Lower earnings in 2H18 for Malaysian banks


Malaysian banks are expected to see lower earnings in the second half of 2018 (2H18) in tandem with the projected slower economic growth, quieter capital markets and continuing competition for deposits.

The lower expectations are in contrast with the more positive showing reported in 1H18 as a result of improved credit costs and impairment expenses.

Maybank Investment Bank Bhd (Maybank IB) in a recent report also lowered its core operating/net profit growth projection for the banking sector to 3.7%/7% from 6%/7% previously, while projecting a 4% net profit growth for the 2H18.

Maybank IB said the 10% year-on-year (YoY) earnings expansion seen in 1H18 was led primarily by lower credit costs, as operating profit growth was a slower 4% YoY.

The research house maintained its ‘Neutral’ call on the sector, with ‘Buy’ recommendations on AMMB Holdings Bhd, Hong Leong Financial Group Bhd and Alliance Bank Bhd.

“Operationally, the second quarter of 2018 (2Q18) was lacklustre. While loan growth was slightly faster, the net interest margin (NIM) expansion that banks enjoyed in 1Q18 from the 25-basis-point hike in the Overnight Policy Rate (OPR) quickly dissipated as deposit competition heated up,” it said.

Together with contraction in aggregate core non-interest income (NOII) from weak capital market activity, cumulative core operating profit in 2Q18 was flat YoY and 2% lower quarter-on-quarter.

However, ongoing credit cost improvement allowed aggregate core net profit to expand 7% YoY in 2Q18 and 10% YoY in 1H18.

For the rest of the year, banks’ earnings are expected to be relatively stable, with loan growth slightly faster as corporate lending picks up, while the competitive repricing of deposits should taper off, thus reducing pressure on NIMs.

Half-on-half core operating profit and net profit are projected to grow 5% and 4% respectively.

Since the last results season, the research house has lowered its 2018 aggregate core operating profit growth to 3.7% from 6% previously, mostly on account of weaker NIMs and softer NOII.

“Correspondingly, our net profit growth forecast is lower at 7% versus 7.7%. We expect net profit to expand faster than operating profit on the back of lower credit costs.

“For 2019, we are expecting operating profit to grow faster at 5.7% YoY, primarily on anticipation of relatively stable NIM and NOII,” the report stated.

AmInvestment Bank Bhd also lowered its core earnings growth expectation for 2018 to 5.8% from 7.6% earlier, in line with the projected slowdown in GDP this year.

Malaysia’s GDP growth came in at 4.5% in 2Q18, below the consensus estimate of 5.2%, according to Bloomberg economists, and lower than several analyst estimates of around 4.9%.

For the full year, Bank Negara Malaysia has revised its GDP growth forecast to 5% from between 5.5% and 6% previously, on expected pro- longed disruptions in oil and gas production and low production in agriculture.

Meanwhile, Maybank IB expects loan growth to come in stronger at 4.6% in 2018 versus an average domestic loan growth estimate of 4% in 2017.

This projection was also revised downwards from 4.9% previously after the last results season.

On the bright side, going into 2019, it sees NIMs staying stable YoY, with AMMB to see a pickup in NIM from more aggressive expansion of its small and medium enterprises (SMEs) business and improved current account savings account gathering capabilities.

Cost-saving initiatives undertaken by several banks, including disposal of stakes in overseas operations and a mutual separation scheme, should see a full-year impact for some banks next year.

AMMB expects the sector’s earnings to grow 6.2% in 2019, with NIMs to be steady or seeing a slight expansion compared to 2018, and its top picks being banks like Public Bank Bhd and BIMB Holdings Bhd that lean towards the consumer and SME segments, while having attractive valuations.