Banking stocks fall to multi-year low after weak GDP growth

This article first appeared in The Edge Financial Daily, on February 13, 2020.
Banking stocks fall to multi-year low after weak GDP growth
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KUALA LUMPUR: Banking stocks, the proxy to economic growth, succumbed to heavy selling yesterday. Selling pressure emerged after the news that Malaysia’s domestic economy grew at barely 3.6% for the fourth quarter last year (4Q19), which in turn dragged down the annual growth to 4.3% — the slowest pace in 10 years.

Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Mohd Yunus noted that there is “ample room” for a rate cut should the domestic economy warrant one. This raises the expectation of the central bank to have another rate cut this year which will cause banks’ net interest income margin to shrink further.

The slower-than-expected gross domestic product (GDP) growth gave reason for investors to dump banking shares knowing that banks’ earnings are relatively sensitive to the economic climate. Furthermore, this will also give rise to concerns over banks’ loan books quality.

The outbreak of Covid-19 added to the concerns of a further slowdown in the economy, although most economists commented that the impact of the outbreak remains unknown.

Hong Leong Bank Bhd, the second most expensive bank on Bursa Malaysia after Public Bank Bhd in terms of price-to-book value, led the fall yesterday.

Hong Leong Bank fell 70 sen or 4.34% to RM15.44 — its lowest closing price since December 2017 — valuing it at RM33.47 billion.

Public Bank was the second biggest loser among the banks yesterday. It slid 52 sen or 2.84% to finish at its 3.5-year low of RM17.78, with a market capitalisation of RM69.02 billion.

Malaysia’s largest bank by market capitalisation, Malayan Banking Bhd (Maybank), too, was not spared from the selldown. Maybank’s share price fell eight sen or 0.94% to RM8.46, valuing it at RM95.1 billion.

CIMB Group Holdings Bhd, meanwhile, lost 13 sen or 2.56% to RM4.95 at the close, whereas BIMB Holdings Bhd shares were down 15 sen or 3.85% to RM3.75.

RHB Bank Bhd fell 11 sen or 1.92% to RM5.61, and Alliance Bank Malaysia Bhd’s stock price drifted five sen or 2.04% lower to close at RM2.40.

The selldown of banking stocks yesterday dragged the Bursa Malaysia Finance Index down by 297.4 points or 2% to 14,615.63, making it the worst-performing subindex on the local bourse, by both value and percentage terms.

The benchmark FBM KLCI retreated 0.55% to close at 1,542.94 points.

Nor Shamsiah told a news conference yesterday the central bank has ample room to adjust the overnight policy rate (OPR) to accommodate challenges in the economy, after economic growth slowed to 3.6% for 4Q19.

According to Nor Shamsiah, concerns are that Malaysia’s economic growth will be affected by the Covid-19 outbreak moving forward, particularly for 1Q20.

“The overall impact of the virus on the Malaysian economy will depend on the duration and spread of the outbreak as well as policy responses by authorities,” said Nor Shamsiah.

Explaining that the selldown of banking stocks was triggered by the weaker-than-expected growth figures and continued concerns about the Covid-19 virus, an analyst told The Edge Financial Daily that it is not all doom and gloom going forward.

According to the analyst, who declined to be named, positive signs are showing as China’s government senior medical adviser has predicted for the outbreak to be over by April.

Coupled with the Malaysian government’s economic stimulus package to be introduced by next month, the economy has a chance of rebounding from its low.

“While [Malaysia’s growth for] 1Q20 is expected to be impacted, the economy is likely to rebound in April. Together with the expected stimulus package, I believe people will look more favourably at banking stocks during that time.

“At the moment, banks that are more exposed to tourism, wholesale and retail, as well as hospitality sectors will be the ones affected,” the analyst explained.

Amid optimism that the new outbreak would soon slow and an effective stimulus package, the analyst opined that the central bank is unlikely to rush into another 25-basis-point cut in the OPR.

“Unless the virus gets worse and the stimulus package does not work, I forecast just one rate cut this year.”

On Jan 22, BNM announced its first rate cut for the year, lowering the OPR by 25 basis points to 2.75%. The OPR is now at its lowest point since March 2011.

Meanwhile, another local analyst opined that while another OPR cut, if any, is not seen as a positive development for banks, the net impact on the overall sector is not necessarily significant.

“Generally, the rule of thumb is that if there’s a rate cut, it should not be positive for banks as it will hit their margins.

“However, at the end of the day, the banks will get to revise their deposit [rates] so the net impact will not be too significant. Assuming there are two rate cuts this year, earnings will be hit by 4-6% on average for the overall sector. The impact is negative, but not huge,” the analyst said when contacted.