PETALING JAYA: Conditions for the local banking sector are expected to remain challenging in the next six months as there are no signs of pick-up, according to Hong Leong Investment Bank Research (HLIB Research).
The research house sees a moderation in sector earnings growth to 2.6% in 2019 from 7.0% in 2018.
HLIB Research said with the US Federal Reserve sounding even more dovish in recent weeks, Bank Negara Malaysia may follow suit and lower the Overnight Policy Rate (OPR) again.
“On a full-year basis, we estimate that every 25 basis points (bps) reduction in OPR would see sector NIM (net interest margin) slipping 3-4bps and our profit forecast falling by 2-3%; from our sensitivity analysis, Alliance and BIMB would lose most if interest rate falls while Affin and AMMB are least affected.”
Despite that, the research house draws comfort from the sector’s strong asset quality and capital position, thus it advised long-term investors who strongly favour sector exposure to be selective.
“Our preferred pick is Maybank for its above-average dividend yield and low foreign shareholding level versus larger domestic peers. Other ‘buy’ ratings are RHB and Alliance.”
HLIB Research warned that the market has not priced in another OPR cut which, therefore, makes banking stocks susceptible to fresh sell-downs. “Thus, this presents a short-term underperformance risk.”
It said the Financial Services Index clocked gains of 3% in the first two months of 2019 but it was quickly erased in the following three to four months, due to the OPR cut, potential removal from FTSE World Government Bond Index and broad negative impact from escalating US-China trade angst.
“However, there were positive outliers like BIMB and RHB which saw their share prices rise by 28% and 8% in 1H19 respectively; the former saw strong showing at its takaful operations while the latter was lifted by good fundamentals and higher dividend payouts.”
The research house said banks were off to a humble start (whereby first quarter 2019 sector pre-provision profit was down 2% year on year) and the second quarter is expected to be challenging as the OPR was cut by 25 basis points in early May, putting strain on short-term net interest margin.
It also sees tapering loan growth and lacklustre non-interest income, considering the softer macro climate today.
HLIB Research expects the sector’s return on equity to drop by 20 bps to 10%, dragged down by the faster uptick in net credit cost of 24bps in 2019 (17bps in 2018).
