Lower net profit growth seen for banks in 2018

This article first appeared in The Edge Financial Daily, on September 19, 2018.
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Banking sector
Maintain neutral:
The negative surprise in banks’ financial results for second quarter of 2018 (2Q18) was the 1.5% year-on-year (y-o-y) drop in operating revenues. At the top line, net interest incomes slid by 3.1% y-o-y in 2Q18 under the pressure of margin contraction arising from stiff competition for deposits. Also, non-interest incomes fell by 9.2% y-o-y in 2Q18, owing to lower investment incomes and weak expansion in fee incomes. The lower revenues were the key reason for the deceleration in banks’ core net profit growth from 9.7% y-o-y in 1Q18 to 6.3% y-o-y in 2Q18.

In light of the lower revenues, banks’ 2Q18 net profit growth was primarily supported by the 36.2% y-o-y plunge in loan loss provisioning (LLP) and 3.3% y-o-y drop in overheads. However, we expect the LLP to bottom in the next one to two quarters.

Malaysian banks’ 2Q18 net profits were below our expectations as two banks — Public Bank Bhd and Affin Bank Bhd — missed our forecasts, compared with AMMB Holdings Bhd that outperformed our expectations. The deviation from our forecasts came mainly from lower-than-expected top-line growth and the unexpected surge in Affin’s LLP.

The industry’s loan growth picked up from 4.4% y-o-y at end-March to 5% y-o-y at end-June. We expect loan momentum to remain strong until August as the zero-rating of the goods and services tax boosted auto sales and narrowed the contraction of auto loans. However, auto sales could taper off in September when the government implemented the sales and services tax. Hence, we think that loan growth could trend downwards from September to end-December. We maintain our projected loan growth of 4%-5% for 2018.

We are forecasting net profit growth of 7.5% for 2018, slower than the 8.3% in 2017. At the top line, we are forecasting expansion of 5.9% in net interest income (versus 5.4% in 2017) and 11.5% in non-interest income (versus 2.1% in 2017) in 2018. Cost-wise, we project a wider expansion of 7.7% in overheads in 2018 versus a rise of 4.8% in 2017 and for loan loss provisioning to surge by 55.8% in 2018 versus a drop of 25.1% in 2017.

The decline in the sector’s 2Q18 operating revenue underscores a challenging environment for banks’ top-line growth due to pressure from margin erosion and weak fee income expansion. LLP remained low in 2Q18 but we expect this to bottom in the next one to two quarters. The appeal of banks lies in the attractive 2019 dividend yield forecast of 4% for the sector versus 3.2% for the market. In view of the unfavourable operating environment, we remain “neutral” on banks. RHB Bank is still our top pick for the sector. — CGSCIMB Research, Sept 14