Latest Trends

• BNM released its 2017 annual report yesterday. Below are the key highlights for the banking sector.

• Total loan slows down. Loans grew at moderate pace of +4.1%, reflected the slower growth of business segment (1.8%) whilst financing to household segment was steady at 5.1%. Business loan was impacted from higher repayment which outpaced disbursement. Amid better corporate earnings, large business chose to pare down borrowings.

• Higher earnings from NOII. Banking sector PBT grew strongly by 12.4% in 2017 amid the absence of large impairment and FX shocks. Both NII and NOII delivered strong results by +7.8% and +12.5% respectively. Growth in NII came from lower interest expense and higher growth of demand deposits. In contrast, NOII was underpinned by higher stockbroking income and financing-related activities.

• Healthy capitalisation. Overall, banks continued to maintain a strong level of capitalisation, supported from better earnings and conservative earnings retention policies. Tier 1 grew healthily by +2.5% driven primarily by gaining popularity of dividend reinvestment plan and capital injections to strengthen balance sheet.

• Increased participation from SME. Banks remain supportive of the SME sector despite the slowdown in the lending to SME to 6% due to selected segments of construction and real estate sectors. BNM introduced a new fund for SME called BNM’s fund for SME with total allocation of RM10.1b. This fund is intended to better optimise utilisation of funds available for SME.

• Asset quality remains intact. The improving domestic economy led to lower delinquencies in the banking sector to 2.1% of total loans with provision well covered for bad loans at 114.8%. Nevertheless, the weakness in the oil and gas sector asset quality remained.

• MFRS9. Due to increase in the provisioning as a result of forward looking impairment approach, BNM allows banks to offset the higher provision against the usage of regulatory reserve. With this, bank’s capital level will remain intact and the likehood of lower dividend payment is minimal.

• Digital efforts. The usage of technology is now extended into SME segment with the introduction of digital platform and e touch points. This platform will allow SMEs with one stop online access point to financing and structured assistance.

Risks

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

Rating

OVERWEIGHT ( ↔ )

• We keep our OVERWEIGHT stance on Banking in 2018 due to 1) improving ROE (led from recovery of earnings); (2) improving NOII income; (3) stable asset quality; and (4) Less severe of MFRS9 impact.

Top Picks

• Maybank (BUY, TP: RM11.00) and RHB (BUY; TP: RM6.00).

Source: Hong Leong Investment Bank Research - 29 Mar 2018