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This article first appeared in The Edge Financial Daily on October 18, 2019

Banking sector
Maintain neutral:
Amid softer growth momentum of the industry, locally incorporated foreign banks saw their loan growth ease to around 2% year-on-year (y-o-y). Studying the second quarter of calendar year 2019 (2Q19) results of five of the larger foreign banks — Standard Chartered Bank Malaysia Bhd, Citibank Bhd, HSBC Bank Malaysia Bhd, OCBC Bank (Malaysia) Bhd and United Overseas Bank (Malaysia) Bhd (UOB), we found their combined y-o-y loan growth trailed behind the system’s loan growth of 4.2%. When compared with data on the eight listed banks under our coverage, the local players saw their combined loans and advances increase by 4.8% y-o-y.

By segment, overall consumer loans continued to be on a downtrend since our last update. Fuelling the decline, residential mortgages have contracted on a yearly basis for six straight quarters. Only UOB registered a growth in residential loans of about 5.4% y-o-y for 2Q19. In tandem with weak total industry volume, hire-purchase loans contracted steadily. The foreign players remained focused on expanding their credit card segment. Combined credit card balances grew 5.6% y-o-y, surpassing Bank Negara Malaysia’s (BNM) 3.1% increase.

The foreign banks stayed mostly cautious in the small and medium enterprise (SME) space. Advances to the SME segment accelerated by 1.4% y-o-y in 2Q19, surpassing local listed banks that saw their SME loans slip 4.1% y-o-y.

Net interest income (NII) declined for the third consecutive quarter. Y-o-y, NII slipped by 2.4% as total interest expense grew 5.1%, exceeding the total interest income growth of 1.3%. Despite muted loan growth, the foreign banks probably sought to strengthen liquidity buffers in view of rising macro challenges. Total deposits raised by the five foreign banks accelerated by 3.5%, fuelled by a current account savings account growth (+7.9% y-o-y) and deposits from individuals (+4% y-o-y). The foreign banks’ average loan-to-deposit ratio (LDR) stood at around 92%, slightly higher than BNM’s LDR of 89% in 2Q19.

Despite the softer loan growth and margin pressure, combined net profit for the five foreign banks grew 1.1% y-o-y but fell 12.7% quarter-on-quarter (q-o-q) for 2Q19, outpacing the local banks’ 6.1% y-o-y (+4.3% q-o-q) decline. The average return on equity widened to around 12.6% for the foreign players versus 9.8% for local banks. Total income climbed 3.5% y-o-y (-0.3% q-o-q), largely driven by a 24.2% y-o-y (+1.2% q-o-q) increase in non-interest income (non-NII). Muting the encouraging non-NII performance, contributions of Islamic banking operations and NII contracted by 11.2% y-o-y (+6.3% q-o-q) and 2.4% y-o-y (-2.4% q-o-q).

Profit before tax (PBT) broadened by 2.1% y-o-y (-11.2% q-o-q), underpinned by a 5.1% y-o-y (+9.2% q-o-q) increase in overhead expenses. Cushioning the increase as well as supporting overall profit growth, however, total allowances for credit impairment losses declined by 18.5% y-o-y (-10.2% q-o-q). The average cost-to-income (CTI) ratio rose to 50.5% for the five foreign banks versus local banks’ average CTI of 48.9% for 2Q19. However, we note that the foreign players continued to operate on a higher level of branch efficiency, compared with local banks, as their average PBT/bank branch stood at RM42.6 million versus RM11.6 million for local players.

The outlook for the banking sector continues to be riddled with uncertainties. Prospects of top-line growth continue to be muted by further margin pressure, modest loan growth and lacklustre capital market activities. Despite the weak macro backdrop, the banking sector remains well capitalised and should continue to display resilience in asset quality. Lending support to earnings, we foresee efforts to keep a lid on overhead costs intact. We reiterate our “neutral” stance on the sector. Our “buy” calls are maintained for CIMB Group Holdings Bhd, RHB Bank Bhd, Alliance Bank Malaysia Bhd and Affin Bank Bhd, with “hold” for Hong Leong Bank Bhd and Malayan Banking Bhd and “sell” reiterated for Public Bank Bhd. We upgrade AmBank (M) Bhd (AMMB Holdings Bhd) to “buy” from “hold” as the total upside to our target price has widened to above 12%.  — TA Securities, Oct 17

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