AmInvest Research Reports

Author: AmInvest   |   Latest post: Tue, 18 Jun 2019, 4:57 PM


Banking - Modest income growth with stable asset quality

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Investment Highlights

  • We continue to be OVERWEIGHT on the banking sector in 2019. We expect the sector's core earnings to grow by 4.6% in 2019 (2018: 6.5%), underpinned by a modest growth of 3.6% in total income, supported by higher NII from loan expansion. Meanwhile, NOII is projected to be flat with controlled growth in operating expenses and stable credit cost. We do not expect significant rises in provisions for loan impairments.
  • For 2019, we expect loans for the Malaysian banking industry to grow by 4.0–5.0% premised on a slower GDP expansion of 4.5-4.8%. This will be close to 2018’s expectation of 5.0% growth on the back of a projected increase in GDP by 4.8–5.0%. Household and non-household loan growth is expected to moderate slightly in 2019. Capital investment spending in services and manufacturing and private consumption will drive economic growth in 2019.
  • We expect the OPR to be unchanged at 3.25% in 2019. NIMs for banks in 2019 are expected to be slightly compressed or flat at best, compared with 2018. NIMs could be still be pressured by the slowdown in the growth of CASA and decline in CASA ratio despite the extension in the NSFR observation period to 2020. We do not foresee deposit rates offered by banks to be as high as that in the deposit campaigns before the deferment of the NSFR. Meanwhile, NIMs of banks’ subsidiaries, namely Maybank Indonesia and CIMB Niaga, are likely to still encounter margin pressures in 2019 although lesser than in 2018. This will be engendered by the rise in interest rates in Indonesia to mitigate the impact of another two Fed rate hikes this year.
  • We expect the sector’s opex to grow by 3.2% for 2019 leading to an improvement in CI ratio of 46.5% (2018: 47.2%).
  • 10- year MGS yields are unlikely to trend significantly lower going into 2019 as further interest rate increases in the US loom. This could result in softer issuances of new sukuk/bonds in 2019. Markets are expected to remain volatile in the near term, and it continues to look challenging on banks’ fee income, particularly the IB and fund management business. For 2019, we have already projected a lower NOII for the larger capitalised banks, Maybank and CIMB.
  • We expect asset quality for banks to remain stable in 2019 albeit an anticipated slight uptick in GIL ratio. GIL ratio for domestic loans could inch up in 2019 from 1.5% while that of overseas loans is expected to be holding up, barring any significant deterioration in oil prices and escalation in the US-China trade war. Loan exposures to commercial real estates, construction and oil & gas sectors are likely to be closely monitored. On allowances for loan losses, we expect provisioning to be slightly higher in 2019 vs. 2018 owing to the slowdown in economic growth after implementing MFRS 9. We have factored in a moderately higher credit cost assumption of 27bps for the sector in 2019 vs. 25bps in 2018.
  • The key risks for the sector are: i) higher-than-expected provisions from deterioration in asset quality in the event that the trade tension between the US and China exacerbates and ii) a lower liquidity in the market, consequently decreasing the CASA growth and ratio of banks further leading to much higher funding cost than expected.
  • For 2019, we expect the sector’s ROE to be 11.0% vs. 11.3% in 2018.
  • Our top picks are Public Bank (fair value: RM26.00/share), Maybank (fair value: RM10.70/share) and RHB Bank (fair value: RM6.20/share). Our BUY call on Public Bank is premised on its strong asset quality and loan loss cover. For Maybank, the group’s earnings are well diversified. It is still recording positive JAWs with growth in total income outpacing expenses. NIM could improve further ahead with the lowering of its funding cost as the group releases the excess liquidity built-up in 1HFY18. Meanwhile, dividend yield for the stock continues to be attractive relative to peers with its high payout ratio while potentially offering investors higher returns with the reinvestment of their dividends into additional shares under the DRS. The high dividend payouts are expected to provide support to the share price of Maybank. On RHB Bank, we continue to like the stock due to compelling valuations, trading at 0.8x to FY19 BV/share. Also, the group's asset quality is improving with provisions declining.

Source: AmInvest Research - 8 Jan 2019

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