FBM KLCI dragged down by banking, plantation sectors

The top 6 Malaysian banks lost a collective RM5.2b in market capitalisation yesterday


Bursa Malaysia came under pressure from the heavy sell-off among banking and plantation stocks as headline risks are posing a threat to both industries.

Billions of ringgit in value were wiped out from the top banking stocks after Finance Minister Lim Guan Eng (picture) threatened to impose a windfall tax on banks if they failed to be more flexible in their lending.

The call was made in view of consumers’ complaints that local banks were too conservative in approving loans despite raking in huge profits every year.

The top six Malaysian banks lost a collective RM5.24 billion in market capitalisation yesterday, with Public Bank Bhd’s, Hong Leong Bank Bhd’s (HLB) and AMMB Holdings Bhd’s share prices being hit the hardest.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said the sell-off was likely driven by Lim threatening banks with a windfall tax.

“Approvals for housing loans have fallen off significantly and, coupled with the government-led Home Ownership Campaign, the minister is likely using the threat of a banking tax to accelerate lending activities,” he told The Malaysian Reserve (TMR).

He said the banking tax is only a threat and the resultant sell-off is a short-term reaction that is unlikely to persist further.

“We see the windfall tax as a threat and yesterday’s sell-off, which I suspect was driven mostly by foreign selling, was an over-reaction.”

Pong added that forcing banks to increase financing for residential purchases could lead to over-lending and put housing affordability under pressure again.

“If market forces are left to prevail, we should see a pick-up in housing loans as the market gradually re-balances.”

Public Bank declined 60 sen yesterday to close at RM23.86, while HLB and AMMB fell 46 sen and 14 sen respectively to close at RM20.34 and RM4.47.

Shares in Malayan Banking Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd were traded seven sen, six sen and five sen lower respectively.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said banks make up about a third of the FTSE Bursa Malaysia KLCI (FBM KLCI) in terms of market value, and the prospect of a windfall tax is another threat to a sector already anticipating a challenging 2019.

“Already, banks are facing margin compression due to competition in both lending and deposit-taking,” he told TMR, adding that a windfall tax is a concern for banks’ earnings going forward.

The Malaysian banking industry is bracing for a slower loan growth this year at 4% to 5% on weaker household and business demand. Net interest margin pressure from deposit competition will also challenge local banks’ profitability in 2019.

Meanwhile, emerging markets (EMs) found support from the US Federal Reserve which indicated the end of US interest-rate hikes in 2019, bringing an end to a three-year rate hike cycle amid signs of a US economic slowdown.

Palm oil and plantation-related stocks are also bracing for a potentially dire situation, if the tension between Malaysia and European Union (EU) continues to escalate.

Prime Minister Tun Dr Mahathir Mohamad has advocated a boycott on EU products, if the union goes ahead with its plan to ban palm oil biofuel which Malaysia produces. The proposed boycott puts the billions worth of trade at risk.

Kuala Lumpur Kepong Bhd (KLK), BLD Plantation Bhd and Genting Plantations Bhd were among the top decliners yesterday, losing a combined RM633.24 million in market capitalisation.

KLK shed RM530 million in market value when it closed 50 sen lower at RM24.48, while shares in BLD and Genting Plantations declined 24 sen (RM6.72) and 10 sen (RM10.38) respectively.

Meanwhile, tepid investor sentiment — fuelled by uncertainties over the current government’s direction on top of a dearth of market catalysts — is weighing on the performance of Malaysian equities.

The FBM KLCI shed 20.55 points or 1.22% to close at 1,663.66 yesterday, following the heavy selling of banking and plantation-based counters.

This was in spite of the index trading in the green early in the day, buoyed by dovish sentiment from the Fed, before plunging 17.86 points between 10.58am and 11.28am yesterday, to 1,671.38.

Oanda Corp senior market analyst Jeffrey Halley said the flattening of the yield curve in the US bond market is a negative sign for growth as well as for banks’ profits.

“Given that the rest of the world has also seen bond yields falling, investors may be expecting the same for Malaysia with a knock-on to the countries’ banks.”

While the end of the US rate-hike cycle makes yields in EMs more attractive, markets may perceive the development as a sign of an impending US recession.

“The end of the US rate-hike cycle in 2019 paints a mixed picture. While it is a relief for EMs on a whole, it could indicate that the US is one step closer to a recession,” Pong said.

He said if weakness in the US economy persists, the Fed will likely opt to lower interest rates to ease monetary pressure.

“If the central bank cuts rates between (monetary policy) meetings, this would be a reliable precursor for a recession.”

Recession is bad news for markets globally as the performance of the economy is closely linked to the performance of the stock market.