Flattish loan growth for banking sector this year forecast

PETALING JAYA: The banking system is expected to see a loan growth of between 5.0% and 5.5% for 2017, according to Kenanga Research, as banks stay cautious on asset quality and approval rates remain tight.
“Together with the ongoing headwinds such as flattish net interest margin, weak capital market activities, and flattish credit costs expected to be seen in 2017, there are limited opportunities to drive earnings growth for the industry materially beyond our current expectation of a mid-to-high single-digit growth,” the research house said in a report yesterday.
It has “market perform” calls for most of the banking stocks under its coverage except for Affin Holdings Bhd where it maintained an “underperform” rating while CIMB Group Holdings Bhd was rated “outperform” as the recent fall in its share price has made it look attractive again.
Meanwhile, Affin Hwang Capital is currently maintaining its loan growth of 4.2% for 2017, based on 4.6% and 3.7% growth from the household and business sectors respectively.
“In our view, the strength in the domestic economy, sufficient liquidity in the banking system and an accommodative monetary policy will continue to support loan growth,” it said.

Affin Hwang Capital has turned more cautious on the banking sector’s outlook in 2017, on the back of challenges in driving growth and profitability, as the spotlight will be on the banks’ strategies to navigate macro and sector-specific challenges, such as the sluggish industry loan growth; potential deterioration in asset quality; mitigation of fraud/cybersecurity; keeping-up with fintech; keeping cost-pressures in check; and changing priorities in light of the IFRS 9 implementation by January 2018.
“For 2017-2018, we foresee a sector earnings growth target of 10% year-on-year (yoy) in 2017 (against 2016’s earnings which was impacted by a 49% y-o-y increase in impaired loan allowances) and 5.8% y-o-y 2018,” said Affin, maintaining a “neutral” call on the sector.
It continues to like defensive banks such as Public Bank Bhd given the group’s more stringent credit underwriting standards and established franchise in the domestic retail financing markets.
The research house said the November 2016 system loan growth (4.3% year-to-date, 5.3% y-o-y, 0.95% month-on-month) surprised it with a stronger monthly growth, with sectors such as real estate, construction, wholesale and retail trade and banking/financial sectors driving the outstanding loan growth.
“Though the annualised loan growth of 4.7% was ahead of our forecast of 4% for 2016, we are, however, keeping our target unchanged as we believe that the same strong result in November 2016 is not likely to be repeated.”
It added that the overall system loan growth remained subdued owing to higher repayment of business loans; shift to the corporate bond market (as reflected by the robust issuance of infrastructure project-related bonds); poorer consumer sentiment; and banks’ cautious approach.