This article first appeared in The Edge Financial Daily on September 14, 2017

KUALA LUMPUR: Net profit growth of seven Malaysian banks, which came in at 12.1% in the first half of 2017 (1H17), is anticipated to slow to 6% in 2H17, according to CIMB Research.

This is mainly due to the higher base recorded in 2H16 of RM12.1 billion, compared with RM10.1 billion for 1H16, it said in a note to clients yesterday.

The forecast is for the seven Malaysian banks under its coverage, namely Malayan Banking Bhd (Maybank), Public Bank Bhd, Hong Leong Bank Bhd, Affin Holdings Bhd, Alliance Financial Group Bhd, RHB Bank Bhd and BIMB Holdings Bhd. It expects their net earnings expansion to register 8.3% in 2018.

Overall, Malaysian banks — including CIMB Group Holdings Bhd — registered a core net profit year-on-year (y-o-y) growth of 20.1% for the second quarter of 2017 (2Q17) — the strongest since 3Q10 — higher than the 14.1% y-o-y growth captured in 1Q17, it said.

The key earnings drivers in 2Q17 were a 9.2% y-o-y rise in net interest income — the strongest in five years — and a 74.8% y-o-y reduction in impairment losses for Maybank and RHB Bank, it said.

However, the sector’s 2Q17 net profit was below the research house’s expectations as one bank missed its estimates, while none of the other banks outperformed its expectations.

Maybank and RHB Bank, it said, recorded the strongest net profit growth of 43% y-o-y each in 2Q17, mainly catalysed by the absence of the chunky impairment losses for their exposures to Swiber bonds. It said the net earnings growth for CIMB Group Holdings was also strong at 26.3% y-o-y in 2Q17.

Apart from the above three banks, all other banks recorded single-digit net profit growth in 2Q17.

“The sole underperformer in 2Q17 was BIMB Holdings as its 1HFY17 net profit only accounted for 47% of our full-year forecast due to lower-than-expected top-line growth,” said CIMB. BIMB Holding’s 2Q17 net profit declined 5.6% y-o-y.

Industry loan growth was also weak at only 1.8% in 1H17, translating into an annualised growth of 3.6% for 2017, said CIMB.

“In our view, the drag mainly came from the business loan segment, which we estimate to have expanded by only 1.1% in 1H17. We are projecting a loan growth of 4% to 5% for 2017F (forecast), below the 5.3% registered in 2016,” it said.

Moving forward, CIMB expects 2H17 earnings to be supported by an expected decline in loan loss provisioning, and a recovery in loan growth.

“We project 9.2% net profit growth for banks under our coverage in 2017F, compared with a rate of only 0.5% in 2016. The 2017 net profit growth would be underpinned by the normalisation of loan loss provisioning, with an expected increase of only 6% in 2017 versus 67.7% y-o-y jump in 2016, and the non-recurrence of RM452 million in impairment losses incurred by Maybank and RHB Bank for their exposures to Swiber bonds,” it said.

It also kept its “neutral” call on banks, given the potential negative impact from the adoption of the Malaysian Financial Reporting Standards 9 in 2018, and unattractive valuations.