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This article first appeared in The Edge Financial Daily on December 12, 2017

KUALA LUMPUR: A potential hike in the overnight policy rate (OPR) and the implementation of the Malaysian Financial Reporting Standard 9 (MFRS 9) are expected to impact the earnings of the banking sector in 2018.

Most economists have priced in one OPR hike by Bank Negara Malaysia next year, while some see two increases if the economy were to grow much faster than expected.

MIDF Research analyst Imran Yassin Md Yusof expects the net interest margin (NIM) of banks to improve slightly from this year due to the potential OPR hike.

“We view that the OPR hike will be beneficial to banks, especially those with a higher retail portion of their loans book and higher percentage of mortgages,” Imran told The Edge Financial Daily.

“However, there may be some [NIM] compression next year due to the Net Stable Funding Ratio (NSFR) implementation in 2019 that will moderate the OPR hike impact — but, in our view, this will be benign.”

The implementation of the NSFR will come into effect no later than Jan 1, 2019. It is a liquidity standard under Basel III that requires banking institutions to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.

AllianceDBS Research said banks with a larger share of variable-rate loans and a strong current and savings account (Casa) base are expected to benefit from an OPR hike, provided there is no uptick in asset quality.

“Based on our sensitivity analysis, every 25bps (basis points) hike in OPR would raise sector earnings by 2%. We currently assume flat NIM trends in 2018,” the research firm said in a recent note.

 

NIMs to be slightly better

AmInvestment Bank analyst Kelvin Ong expects NIMs to be slightly better in 2018 compared with 2017, with a projected improvement of 3bps year-on-year (y-o-y).

“We expect some repricing of loans to happen in 2018 as a result of the implementation of MFRS 9.

“With MFRS 9 in place, the banks would have to make more provisions, hence we expect some upward repricing of loans to compensate for the additional provisions,” he told The Edge Financial Daily.

Ong opined that the deferment of the implementation of the NSFR to Jan 1, 2019 from the initial date of Jan 1, 2018 has lessened competition among banks for deposits.

“We are seeing some competition among banks for deposits at present, but it is not so intense. Also, should the OPR hike happen, there will be some improvement to NIMs as interests earned on loans given would go up first, before the adjustment to interest paid out on deposits catches up,” he said.

Ong said the impact from the implementation of MFRS 9 is expected to be manageable for the banks.

“The impact [on capital ratios] could range from 25 to 90bps, and we think this is quite a manageable impact for the banks. The day one impact of MFRS 9 to banks would go towards the balance sheet via an adjustment to banks’ retained earnings, and this will affect banks’ Common Equity Tier 1 (CET1) ratios,” he said.

MFRS 9, which comes into force on Jan 1, 2018, requires banks to change the way they make loan loss provisions. They will have to make provisions in anticipation of future losses rather than the current practice of making provisions only when loans have been classified as impaired.

 

Loan growth

Maybank IB Research, in a banking sector note last week, lowered its aggregate loan growth forecast for 2018 to 4.2% from an earlier forecast of 4.7%, following the conclusion of the financial results reporting season for the third quarter of 2017 (3Q17). The firm had also pared its 2017 loan growth forecast to 3%, from 4.7% previously.

“Industry loan growth slipped further to 4.6% y-o-y in October 2017 from 5.2% y-o-y in September 2017 as non-household loan growth eased further to 4.1% y-o-y from 5.4% y-o-y in September. However, household loan growth maintained its pace at 5.1% y-o-y from 5% y-o-y in September 2017.

“On an annualised basis, the upward trend in household loan growth was more pronounced, picking up from an annualised pace of just 3% in Feb 2017 to 4.5% in October 2017. Annualised loan growth for non-household loans was just 1.5% in October 2017. Annualised loan growth for the industry was 3.2% in October 2017,” the research house said.

AllianceDBS, meanwhile, noted that loan growth in 2017 has been challenging for banks.

“Loan growth for 3Q17 was weak. Although there are hopes for a slight rebound in 4Q17, loan growth may end the year at only 4% at best.

“We expect some loan growth recovery in 2018 premised on the spillover from the persistently strong GDP growth. Loan growth tends to lag GDP growth by two to three quarters. Our loan growth base-case assumption is 5% for 2018,” said the firm.

As for the banking stock picks, MIDF’s Imran had buy calls on a few banks including CIMB Group Holdings Bhd with a target price of RM7.10, with the premise that the banking group would see better loan growth and NIM in 2018, and an improvement in earnings in Thailand and Indonesia.

AllianceDBS’ top picks included Malayan Banking Bhd (Maybank) with a target price of RM10.70. “Maybank is staging a strong rebound with improved credit costs and no further impairment surprises; its high Casa ratio as well as its strong position in capital markets and Islamic banking gives it a leg up in the current operating environment,” the firm said.

 

Syariah-compliant investments

AllianceDBS said the creation of more investable syariah equity opportunities in the financial sector, mooted by Permodalan Nasional Bhd (PNB), could spark interest in the sector.

In August, PNB was reported to be studying a potential issuance of Islamic shares (i-shares) by Maybank which will be linked to the Islamic banking business of the group. PNB controls 51% of Maybank.

“Apart from potentially designating part of Maybank’s share base as i-shares, we could see a twist involving Maybank Islamic Bhd which may be housed with [the MIDF group which is wholly owned by PNB].

“This is based on reports that MIDF could be seeking a relisting and obtain an Islamic banking licence. We believe other banks may follow suit with the i-share designation if Maybank successfully pulls this off,” said AllianceDBS.

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