Macquarie Equities Research (MQ Research) released a report this morning (4 Dec) on the banking sector, expecting 2020 to be the year of recovery for global growth. MQ Research remains constructive on Malaysian banks for the next year and maintains CIMB as its top picks with an increase in target FY20 net profit by 2.7%.

Event

With global growth expected to recover, the end of monetary easing will provide net interest margin (NIM) reprieve for banks. Coupled with fiscal spending uptick on the domestic front, MQ Research remains constructive on Malaysian banks in FY20. MQ Research continues to prefer corporate banks over consumer banks, and CIMB remains its top pick among big cap banks; switch from Public to Maybank.

2020: The rebound year, but with downside risks

Macquarie’s Chief Economist and Head of Macro Strategy, Ric Deverell, anticipates that 2020 will be a rebound year. That said, the recovery will not be as sharp as 2016/2017. Of course, this is contingent on the “known-unknown” that is the US-China trade war – a de-escalation is expected ahead of the US elections, but the possibility of the alternative continues to skew risks to the downside.

Rates: The end of easing, with upside potential

Maintain MQ Research’s base case: BNM to hold overnight policy rate at 3.00% – positive for NIMs. In line with Ric’s expectation that the monetary easing seen in 2019 is likely to end; most central banks on hold in 2020. Of course, this is contingent on the aforementioned growth outlook. Most importantly, Ric expects the Fed will hold rates through 2020, and possibly into 2021 as well (BNM takes rate-setting cues from the Fed). That said, most banks expect an FY20 rate cut following no-cut in November. Additionally, MQ Research does not see the surprise statutory reserve requirement (SRR) cut as a precursor to FY20 rate cuts. While MQ Research expects soft 4Q19 data, some positive indications have emerged – e.g. purchasing managers index (PMI) recovering to one-year high of 49.5 points in November. MQ Research raises FY20 net profit (NP) by +2.7%/-1%/+1.9% for CIMB/Maybank/Public.

3Q19 had bright spots but 4Q19 won’t be much better

Stripping out one-off’s, CIMB’s earnings beat was a nice surprise in a challenging environment – mainly with credit costs coming in below expectations. Public as usual, didn’t disappoint, but loans growth was the weakest among the Big 3.

Maybank’s asset quality issues in Indonesia/Singapore wiped out non interest income gains made over 9M19, driving MQ Research’s -4.3% FY19 NP cut. However, asset quality on the domestic front continues to prove resilient as per MQ Research’s sector note; Oct sector-wide non performing loans (NPL) ratio moved sideways at 162bps. That said, outlook for 4Q remains challenging with loans growth decelerating to +3.7% year on year (y/y) (Sept: +3.8% y/y) while margins continued to inch downwards on stiff competition for loans, offsetting lower deposit competition. In search of growth, it appears that Maybank Indonesia and CIMB Niaga are offering the lowest rates for Indonesian mortgages. Maintain CIMB as MQ Research’s top pick; recommend switching from Public to Maybank.

Source: Macquarie Research - 4 Dec 2019