Mixed outlook for local banking sector

PETALING JAYA: While there is a more positive momentum for loan growth, analysts cautioned that the banking sector could be dragged by weak consumer sentiment.
AmInvestment Bank has upgraded its call on the banking sector to “overweight” from neutral on the back of loan growth momentum, consecutive rise in the levels of applications and approvals of household and non-household loans, stable asset quality trend for domestic loans, signs of better outlook for capital market activities, and return on equity of banks to be more stable moving forward with a gradual improvement in provisions.
“We are turning more positive on the sector and upgrading our call from neutral to overweight with buys on CIMB Group Holdings Bhd, RHB Bank Bhd and Public Bank Bhd,” AmInvestment Bank said.
However, Kenanga Research maintained its view of moderate loan growth ahead despite the faster loan momentum, as it will be dragged by the household segment underpinned by weak consumer sentiment coupled with banks being cautious/selective on asset quality as approval rates are still tight, especially for the household segment.
“Stiff price-based competition might trend upwards in 2017 as competition for both loans and deposits intensify for higher liquidity and longer-term funding. Together with higher impairments and elevated credit costs (coming from inflationary pressures), there are limited catalyst to drive earnings growth for the industry materially beyond our current expectation of a mid-to-high single-digit growth,” Kenanga said.
It added that valuations are already stretched for the banking stocks in its universe. Hence, it has underperform calls for most of the banking stocks except for BIMB Holdings Bhd and Public Bank, which are at market perform while Hong Leong Bank is rated as an outperform call due to its undemanding valuation.
It said Hong Leong Bank’s relatively strong asset quality and adequate coverage should see minimum risk of higher credit cost going forward.