Cloudy outlook for local banks as NIMs compress and economy slows

The likelihood of a 2nd rate cut is now even higher following a series of surprising rate cuts by several Asian central banks in August


MALAYSIAN banks are likely to face a challenging second half of 2019 (2H19) after the recent financial quarter saw most large lenders impacted by the Overnight Policy Rate (OPR) in May.

The weaker economic outlook led Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, the country’s largest lenders by assets, to note that they expect another 25-basis-point (bps) cut in the OPR before year-end as the case for lower interest rates grows stronger.

The likelihood of a second rate cut is now even higher following a series of surprising rate cuts by several Asian central banks in early August, after the US Federal Reserve (Fed) slashed its lending rates in July for the first time in a decade.

Should Malaysia’s OPR come down by another 25bps before year-end, analysts said banks would see their net interest margins (NIMs) compress by 2bps-3bps over the next two quarters before loans and deposits are repriced.

Earnings would also drop by an average of 3%, depending on each bank’s percentage of floating rate loans in its portfolio.

Loans growth and non-interest income are also set to taper in 2H19 due to a softer economic climate.

Malaysia’s GDP growth for the second quarter (2Q) came in above expectations at 4.9%.

Exports in 2H19 could be hit by slower growth in the manufacturing and services sectors on weaker trade demand and a low base effect, while high crude palm oil inventory levels would hit shipment and prices.

The Bursa Malaysia Finance Index declined 10.59% year-to-date, while the FTSE Bursa Malaysia KLCI is down by 5.2%.

Maybank’s net profit slipped 1% to RM1.94 billion in the 2Q ended June 30, 2019, from RM1.96 billion a year earlier due to higher interest expense. Revenue was 13.4% stronger year-on-year (YoY) at RM13.05 billion.

Citigroup Inc lowered its target price (TP) on Maybank to RM8.60 from RM9.40, adding that the bank will continue to face pressure on its NIM and weakness in non-interest income.

Slowing fees and higher provisioning due to current market conditions would also impact its performance.

Citigroup dropped its financial year ending Dec 31, 2019 (FY19), net profit estimate for Maybank by 8.1% to RM7.3 billion, while keeping a ‘Neutral’ call on the stock.

Kenanga Investment Bank Bhd (Kenanga IB) maintained its ‘Outperform’ call on Maybank, with a lower TP of RM9.70 versus RM10.35 previously.

It also reduced FY19 net profit estimates by 2% to RM7.9 billion on account of compressed NIM and higher credit charges.

CIMB’s earnings fell 23.7% YoY to RM1.51 billion in the 2Q, while revenue slid 8% YoY to RM4.47 billion. The decline was attributed to the absence of a RM920 million one-off gain recorded last year from the disposal of stakes in its joint venture with Principal Financial Group.

Hong Leong Investment Bank Bhd (Hong Leong IB) retained a ‘Hold’ call with a TP of RM5.45 on CIMB as 2Q core net profit rose within expectations and loans grew, while NIM contracted and asset quality weakened.

It said CIMB’s NIM will still be challenged by its loan portfolio de-risking strategy in Indonesia and Thailand, although loans growth should remain strong.

AllianceDBS Research Sdn Bhd was not impressed by CIMB’s 2Q19 earnings, stating that the bank is “still very much in a transition over the next two years, with expenses being frontloaded to invest in growth drivers”.

As such, AllianceDBS kept its ‘Hold’ view on CIMB with an unchanged TP of RM5.35.

Public Bank
Public Bank Bhd’s earnings declined 4.5% YoY to RM1.33 billion in the 2Q as a result of the OPR reduction. Revenue improved 2.9% YoY to RM5.6 billion.

Maybank Investment Bank Bhd’s (Maybank IB) retained a ‘Hold’ call on Public Bank despite weak 2Q results and FY19/FY20 earnings estimates were lowered by 4% to account for larger NIM compression.

The research house also lowered its TP to RM21.70 from RM22.70 and increased its NIM compression estimate to 7bps for FY19 versus 3bps previously.

Public Bank’s management has revised its NIM guidance to a high single-digit contraction in FY19, Maybank IB said.

MIDF Amanah Investment Bank Bhd maintained a ‘Buy’ call on Public Bank, but dropped its TP to RM24 from RM27.20 and FY19 earnings forecast by 1%.

