This article first appeared in The Edge Financial Daily on June 19, 2018
Banking sector
Maintain neutral: Although banks’ core net profit growth softened from 12.8% year-on-year (y-o-y) in the fourth quarter of 2017 (4Q17), the momentum remained healthy at 9.7% y-o-y in 1Q18. The key drivers of 1Q18 earnings growth were: i) a wider expansion of 8.3% y-o-y in non-interest income versus 7.7% y-o-y in 4Q17; ii) a 9.4% y-o-y drop in loan loss provisioning; and iii) a smaller increase of 1.8% y-o-y in overheads in 1Q18 verus 8.1% y-o-y increase in 4Q17.
The market expected the rate hike in January 2018 to lift banks’ margins in 1Q18. Ironically, banks’ net interest margin shrank by nine basis points y-o-y, causing 1Q18 net interest income (from conventional banking operations of the local banks and Islamic banking operations of BIMB Holdings Bhd) to fall 0.7% y-o-y. In our view, this was mainly due to the increased competition for deposits.
Malaysian banks’ 1Q18 net profit was below our expectations as three banks, that is Public Bank Bhd, AMMB Holdings Bhd and Alliance Bank Malaysia Bhd, missed our forecasts, compared with only one bank (BIMB Holdings) outperforming our expectations. The variance in 1Q18 to our forecasts mainly came from lower-than-expected top-line growth
Loan growth picked up from 4.1% y-o-y at end-December 2017 to 4.4% y-o-y at end-March 2018, mainly driven by the improvement in non-core segments, that is construction, financing for purchase of securities and “other” loans. For core loan segments, the growth in residential mortgages was stable at 8.9% y-o-y at end-March 2018 while the growth in working capital loans remained lethargic. We are projecting loan growth of 4% to 5% for 2018.
We are forecasting net profit growth of 8.9% for 2018 (versus 8.3% in 2017), which is below the 10.4% we had projected after the 4Q17 results season in February 2018. At the top line, we are forecasting an expansion of 6.3% in net interest income (versus 6% in 2017) and 12.7% in non-interest income (versus 1.6% in 2017). Cost-wise, we expect a wider increase of 7.7% in overheads in 2018 compared with a rise of 4.8% in 2017 while loan loss provisioning is projected to increase by 53.3% in 2018.
We continue to rate banks as a “neutral” given the expected contraction in margins (from the levels in 1Q18) and weak loan growth. We also envisage a weaker net profit growth of 7% to 8% y-o-y in 2H18 forecast versus around 10% yoy in 1H18. Potential upside/downside risks to our call include an improvement/deterioration in loan growth and fee income growth. — CGSCIMB Research, June 17