2017 — a bullish year for Malaysian banks

Pic By TMR File

The share price of the local banking players on averaged has surged about 17% in the past year, with the

two banking giants — Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd rising close to 24% and 51% respectively.

As the banking industry accounts for about 32% of weightage in FTSE Bursa Malaysia KLCI, the sector’s prospect would provide harbinger of the performance for the benchmark index.

In terms of financial results, on average, Malaysian banks reported rather decent results with third-quarter (3Q) profit surging more than 11% yearon- year (YoY).

On a nine-month cumulative basis, net profit soared about 15% YoY.

The stronger financial performance was a result of healthy loan growth, improving net interest margin (NIM) (on average, banks’ NIM expanded by 3.7% for the 3Qs ended September 2017) and a better control on operating expenses.

The sector saw encouraging growth for total loan applied (+4.2%) and loan approved (+7.5%) until end-October 2017.

CIMB, Maybank and AMMB Holdings Bhd registered the strongest loan growth of 9%, 7.2% and 5.6% YoY respectively.

The positive loan growth for the banking industry was a result of the banks’ leniency in approving loan applications.

Quarterly loan approved posted three consecutive quarters of positive growth after experiencing four continuous quarters of contraction in 2016, as banks loosened their lending due to the stronger domestic economy.

Given the rather pronounced loan growth, loan portfolios are likely to expand at a respectable pace, which would allow the banks to earn more interest income in years ahead.

2017 was a very good year for Malaysia with economic activity growing by 5.6%, 5.8% and 6.2% respectively for the first 3Qs.

The private sector was the main driver for Malaysia’s economy, with private consumption and private investment growing at high single-digit growth rate of more than 7%.

The local manufacturing sector, which accounts more than 20% of Malaysia’s total gross domestic product (GDP), grew at an average growth rate of about 6%, underpinned by strong demand for local electrical and electronics products, given the rise in the global technology sector.

The stronger economic activity contributed to the upgrade in Malaysia’s GDP growth by organisations such as RAM Rating Services Bhd, the World Bank and the International Monetary Fund.

In 2018, consumer spending is likely to further improve, underpinned by the cut in personal income tax and several measures proposed in Budget 2018, which are likely to increase the average household disposable income.

As the 14th General Election is just around the corner, we are likely to see a pickup in government spending, which might subsequently lead to higher local consumption and accelerating construction and infrastructure projects.

We expect the banking sector to be one of the biggest winners in 2018, as the abovementioned factors are poise to create positive impetus for recovering loan demand this year.

The stronger GDP has put the possibility of a revision in the Overnight Policy Rate (OPR) this year, but we believe it does not indicate the start of a series of rate hike.

Regardless of how many rate hikes this year, the banking sector is likely to benefit from a more hawkish monetary policy as we might see an improvement in the banks’ profit margin.

The degree of improvement on each of the individual banks would vary, depending on the composition of fixed rate and variable rate loans of the banks’ loan portfolio.

The bank with a higher level of variable rate loans is likely to benefit the most from the OPR hike.

While there are several catalysts to drive the banking sector’s performance, there is one area to lookout for.

Starting Jan 1, 2018, the new accounting standard — Malaysian Financial Reporting Standards 9, which required amendments to the following areas such as impairment, hedge accounting, classification and measurement for financial instruments, have kicked into effect.

To a certain extent, the adoption of the new standard is likely to post a greater impact on the banking sector by increasing the impairment losses provision.

At this stage, no one could determine exactly the impacts on banks’ income statement and balance sheet, but the increase in impairment losses provision will be charged to retain earnings and might have a lesser impact on banks’ earnings, as compared to their balance sheet.

One should not overly concern about this, as most of the local banks have strong buffers, with the Tier-1 capital ratios well above the minimum capital ratio (6%) required by the central bank.

After three years of earnings revision downward since 2014, we have finally seen an earnings upward revision for the banking sector in 2017.

Analysts have revised the earnings forecast for banking sector from -2.9% to 3.2% for 2018, and 13.8% for 2019.

Given the supportive macroeconomic backdrop and encouraging earnings revision trend, we think the domestic banking sector remains as an attractive investment option for investors this year.