By FARA AISYAH / Pic By MUHD AMIN NAHARUL

MALAYSIAN banks are expected to see earnings’ recovery in the fourth quarter of 2019 (4Q19), backed by improvements in net interest income.

Most of the losses suffered following the Overnight Policy Rate (OPR) cut last May were recouped in 3Q19, MIDF Amanah Investment Bank Bhd (MIDF Research) senior analyst Imran Yassin Mohd Yusof said.

On average, there was a four basis points (bps) improvement in net interest margins (NIMs) in 3Q19, as opposed to the five bps decline in 2Q19, due to banks positioning themselves prior to the OPR cut by taking in fewer expensive fixed deposits.

“We expect this to also be the case in 4Q19, especially as we had observed that there was no undue fixed deposits competition in the quarter,” he told The Malaysian Reserve.

Major lenders were a mix in 1Q19-2Q19, with Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and Alliance Bank (M) Bhd showing year-on-year (YoY) net profit declines throughout.

In 3Q19 however, CIMB, Alliance, Hong Leong Bank Bhd, Affin Bank Bhd and AMMB Holdings Bhd (AmBank) posted YoY net profit declines, dragged by the OPR reduction, while RHB Bank Bhd and Maybank bucked the trend.

RHB is MIDF Research’s top pick going forward, given that the bank’s positive performance reflects “good traction” in its business strategy, Imran Yassin said.

Meanwhile, Alliance is expected to face some pressure on its 4Q19 earnings due to its high provision level, which should be cleared by 2020.

MIDF Research also expects another 25bps cut in OPR this year, which should result in compression of NIMs and subsequently, banks’ earnings.

“However, we were surprised to observe how fast NIMs rebounded in some banks during our review of the sector’s 3Q19 earning results. This could be due to banks expecting an OPR cut and manoeuvring accordingly,” Imran Yassin said.

Thus, another potential OPR cut would not be too detrimental to banks’ net income and earnings.

“While there may be an immediate squeeze to interest income in the quarter of the OPR cut, there will likely be a decline in interest expense the following quarter,” Imran Yassin added.

He said pressure on margins and NIM compression will be manageable in 2020, while banks will likely see earnings growth.

In a recent note, Maybank Investment Bank Bhd said it expects the banking environment to remain stable but still challenging into 2020.

“We forecast faster operating profit/net profit growth of 4.8%/4.7% from 3.2%/1.1% in 2019 estimates, on the back of moderating NIM compression and stable, albeit still elevated, credit cost,” the research house said.

It has a ‘Neutral’ recommendation on the sector, with ‘Buy’ calls on CIMB, RHB, AmBank and BIMB Holdings Bhd.

AllianceDBS Research Sdn Bhd revised its 2020-2021 forecast for banking sector earnings to between 3% and 4% after incorporating a 25bps rate cut in 1Q20, as well as more moderate loan growth assumptions.

“Loans growth is still hampered by a lack of participation on the corporate end, to which more material progress in major infrastructure contracts could provide the panacea,” it said in a recent note.

The research firm’s top picks are Hong Leong and RHB.