The sector quickly lost steam in 1H19 on BNM’s OPR cut, news on FTSE Russell and the continuing global trade tensions
by NG MIN SHEN/ pic by TMR GRAPHIC
ANALYSTS warned that the banking sector could see lower earnings in the second half of 2019 (2H19) due to the softer economic environment and the 25-basis-point (bps) cut in the Overnight Policy Rate (OPR) by Bank Negara Malaysia (BNM) in May.
Hong Leong Investment Bank Bhd (Hong Leong IB), in a note on Tuesday, said the outlook for banks remains challenging after the sector “got off to a rousing start, but quickly lost steam in the 1H19”.
“The Kuala Lumpur Financial Index (KLFIN) clocked gains of 3% in the first two months of 2019, climbing to as high as 17,878 in late February, but this was quickly erased in the following three to four months. KLFIN retreated 4% in 1H19,” it said.
This was kick-started by CIMB Group Holdings Bhd, as investors did not fully appreciate its new strategy and stretched financial targets, and Public Bank Bhd — the first to paint a bleak 2019 outlook.
The industry was also hit by the OPR cut, news that the FTSE Russell may drop Malaysian bonds from its World Government Bond Index and the continuing global trade tensions that continue to dampen business sentiment.
Lenders are expected to see strained net interest margin (NIM) in the second-quarter (2Q19) earnings following the OPR cut, and tapering loans growth and lacklustre non-interest income due to a softer macro climate.
Hong Leong IB projects the sector’s earnings growth in 2019 to moderate to 2.6% from 7% in 2018, while return on equity (RoE) will drop to 10% thanks to a faster uptick in net credit cost.
“The sector now seems to be moving sideways due to the lack of catalysts to spark a re-rating. Moreover, potential downside risk is building up as there is increasing indication that points to a 50bps rate cut in the US by end-2019… concern lies with its spill-over effects, which may lead to BNM lowering the OPR further,” it added.
Year-to-date (YTD), the KLFIN has lost 2.81%.
Hong Leong IB is keeping its‘Neutral’ call on the sector, drawing comfort from the sector’s strong asset quality and capital position.
However, it said the market has not priced in another OPR cut, which makes banking stocks “susceptible to fresh sell-downs”, thus presenting a short-term underperformance risk.
“We advise long-term investors who strongly favour sector exposure to be selective. Our preferred pick is Malayan Banking Bhd (Maybank) for its above-average dividend yield and low foreign shareholding level versus larger domestic peers,” it said, adding that it also has ‘Buy’ ratings on RHB Bank Bhd and Alliance Bank Malaysia Bhd.
Fitch Ratings Inc, meanwhile, has a ‘Stable’ outlook on Asian banks, whose credit profiles are supported by relatively strong economic growth, although the ratings firm also cautioned against a stronger US dollar and slower global trade.
Several markets in Asia are directly or indirectly exposed to slower growth in China, it said, adding that the bias is for interest rates among banks in Asia to decrease in 2019, following hikes in 2018.
MIDF Amanah Investment Bank Bhd remains positive on lenders as it believes there are bright spots still, like a downtrend in expenses and low credit costs, which should alleviate weak income.
“Banking income performances in 1Q19 were slightly muted due to NIM compression, which came mostly from deposit competition and may be exacerbated in later quarters by the OPR cut. However, we believe this issue has been overplayed,” it said.
Its top stock picks are Maybank, CIMB Bank and Public Bank.
Kenanga Investment Bank Bhd has upgraded the local banking sector to ‘Outperform’, citing under-valuation of the industry in which larger banks have underperformed YTD.
“Valuations are attractive and undemanding…while we expect a mild impact to banks’ toplines (negative on NIM but positive on credit demand) from the recent rate cut, bottom lines are likely to be enhanced as impairment allowances reduce,” it said.
Its top picks are Alliance Bank and CIMB Bank, as it believes these are prime beneficiaries from mergers and acquisitions and tie-ups.