Local lenders expected to report a better final quarter of 2017

Banks will likely post improved earnings for the 4Q and better FY17 performance compared to FY16

By NG MIN SHEN / Pic By TMR

Local lenders are expected to end the final three months of 2017 on a positive note, helped by the better nine-month performance after what was seen as a difficult 2016, said analysts.

Financial institutions will begin to announce their final quarter of 2017 (4Q17) results and full-year performance soon. Public Bank Bhd, the second-largest lender based on market capitalisation, would be among the first banks to reveal their 2017 full figures. The banking sector’s performance is traditionally benchmarked against the health of the economy.

AmInvestment Bank Bhd analyst Kelvin Ong said lenders will likely post improved earnings for the 4Q, as well as the full year ended Dec 31, 2017 (FY17) compared to FY16.

“The larger banks are re- cording lower provisions compared to 2016, while operating income looks healthy and should continue to see modest improvement. Interest income and net interest margins (NIMs) are a mixed bag. Some players are improving, while some are seeing contractions,” he told The Malaysian Reserve (TMR).

Funding costs have also improved, but Ong said some financial institutions are seeing pressure on their deposits.

“Loan books are expected to see growth in the mid-single digit range across the industry for the year,” he said, adding that this was partly due to a slow loan growth among corporates.

In a sector report, AmInvestment said it anticipates the banking industry to register a 5% loan growth this year on the expected 5.5% gross domestic product (GDP) growth. NIM is expected to improve by three basis points year-on-year (YoY) this year.

Some lenders are also expected to register strong results following their disposal of non-strategic assets. Financial institutions have started to shave off non-core assets as they seek to lessen the capital injection required for these other financial subsidiaries.

But overall, the country’s financial services industry registered an upward momentum last year, in line with the higher economic growth and improved private consumption.

Fundsupermart Malaysia in a recent report said the sector posted an overall net profit growth of about 15% in the first nine months of 2017 (9M17), which reflected a healthy loan growth, controlled operating expenses and improving NIM. Lenders’ NIM expanded at an average of 3.7% during 9M17.

Quarterly loans approved posted three consecutive quarters of positive growth, after recording four continuous quarters of contractions in 2016.

“Given the rather pronounced loan growth, banks’ loan portfolios are likely to expand at a respectable pace which would allow them to garner more interest income in years ahead,” Fundsupermart analyst Jerry Lee Chee Yeong said.

For the 10-month period ended October 2017, the banking industry saw an overall growth of 4.2% for total loans applied and 7.5% for loans approved.

Maybank

Maybank’s loan growth stands at 7.2% YoY
(Pic: TMRpic)

CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and AMMB Holdings Bhd posted the strongest loan growth among banks at 9%, 7.2% and 5.6% YoY respectively.

Lenders are also expected to be the biggest beneficiary of the anticipated rate hike this year, especially banks with higher levels of variable rate loans.

The central bank is expected to raise the Overnight Policy Rate at least once in 2018, following the stronger than expected GDP during the first three quarters of last year.

Meanwhile, the impact of the Malaysian Financial Reporting Standard 9: Financial Instruments (MFRS 9) remains to be seen, as the new accounting standard — implemented from Jan 1, 2018, — requires an increase in impairment losses provisions, which in turn will impact banks’ common equity Tier 1 (CET1) ratios.

“MFRS 9 was a big concern last year and some may have loaded up on provisions, but the impact may not show up in 4Q17 reports. Come March 2018, you’ll see more clarity in terms of the actual impact. Perhaps that’s when banks will start lending more,” an analyst told TMR recently.

AmInvestment said the impact of MFRS 9 on banks’ capital positioning is forecast to be manageable, with any increase in provisions from the adoption of the new standard expected to impact banks’ balance sheets more than their profit and loss statements.