By SHAZNI ONG / Pic By HUSSEIN SHAHARUDDIN
Lack of catalysts and external uncertainties are expected to keep the prospects of the Malaysian banking sector challenging this year.
Besides external concerns, the industry is also facing murky domestic environment, Kenanga Research said in an industry coverage note.
While maintaining a ‘Neutral’ call on the sector, the research firm expects no fundamental change which could adversely impact the local banks this year.
“The global and domestic uncertainties are causing concerns of moderate loan growth and soft capital market activities ahead.
“The industry remains unexciting, dragged by moderate loan growth and soft capital markets. Prevailing negative sentiment, both globally and domestically, will continue to drive volatility and uncertainty in the industry,” it noted.
Kenanga Research added that, however, the industry is still viewed cautiously, no thanks to potential uncertainties and headwinds.
“Caution will still prevail due to the soft economy outlook globally. Banks with healthy asset quality will still be the favour due to their defensive quality. As such, selective asset growth will still be the focus for the banks.
“So far, banks in our universe have been supported by lower impairment allowances and likely to remain so due to normalisation of credit charge ahead.”
The research firm pointed out that loan growth is expected to remain moderate with fee-based income expected to be soft with the volatile capital market.
Kenanga Research expects impairment allowances to remain consistent, which could buffer the financial institutions’ bottom lines.
“We do not discount another potential up-cycle of impairment allowances, especially those highly exposed to the energy sector as energy prices have been under pressure due to the perceived economic slowdown both domestically and globally,” it noted.
The research firm also expects mild compression for net interest margin (NIM) as most of the banks’ loan-to deposit ratio and loan-to-fund ratio are more than 90% and 80% ratios respectively.
Due to slowing momentum in household demand, the research house also did not discount the likelihood of competitive lending rates in the near term as banks strive to achieve their loan growth targets.
“This competition will ultimately lead to further downside pressure on NIM.”
Kenanga Research picked BIMB Holdings Bhd and Malaysia Building Society Bhd (MBSB) as its industry favourites, both with an ‘Outperform’ call.