KLCI seen rising as banking improves

PETALING JAYA: The FBM KLCI could stand a better chance to edge higher on the back of signs of recovery in the banking sector, which is a heavyweight of the benchmark index.
The banking industry, which has a weightage of close to 33% in the KLCI, is also a key proxy to the economy. Over the past three years, the KLCI has delivered negative returns of 5.7%, 3.9% and 3% in 2014, 2015 and 2016.
Following that, the valuations of the KLCI also reverted to its long-term mean of slightly over 16 times price-to-earnings ratio (PER) in 2016.
RHB Research head of research Lim Chee Sing is hopeful that the KLCI will be able to buck its trend of registering positive growth in 2017 in anticipation of a pick up in the economic growth after slowing down in the past two consecutive years, which is in line with the global trend.
As economic growth prospects are improving, he said demand for credit will increase accordingly, with loan growth picking up in the past three months.
“You may see slightly better outlook for banks’ credit as their earnings are coming from interest income, from the credit that they extend to the economy,” he noted.
Lim said the stock market will also be boosted ahead of the upcoming general election, as the market is expected to see a rise in spending and hence lend some support to domestic demand.
While net interest margin could still be under pressure, he opined that it is not significant as better capital market activity will provide support to fee-based income.
On a quarter-on-quarter basis, the banking sector registered a 7 basis-point growth in net interest margin to 2.25% in the last quarter of 2016, underpinned by management of liquidity and lower funding cost.
Lim said if impaired loans do not increase further, the banking sector could see a better earnings growth on the inflow of portfolio investors.
Meanwhile, Inter-Pacific Research Sdn Bhd head of research Pong Teng Siew said he sees renewed market confidence in the banking sector, judging from a slight improvement in loan approval despite a continued shrink on a year-on-year (yoy) basis.
“It is not completely out of the woods, but specifically for certain key sectors like the property sector, we’re now seeing an actual year-on-year growth in approval,” he explained.
On asset quality, Lim is of the view that asset quality may not deteriorate much going forward, despite rating agency Moody’s Investors Service’s cautious stance over continued asset quality deterioration for overseas business of six largest Malaysian banks, namely Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and AmBank (M) Bhd.
Pong noted that the non-performing loans (NPL) ratio seems to be quite stable at the moment.
“You would expect as the total loan base increases, so as a percentage of total loans, the NPL ratio has actually fallen slightly,” he said.
However, Pong pointed out that it is a bit worrisome for the commercial property segment as its NPL soared to the highest level since August 2010.
Pong also expects loan growth to be flat on the back of low approval rate.
“I think up to the middle of this year, loan growth will still be quite slow. My impression is that banks are still very tight on its lending standard. There is not much room for the loans to grow,” he said.
He added that maintaining the current loan growth of about 5% would be good enough.
Given there are still risks lingering around, Lim estimates the year-end target for KLCI to be capped below the 1,800-point mark.
Pong anticipates the market will perform well for at least up to late April, with a mid-year target of 1,750 points.
“Beyond that, it’s difficult to say because there seems to be some red flag around the world economy. Moving into March, some data seems to be slackening off again in terms of growth, so we’ll have to adopt a wait-and-see approach to see how far the slowdown will go,” he said.