Banks expected to sustain growth momentum in 2018 on loan expansion

In 2017, country’s 3 biggest banking groups by market capitalisation saw improved numbers across the board

By NG MIN SHEN / Pic By TMR File

THE good performance experienced by local lenders in 2017 is expected to continue into 2018, backed by strong economic growth and a general uptrend in performance indicators.

MIDF Amanah Investment Bank Bhd analyst Imran Yassin Yusof said banks will continue to do well this year, benefitting from anticipated greater loan expansion as there is a lag effect between high gross domestic product (GDP) growth and loan growth.

“Industry loan growth last year was slightly below expectations, but still decent. Following the excellent GDP growth last year, we expect loans to pick up in 2018, which will translate into a better performance for banks,” he told The Malaysian Reserve (TMR).

Last year, the nation’s three biggest banking groups by market capitalisation — Malayan Banking Bhd (Maybank), Public Bank Bhd and CIMB Group Holdings Bhd — saw improved numbers across the board, including record-breaking pretax profits.

While smaller banks saw mixed results for the latest quarter and year-to-date, recovery seemed to be running theme in 2017, after most major banks in 2016 showed continued asset quality deterioration from overseas loan portfolios and weaker profitability from slower revenue growth and higher credit costs.

Economic growth momentum is also projected to continue in 2018, with analysts estimating the GDP to increase in the range of between 5.1% and 5.3% for the full year.

An investment bank-backed analyst said lenders are likely to be boosted this year by business-related loans, on the back of stronger trade and economic stability.

“Loan growth last year mostly came from mortgages, while this year general trade conditions are set to improve, so banks should see greater improvement in working capital. Housing loans will probably slow down somewhat this year, though properties continue to be sold,” he told TMR.

Should provisions increase due to the implementation of the Malaysian Financial Reporting Standard 9 (MFRS 9) beginning Jan 1 this year, lenders’ credit costs might also experience a certain impact.

The new standard requires banks to make provisions for expected credit losses, while the previous standard was based on incurred losses.

“Though there could be a slight pressure from MFRS 9, based on current guidance from banks, there won’t be a significant increase in provisions. Thus, margins are expected to be stable, helped by the Overnight Policy Rate hike as well,” Imran said.

He added that total loans approved for the first month of 2018 — which maintained a double-digit growth trend since November 2017 — could not keep up with total loans applied, which grew at the fastest pace since November 2013.

“This bodes well for industry loan growth as the backlog in loans demand will spill over into the coming months,” he said.

As per data from Bank Negara Malaysia , the banking system’s total loans rose 4.2% year-on-year (YoY) in January 2018 to RM1.59 trillion, higher than 4.1% in December 2017.

This was attributed to stronger household loan growth at 5.3% in January 2018 versus 5.1% in the immediate preceding month.

Non-household loans eased to 2.7% from 2.8% in December 2017 due to working capital loans, which slipped to 0.8% in January this year from 0.9% in December 2017.

Total loan applications jumped 25.2% YoY during the first month of 2018, versus a 2.1% decline in December last year.

Household and non-household loan applications grew 26.2% and 24.6% respectively in January 2018, against 6.8% growth and a 12.5% decline respectively in December.

Total deposits accelerated to 4.4% in January from 4.1% in the previous month, held up by business enterprises deposits which grew 9.4%, while individual deposits slid to 2.9%.

Deposits are also predicted to see positive growth this year, underpinned by current and savings accounts (CASA) deposits.

“CASA rates are very low compared to fixed deposit or investment instruments, so we see the trend growing. A lot of CASA growth will also come from businesses, and small and medium enterprises,” Imran said.

He added that the new ruling under Budget 2018, which requires salary payment for foreign workers to be made through local bank accounts, will boost cheap deposits as well as ancillary income for banks.

Maybank posted record earnings of RM7.52 billion for the period of January to December 2017 compared to RM6.74 billion in 2016, while revenue climbed to RM45.58 billion from RM44.6 billion.

Pretax profit crossed the RM10 billion mark for the first time at RM10.1 billion against RM8.84 billion recorded in 2016.

Public Bank too achieved a record pretax profit of RM7.12 billion in 2016, while net profit came in higher at RM5.47 billion versus RM5.21 billion posted in the year prior.

Revenue for the year climbed to RM20.86 billion from RM20.1 billion a year ago.

CIMB’s pretax profit was also its highest ever at RM6.11 billion during 2017, while net profit jumped to RM4.48 billion from RM3.56 billion in 2016.

Revenue was higher at RM17.63 billion last year against RM16.07 billion registered the year before.

AmInvestment Bank Bhd in a March 5 report maintained its ‘Overweight’ call on the sector, with ‘Buy’ ratings on RHB Bank Bhd, Public Bank and Alliance Bank Malaysia Bhd.

Maybank Investment Bank (IB) Bhd kept a ‘Neutral’ recommendation on the industry, while adding Alliance Bank to its ‘Buy’ call list, which includes Bank Islam Malaysia Bhd and Hong Leong Financial Group Bhd.

MIDF’s positive stance on the sector was unchanged, with higher demand and approval for loans to drive earnings potential for banks.