RHB Bank
RHB Bank Bhd bucked the trend with a 7.9% YoY rise in net profit to RM615.41 million in the 2Q, helped by higher non-fund-based income and lower expected credit losses on loans. Revenue expanded 12.1% YoY to RM3.42 billion.

JPMorgan Securities (M) Sdn Bhd stayed ‘Overweight’ on the stock with a TP of RM6.50. The research firm expects a consistent performance from RHB Bank despite the tough macro environment, adding that “trends are good and the stock is cheap”.

RHB Bank’s net interest income performed above JPMorgan’s expectations by letting go of RM10.4 billion worth of money market time deposits for the year to date, along with faster retail loan growth.

Hong Leong IB retained a ‘Buy’ call on TP of RM6.45 on RHB Bank, with NIM expected to fall further given the full six-month impact from the OPR cut and rising price-based competition for loans — although this would not be overly severe as the bank has room to retire some of its expensive funding.

Hong Leong Bank
Hong Leong Bank Bhd’s net profit rose 1.7% YoY to RM636.45 million in the 4Q ended June 30, 2019, on higher share of profit from associates.

Revenue was 0.7% weaker YoY at RM1.17 billion partly due to the OPR cut in May.

Kenanga IB maintained a ‘Market Perform’ call on the stock, while lowering its TP to RM17.30 from RM20.05.

It cut its earnings estimate for FY20 by 9% to RM2.68 billion, with NIM expected to compress by 4bps instead of just 1bp.

JPMorgan retained its ‘Overweight’ recommendation on Hong Leong Bank with a TP of RM20. It said Hong Leong Bank has one of the best financial technology offerings in the country, which could show up in better revenue growth over the next two years.

The bank is also one of the best credit underwriters in the region with a non-performing loan (NPL) ratio of 0.8% (versus Public Bank’s 0.5%), and one of the country’s most efficient banks despite continuous digital investments over the years, with a cost-to-asset ratio of 1% (Public Bank: 0.9%) versus a sector average of 1.28%.

AMMB Holdings Bhd’s (AmBank) net profit jumped 12.6% YoY to RM391.46 million in the 1Q ended June 30, 2019, on interest for fixed income securities and customer lending.

Revenue expanded 10.1% YoY to RM2.39 billion.

Maybank IB upgraded AmBank to a ‘Buy’ with a TP of RM4.75 amid prospects of positive operating profit growth momentum.

It also raised its earnings projection for AmBank’s FY20 by 5% on credit recoveries in the 1Q, although NIM is projected to compress by 2bps for the year.

Affin Bank
Affin Bank Bhd’s earnings more than doubled to RM156.03 million in 2Q due to write-backs on credit impairment losses. Revenue was 0.8% YoY better at RM497.93 million.

Hong Leong IB raised its FY19 earnings forecast for Affin Bank by 12% to factor in lower net credit cost, although it kept a ‘Hold’ recommendation and TP of RM2.25 on the lender.

NIM slippage will return in subsequent quarters given the quick build-up of expensive deposits, a full nine-month impact from the May OPR cut and growing price-based competition for loans.

Net credit cost is expected to normalise as the recent positive write-backs seen are not sustainable, given its “pedestrian asset quality and low loan loss coverage”.

MIDF Research kept its ‘Buy’ call on Affin Bank with a revised TP of RM2.50 versus RM2.70 previously, adding that it is “disappointed by the income weakness” in Affin Bank’s results for the 1Q of this year.

In the current competitive deposits climate, Affin Bank also needs to step up its efforts in attracting more current account and savings account deposits, according to MIDF Research.

Alliance Bank
Alliance Bank Malaysia Bhd’s net profit plunged 43.8% YoY to RM76.69 million in the 1Q ended June 30, 2019, due to the impact of the OPR cut and a full provision and impairment of RM74.9 million made for a few large accounts.

Revenue, however, rose 1.5% YoY to RM406.93 million.

Kenanga IB maintained an ‘Outperform’ call on Alliance Bank with a lower TP of RM3.45 amid risks of further NIM compression and higher provisioning.

NIM contraction in particular is unavoidable for the bank’s FY20, given the prospect of a second OPR cut (with 95% of Alliance Bank’s fixed deposits maturing in six to nine months) coupled with larger provisioning.