Analyst cuts core earnings growth forecast for banking sector

PETALING JAYA: AmInvestment Bank has cut the banking sector’s core earnings growth forecast to 7.6% from 9.2% after lowering expectations for banks’ non-interest income.
The earnings growth will be contributed by an increase in revenue and improvement in operating expenses. Last year, banks’ core earnings grew 10.6%.
Non-interest income is now expected to be more challenging than earlier expected, due to softer capital market activities, with IPOs and capital raising in the equity market likely to remain slow.
AmInvestment Bank, which has reiterated its “overweight” call on the banking sector, is maintaining the loan growth expectation of 5% for the Malaysian banking industry supported by a gross domestic product growth of 5.5%. Domestic demand and improvement in external trade remain the drivers of economic growth.
Banks registered slower loan growth in Q1’18, dampened by the slower pace of overseas loans even though domestic loan growth was above the industry rate.
AmInvestment Bank expects loan growth of banks to improve in H2’18 underpinned by a pickup in consumer loans.
“A stronger consumer spending is anticipated in the short-term period between the implementation of zero-rated GST and reintroduction of SST. We expect business loan growth to also improve, supported by the absence of large corporate loan repayments and a non-repeat of the forex translation impact seen in Q1’18.”
The research house also noted that loans to the manufacturing, wholesale and retail sectors, benefiting from the improvement in consumer spending, are anticipated to be stronger compared with loans to the construction and construction-related sectors. This is in view of the fact that several major infrastructure projects have been terminated while some are under review.
Net interest margin-wise (NIM), AmInvestment Bank anticipates it to taper off in H1’18 from Q1’18, which was boosted by an Overnight Policy Rate (OPR) hike of 25 basis points last January. NIM is projected to only expand two basis points (bps) this year against a projection of a three bps increase previously.
“The lagged repricing of banks’ deposit rates adjusting to the increase in OPR coupled with keener competition for deposits compared to H1’18 as the sector moves closer towards the implementation of net stable funding ratio (NSFR) will be the contributing factors.”
“Also, the tapering of margin is also expected to be partly attributed to pressures on the asset yield of banks’ subsidiaries in Indonesia (Maybank Indonesia and CIMB Niaga).”
AmInvestment Bank believes the OPR will be maintained at 3.25% in H2’18, based on the headline inflation, which is still expected to be low, thus sustaining a positive real interest rate.