KUALA LUMPUR: Malaysia’s banking sector will face some headwinds this year, including challenges that had already created a tougher environment last year, analysts said.
Loan growth easing further on slower economic growth, net interest margin remaining under pressure and non-interest income remaining subdued are among the headwinds.
“Despite the headwinds, there are also several positive drivers within the banking sector, and we believe these would at least partly offset the headwinds,” said Hong Leong Investment Bank (HLIB) in a research note.
On the positive side, asset quality is expected to remain robust this year and there is ample liquidity to fund domestic growth. There are also attractive valuations following share price corrections, and the full impact of cost management initiatives kicking in this year should cushion banks’ bottomlines.
HLIB cites the decline in share prices of six banks in its report as indicative of slower economic activities, especially after the implementation of the Goods and Services Tax in April last year.
The declines of banking stocks of Alliance Financial Group Bhd (AFG), Affin Bank Bhd, AMMB Holdings Bhd, CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and RHB Capital Bhd (RHBCap) ranged between nine per cent and 33.5 per cent.
The research house said the only exception was Public Bank, with less than one per cent decline in its share price.
Maybank Investment Bank (Maybank IB) said on an annualised basis, overall loan growth was a much slower 7.5 per cent compared with eight per cent in October last year, with annualised household loan growth of 7.6 per cent and non-household loan growth of 7.3 per cent.
“Household loans, which currently make up 57 per cent of total loans, have continued to moderate in growth and at 7.8 per cent year-on-year, this is the first time growth has slipped to less than eight per cent since March 2008,” it said in a research note.
Maybank IB said loan applications contracted 5.4 per cent year-on-year in November last year after a 12.8 per cent year-on-year jump in October, with a much more sizeable 13.1 per cent year-on-year decline in residential property applications compared with -9.5 per cent year-on-year the month before.
It said the pace of contraction was also a larger, at 30 per cent year-on-year in November for non-residential property loan applications, compared with -21 per cent year-on-year in October.
On loan deposit ratio (LDR), HLIB noted that the industry LDR increased to 86.3 per cent in October last year (from 81.6 per cent in end-2014), with excess liquidity shrinking by 25.7 per cent to RM227.3 billion during the same period, partly due to capital outflows and weaker underlying economic activities.
Its earnings forecasts for four of seven banks under its coverage (AFG, Affin, CIMB and RHBCap) are trimmed, while earnings forecasts for AMMB, Maybank and Public Bank are maintained.
Maybank IB said its selection was focused on banks with decent balance sheet liquidity. Hence, it issued a “buy” call on AFG, BIMB and Hong Leong Bank/Hong Leong Financial Group, which had comfortable gross LDRs of 86, 83 and 81 per cent, respectively.