This article first appeared in The Edge Financial Daily on October 2, 2019
KUALA LUMPUR: Malaysia’s banking sector will remain stable but soft going forward, say analysts, with most of them giving a modest growth outlook.
In August, loans growth stayed at 3.9% year-on-year (y-o-y), same as the preceding month, as business and household lending was tepid, while deposits growth slowed further to 4.6% versus July’s 4.9% primarily due to softer build-up in fixed deposits.
Other indicators too remained weak, as loan applications swung back to negative at -0.3% compared to July’s positive 0.5% growth, on lower household demand.
Loan approvals tapered to a 1.7% y-o-y growth against 11.2% in July on tighter lending to households, according to Hong Leong Investment Bank (HLIB).
Analysts are of the view that the loan growth will remain subdued going forward, with added headwinds from rising gross impaired loans (GILs) — which in August ticked up one basis point month-on-month to 1.61% — showing a sign of stress in certain sectors’ lending and little improvement in asset quality.
Furthermore, there are concerns over margin contractions due to the overnight policy rate cut and an expected uptick in credit costs in 2019, in line with the increase in the GIL ratio, said Winson Ng, analyst at CGSCIMB Research, who reiterated a “neutral” call on the sector.
“The negative take from the August 2019 banking statistics was another sizeable hike in the industry’s GIL, up RM336.9 million. The increase in GIL totalled RM767.9 million for the two-month period of July and August 2019, and pushed up the GIL ratio from 1.57% as at end-June 2019 to 1.61% at end-August 2019, inching closer to our projected 1.8% for end-2019F,” said Ng.
“The industry’s total loans expanded by only 1.9% in the first eight months, suggesting downside risks to our projected loan growth of circa 5% for 2019,” he said, adding that estimates show that a one percentage point reduction in projected loan growth would trim 2019 net profit forecasts by about 0.8%.
Affin Hwang Capital analyst Tan Ei Leen had a slightly more optimistic perspective, although she noted that the sector could see a contraction in core earnings per share growth of -0.9% y-o-y in 2019, before a slightly modest growth rate of 1.2% and 1.6% y-o-y in 2020 and 2021, respectively.
She expects loan growth to pick up in the fourth quarter of 2019, driven primarily by drawdown of construction-related project loans as well as residential property loans, boosted by the home ownership campaign.
She said the year-to-date loan growth of 1.9% translates into an annualised loan growth of 2.9%.
“For 2019E, we have a loan growth target of 3.8% y-o-y, which we lowered from 5% recently. We believe that overall downside risks are cushioned by the broad-based economy, resilient domestic consumption spending and a low unemployment rate of 3.3% (June 19),” Tan said.
Although the growth outlook for banks is modest, on the flip side, valuation and dividend yields of banks appear to be compelling.
HLIB research analyst Chan JitHoong draws comfort from the sector’s inexpensive valuations which he said is trading at -1.5SD (standard deviation) to its five-year mean price-to-book value.
Chan said investors who favour exposure to this sector will have to be selective, and recommended Malayan Banking Bhd which is giving above average dividend yields, as well as RHB Bank Bhd and BIMB Holdings Bhd that are still eking out healthy growth. The research house maintained its “neutral” call on the overall sector.
Maybank IB Research analyst Desmong Ch’ng believes the larger caps are fairly valued at this stage.
He has a “buy” call on the smaller- to mid-capitalised banks such as AMMB Holdings Bhd, Hong Leong Financial Group Bhd, and Alliance Bank Malaysia Bhd, besides RHB and BIMB.