In our view, there were not much upside or downside surprises based on the release of BNM’s 2017 Financial Stability and Payment Systems Report. For 2018, we believe that favourable conditions such as receding household debt risks, ample liquidity and an ease in default risk will be positive factors for the domestic banking sector. Maintain OVERWEIGHT. Top picks: Hong Leong Bank and Maybank.

The Overall Banking Sector Performance Improved in 2017

According to BNM, the banking sector’s profitability (as measured by pretax profit) continued to increase by 12.3% yoy to RM36bn in 2017, reflecting slower growth in interest expense, higher fee-based income and lower impairment and other provisions. Meanwhile, for 2018E, we continue to forecast a core net profit growth of +6.4% yoy and 4.5% yoy in 2019E.

The Banking Sector’s Financing Growth May Expand Further in 2018

The banking sector outstanding financing grew by 4.1% yoy to RM1.58tr in 2017, underpinned by households (+5.1% yoy vs. 5.3% yoy in 2016) and SMEs (+6% vs. 9.5% yoy in 2016). Though 2017 saw repayments for large businesses outpacing disbursements, we believe that there will be a recovery in business loans due to the need to invest in further capacity expansion arising from increased capacity utilisation rate in 2017 vs. 2016. At this juncture, we are maintaining our loan growth target of 5% for 2018E.

Receding Risks of Elevated Household Debt to Financial Stability

Growth in household borrowings moderated for the seventh consecutive year and BNM considers the growth to be more in-line with income growth. In 2017, the ratio of household debt-to-GDP ratio declined further to 84.3% (owing to stronger GDP) from 88.3% in 2016. Accordingly, the underlying trends in household debt accumulation continued to improve.

Maintain Sector OVERWEIGHT

We maintain our sector OVERWEIGHT call. We foresee sector core earnings growth of 6.4% yoy in 2018E, followed by a more modest 4.5% yoy in 2019E and 3.8% yoy in 2020E. The sector’s overall valuation in 2018E still appears attractive at a 1.43x P/BV multiple (on a forward basis) against the past-10-year average of 1.6x and the past-5-year average of 1.5x. Key risks: new NPL formation, NIM compression, higher funding costs, weaker loan growth, much higher provisions on FRS 9 adoption. Our top picks are Hong Leong Bank (BUY, PT RM20.00) and Maybank (BUY, PT RM12.00).

Source: Affin Hwang Research - 29 Mar 2018