Investment Highlights

• We continue to be OVERWEIGHT on the banking sector. We now expect the sector's core earnings to grow by 7.6% in 2018 (previously: 9.2%) after lowering our expectation for banks’ non-interest income. This will be contributed by an increase in revenue and improvement in operating expenses (2017 core earnings growth: 10.6%).

• For 2018, we retain our loan growth expectation of 5.0% for the Malaysian banking industry supported by a GDP growth of 5.5% (loan-to-GDP multiplier of close to 1.0x). Domestic demand and improvement in external trade remain the drivers of economic growth.

• 1Q18 saw a slow loan growth for banks. Domestic loan growth in 1Q18 of most banks was above the industry rate, although dampened by the slower pace of overseas loans. FX translation with the strengthening of the ringgit also affected the growth of international loans. We expect loan growth of banks to improve in 2H18, 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 loans repayments and a non-repeat of the FX translation impact seen in 1Q18. Loans to the manufacturing, wholesale and retail sectors benefitting from the improvement in consumer spending are anticipated to be stronger compared to 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.

• In 2H18, we anticipate NIM of banks to taper from 1Q18 that was boosted by an OPR hike of 25bps on Jan 2018. The lagged repricing of banks’ deposit rates adjusting to the increase in OPR coupled with keener competition for deposits compared to 1H18 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). We expect bank’s NIM to expand by 2bps for 2018 against a projection of a 3bps increase previously.

• The OPR is likely to be maintained at 3.25% in 2H18. This is based on the headline inflation which is still expected to be low, thus sustaining a positive real interest rate. We project the inflation rate for 2018 to be 2.0%–2.5%. The implementation of zero-rated GST effective June 1 until the reintroduction of SST in September provides a 3 months’ tax holiday, hence lowering the prices of goods while the firm petrol prices (RON 95 and diesel) until the end of 2018 are likely to keep a lid on the inflation pressure.

• Non-interest income of banks is now expected to be more challenging than what we expected earlier. This is in view of softer capital market activities based on the rising MGS yield trend, which is in line with the other Asian countries due to the tightening in US with rising yields in the latter’s treasury securities. Meanwhile, the issuance of IPOs and capital raising under the equity market are likely to remain slow. We expect the higher yields to also affect banks’ investment and trading income with a marked-to-market impact on securities coupled with lower trading gains.

Source: AmInvest Research - 26 Jun 2018