Modest growth outlook for Malaysian banking sector

PETALING JAYA: The growth outlook for banks remains tepid for now but comfort can be drawn from the sector’s cheap valuations, according to HLIB Research.

“Although the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it’s trading near two standard deviations below its five-year average price-to-book ratio. Those that favour exposure to this sector have to be selective,“ it said in a report.

It said the slowdown in system loan growth was arrested in November 2019 at 3.7% year-on-year (yoy) while deposit growth tapered to 2.6%. However, leading indicators were better, asset quality improved, and interest spread widened.

“Although these were positives, we prefer to wait and observe trends for the next one to two months to confirm a bona fide improvement.”

The November system loan growth was within HLIB’s 2019 loan growth estimates of 3.5-4%. For 2020, it said loans are expected to expand at similar rate given limited positive catalysts to spur stronger borrowing demand.

Although interest spread widened, it reckoned a squeeze will return on lower average lending yield, seeing the lacklustre loan growth climate should encourage banks to engage in price-based competition to chip share away from one another.

“Hence, we believe maintaining net interest margins (NIM) would remain as an uphill challenge.”

HLIB retained a neutral call on the sector and its preferred pick is Malayan Banking Bhd. Other buys are RHB Bank Bhd, BIMB Holdings Bhd and Alliance Bank Malaysia Bhd.

Meanwhile, Affin Hwang Capital believes that the rest of the loan growth in the fourth quarter of 2019 will be driven primarily by residential property and other household loans, as well as manufacturing, retail and transportation sectors.

“We believe that overall downside risks are cushioned by the broad-based economy, resilient domestic consumption spending and a low unemployment rate of 3.2% (October).”

It expects the overall banking system NIM to edge down by 7bps in 2019 to 2.12%, stemming from weak asset yields and overall higher funding cost.

“We maintain our neutral sector view as we foresee a contraction in sector core earnings per share growth of 1.2% yoy in 2019, and a further decline of 1.8% yoy in 2020 and flat growth in 2021.”

Its top picks are AMMB Holdings Bhd, Aeon Credit Service (M) Bhd and ELK-Desa Resources Bhd.

source https://www.thesundaily.my/business/modest-growth-outlook-for-malaysian-banking-sector-MD1849817