PETALING JAYA: CGS-CIMB has lowered its 2021 loan growth forecast for Malaysia’s banking sector to 2-3% from 4-5%, to match the downward revision in its gross domestic product (GDP) expansion projection for the country from 7.5% to 5% made in February.
“We think that the movement control order 2.0 (MCO 2.0) would have an indirect negative impact on banks’ loan growth as it disrupted some business activities and dampened business sentiment,” it said in a report.
The research house pointed out that auto sales weakened in January 2021, which would be detrimental for loan growth in the banking sector. As a result, it slashed about 2% from its 2021 loan growth forecast for all banks to reflect its projections for the industry.
However, CGS-CIMB noted that there have been improvements this year, as the banking sector’s loan growth picked up from 3.4% year on year (yoy) at end-December 2020 to 3.8% yoy at end-January 2021.
“The improvement primarily came from the business loan segment, which expanded by 1.5% yoy at end-January 2021, compared to a rise of 0.5% yoy at end-December 2020. Meanwhile, the growth in household loans inched down from 5% yoy at end-December 20 to 4.9% yoy at end-January 2021,” it said.
Nonetheless, the research house has observed a weaker trend in the leading loan indicators as loan application growth moderated to 9.7% yoy in January from 12.3% yoy in the previous month, while the contraction in loan approvals widened to 3.5% yoy in January from 0.1% yoy in the month before.
It opined that such a trend does not bode well for banks’ loan growth in the next one to two months.
CGS-CIMB said the industry’s gross impaired loan (GIL) ratio rose in January this year, but the quantum of increase was manageable at only 4 basis points month on month (mom) to 1.6% at end-January compared to 1.56% in the preceding month, in line with its expectation of an uptick in GIL ratio.
“We estimate a GIL ratio of 2% at end-December 2021.”
On the whole, CGS-CIMB reiterated its “overweight call” on the sector as it expects banks’ net profit for 2021F to be catalysed by a recovery in net interest income growth and a decline in loan loss provisioning (LLP), which are the potential re-rating catalysts for the sector.
“Despite the cut in loan growth, we expect banks’ net interest income to increase in 2021F due to wider net interest margin,’ it said.
Its top picks for the sector are Public Bank, Hong Leong Bank and RHB Bank.
It said the call is premised on an earnings growth rebound forecast in 2021, supported by an anticipated GDP growth recovery by its economist.
On the flip side, it has identified a protracted economic downturn extending into 2021 as a potential downside risk, which would cause banks to grapple with a slowdown in loan growth and further increase in LPP.
“We have factored in a 25bp cut in Overnight Policy Rate (OPR) in 2021 for our earnings forecasts for banks. The downside risk for banks’ margins would be wider than the 25bp reduction in OPR in 2021.”
CGS-CIMB estimated that every additional 25bps OPR cut would reduce its projected FY21 net profit for banks under its coverage by an average of about 2.2%.
AmInvestment Bank Research (AmResearch), however, has maintained its OPR projection of 1.75% in 2021 for now, but it does see some downside risk to the forecast should the economic recovery turn slower than expected.
“We expect the OPR to be maintained at 1.75% at the coming MPC meeting on March 4, 2021,” it said.
Meanwhile, it pointed out that banks’ outstanding impaired loans in January 2021 rose 2.5% month on month or RM722 million, coming largely from higher impairments of household loans while the increase in impairments of non-household loans was smaller.
The research house said the industry’s total GIL inched higher to 1.6% while net impaired loan ratio rose slightly to 1.01%. In addition, total provisions for the sector increased by 1.1% month on month or RM341 million in January this year as banks continued to set aside pre-emptive provisions against future credit losses.
“On a comforting note, the quantum of provisions in January 2021 was lower than all the three months in 4Q2020,” it said.
On the whole, AmResearch reiterated its “overweight” call on the sector and favoured the larger systematic banks, namely Maybank and CIMB, to ride on the economy recovery in 2021 as well as banks with undemanding valuations trading at attractive price-to-book ratios, such as RHB Bank.
“Also, we like Hong Leong Bank with its strong top line growth, robust profit contribution from associates and resilient asset quality.”
MCO 2.0 is expected to have an indirect negative impact on banks’ loan growth. – REUTERSPIX
