Latest Trends

• BNM released its 2016 annual report yesterday. Below are the key highlights for the banking sector.

• Resilient performance. All in, the banking sector delivered satisfactory performance despite GDP growth moderation with oil and FX shocks in 2016. Outstanding loan ended 2016 with 5.3% growth and remained supportive of economic growth with ample liquidity. Despite the negative shocks, the banking sector remained resilient with ample buffer to absorb loss chiefly benefiting from various regulations on capital management.

• SME lends support to business loan . SME loan made a headlight in 2016 as it surged by 9.2%, thus supporting business loan to grow by 4.8%. Overall, banks turned cautiously optimistic on the SME sector despite continued uncertainty in global outlook. Moving forward, government remains supportive of SME growth with various allocations under Budget 2017 for SME development amounting to RM930m for grab.

• Household debt cools down. Household debt growth moderated further to 5.4% (2015: +7.3%), causing household debt level to dip slightly to 88.4% of GDP (2015: 89.1%). Bulk of the debt is tied up to properties and principal-guaranteed investment which contribute to wealth accumulation. The capacity of household to service debt has generally remained firm with accelerating in income by 5.5% (+5.7% in 2015).

• Oil and gas well contained. The pre-emptive measures by banks saw exposure in oil & gas well contained as the interest coverage ratio of the sector remained low at 7.7% of total corporate debt (2015: 6.2%).

• Asset quality deteriorates slightly. Asset quality weakened marginally due to weakening of oil & gas-related, automotive and real estate sectors which saw individual allowance rise to 1.24% (2015: 1.20%). Given this, loan loss coverage deteriorated slightly to 90.2% (2015: 96.3%).

• Heightened usage of technology. The usage of technology is fast changing the banking landscape as banks now turn to technology to improve the efficiency and reduce the cost of transaction. At the same time, new innovations continue to rapidly emerge with the proliferation of financial technology (FinTech) start-up companies.

Risks

• Deteriorating asset quality that will impact banks provisioning level and high household debt that will push consume sentiments lower.

Rating

NEUTRAL ( ↔ )

• We keep our NEUTRAL stance on Banking sector due to modest growth outlook for earnings, loan and deposit growth in the environment of stable GDP expansion. The modest earnings growth will result in lower ROE and lower the expected return.

Top Picks

• Maybank (BUY, TP: RM9.45) , BIMB (BUY; TP: RM4.86) and Alliance Financial Group (BUY, TP: RM4.20).

Source: Hong Leong Investment Bank Research - 24 Mar 2017