with March seeing a further 3bps increase.

“Overall sector liquidity remains ample, with system loan-deposit ratio of 87.7% in March and system liquidity coverage ratio of 141%, which should be supportive of our thesis of net interest margin expansion for the banks in 1HFY18 results,” it added.

“With a system gross impaired loans ratio of 1.57% — still largely unchanged over the last year, we believe asset quality from the Malaysian book is unlikely to pose any negative surprise for the banks in the next results announcement,” said Nomura.

The foreign research firm has an “overweight” call on the Malaysian financial sector.

“We believe all eyes will be on the 1QFY18 results released in May, where banks with December financial year end will report FRS 9 compliant results and disclosures. Of note will be the quantum of stage 2, that is, underperforming loans book, and the extent of capital erosion on day-1 transition,” noted Nomura.

Within its Malaysia bank coverage universe, Nomura has “buy” ratings on Malayan Banking Bhd, CIMB Group Holdings Bhd and Public Bank Bhd.