AmInvestment maintains ‘overweight’ rating for banks

PETALING JAYA: AmInvestment Bank is maintaining its “overweight” rating on the banking sector in 2018, as it anticipates stronger operating income growth and manageable impact of the implementation of Malaysian Financial Reporting Standards 9 (MFRS 9) this year.

In a note today, AmInvestment said it expects the sector’s core earnings growth to improve to 10.1% in 2018 from 6.8% last year, underpinned by higher non-interest income of 5.4% year-on-year (y-o-y) from stronger capital market activities and a modest loan growth.

The research house said it also projects an improvement in net interest margin (NIM) to drive the growth in banks’ interest income by 6.1% y-o-y in 2018.

“For 2018, we are anticipating a loan growth for the Malaysian banking industry at a modest 5.0% on the back of a gross domestic product (GDP) growth of 5.5%, resulting in a loan-to-GDP multiplier of close to 1.0 times.”

Furthermore, AmInvestment said it expects NIM of banks to improve by three basis points (bps) y-o-y this year, as it foresees modest improvement in NIM from banks’ repricing of loans to compensate for higher provisions under MFRS 9 as well as a milder pressure on banks’ funding cost from deposit competition.

In addition, the research house said it expects a gradual improvement in banks’ asset quality this year, particularly on the asset quality of banks’ overseas operations.

On allowances for loan losses, AmInvestment said it views the sector’s provisioning to be higher this year, due to the implementation of MSFR 9 on Jan 1, 2018.

However, it said the increase in provisions on day one of the adoption of MFRS 9 will be charged directly to shareholders’ fund, which will impact banks’ CET1 ratios.

“Nevertheless, we expect the impact to banks’ capital position to be manageable. Any increase in provisions from the adoption of the new accounting standard is expected to have a much larger impact on banks’ balance sheets than their P&Ls.”

“We are maintaining our credit cost assumption of 30bps for the sector in 2018 versus 31bps in 2017.

“We will review our assumption once banks have provided their guidance on the run-rate of their credit cost post-MFRS 9,” it added.