The Malaysian banking sector has continued to stay resilient while fundamentals remained strong as implied by adequate capital ratios, liquidity and loan loss cover. We see an improving trend in the country’s household debt-to-GDP level, low risk of business default and imbalances in the country’s housing market gradually improving. We note that market participants are also pricing-in the risk of an OPR cut, of which will be negative for banks’ earnings. Maintain NEUTRAL. Top picks: Maybank, Alliance Bank and Aeon Credit.

Summary of Key Takeaways From BNM’s Briefing

At the briefing yesterday on BNM’s 2018 Annual Report and Financial Stability and Payment Systems Report, the few important key takeaways we noted include: - i) BNM’s expectation of 2019 GDP growth at 4.3-4.8%; ii) stable loan approval rates, though applications and approval trends are moderating; iii) private sector financing will remain supporting of economic activity; iv) domestic banking sector remains resilient and liquid; v) household debt levels remains elevated, although the debt-to-GDP ratio eased to 83% in 2018 (from 83.8% in 2017); and vi) low default risk in business and household debts, due to high debt-servicing capacity and sufficient financial buffers.

What Are the Impact of Key Observations on the Banking Sector?

We have turned more cautious (in 4Q18) on the banking sector’s core net earnings growth in 2019, in which we pencil in a growth rate of 2.5% yoy against a stronger growth rate of 6.9% yoy as seen in 2018. We continue to see higher earnings downside risks arising from deposit competition within the sector itself (of which will drive up funding costs and erode bank’s net interest margin) as well as from external factors (unresolved trade tensions, slowing global demand and weaker commodity prices). A potential downward revision of 25bps in the OPR could result in an aggregate reduction of 1.3% in the banking sector’s net profit, in our view.

Maintain Sector NEUTRAL

We maintain our sector NEUTRAL call, noting that business and consumer outlook in 2019 will be dampened by external uncertainties and a lack of domestic catalysts. For 2019, we have a loan growth target of 5.0%, against a higher target of 7-8% set by some key banking players. Our top picks are Maybank (BUY, PT RM11.50), AEON Credit (BUY, PT RM20.10) and Alliance Bank (BUY, PT RM5.00).

Source: Affin Hwang Research - 28 Mar 2019