Analysts more positive amid optimism on economy, bottoming out of sector’s earnings
THE tide is changing for the banking sector on optimism about Malaysia’s economy and the bottoming out of the sector’s earnings.
Earnings across Malaysian banks had been more or less flat over the last three years or so, but analysts reckon that was about to change.
They expect the sector’s earnings to bottom out in the first quarter on the back of steady net interest margins (NIM), stabilising credit costs, peaking non-performing loans (NPLs) and improving cost-to-income ratios (CIRs).
Credit growth has also turned more robust, prompting an upgrade to analysts’ calls on the sector and its stocks.
Affin Hwang Investment Bank Bhd expects banks’ earnings to grow 10.9 per cent this year, off the low base last year, and another 3.6 per cent next year.
It is turning more positive on the sector outlook subsequent to a three-year period (2014-2016) during its normalised earnings were relatively flat, dampened by heightened allowances in 2015 and last year.
“The banking sector’s outlook this year will start bottoming out in the first quarter as new NPL formation moderates while operational rationalisation exercises have been completed at most banks.
“The Malaysian banks are currently riding on a new growth trajectory as the economy likely enters a new phase of protracted economic growth,” said Affin Hwang, which upgraded its “neutral” call on the sector to “overweight”.
It believes that the banks are stepping up their cost-optimisation measures to improve CIR and transactional activities to drive fee-income and current account savings account growth.
Affin Hwang raised the target prices across its coverage. This factors in a more robust earnings with stronger loan growth and stable NIM driving fund-based income, though its expectations of credit cost remain elevated at between 35 and 36 basis points.
Public Bank Bhd remains Affin Hwang’s top pick. It also upgraded CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank), Alliance Financial Group Bhd and Hong Leong Bank Bhd to “buy”.
“The bank with the biggest earnings revision is CIMB Group as we raise our outlook on the group’s loan growth and net interest income generation with stable NIM, while maintaining our expectation on credit cost at 53-57 basis points over the next three years,” said Affin Hwang.
MIDF Research reaffirmed that loans growth was set to rebound this year on the uptick in Malaysia economy.
“We believe that the green shoots remain with a recent upturn in loans demand and approval. There was a positive turn in demand for loans, growing by 21.2 per cent year-on-year in February, compared with 8.4 per cent year-on-year decline in January, which marked the first growth in loans since July last year,” it said.
MIDF Research favoured Public Bank and Hong Leong Bank, with “buy” calls due to their good asset quality and sustained profitability.
It also tagged a “buy” on Affin Holdings Bhd as its turnaround programme shows results.
MIDF Research expects CIMB and Maybank to continue earnings recovery with solid asset growth and regional exposure.