RETAIL BANKING | Staff Reporter, Malaysia

Malaysian bank earnings growth may slow 9.7% in 2018 amidst new leadership

The results of Malaysia's 14th general elections may dampen sector growth.

The earnings of Malaysian banks are expected to slow down from 14.3% in 2017 to single-digit expansion at 9.7% in 2018, according to UOB Kay Hian, as the country embarks on a fresh economic trajectory under the leadership of newly elected Mahathir Mohamad. 

Also read: Sluggish approval rates dampen loan growth in Malaysia

Mahathir’s rise to power heralded a massive shift in the country’s politics as he defeated the long-ruling Barisan Nasional coaliation led by Prime Minister Najib Razak in the country’s 14th general elections.

“Post-GE14 macro policy uncertainty could have a slight dampening effect on the banking sector’s growth. As such, we believe the sector is unlikely to chart the same degree of outperformance prior to GE14,” said analyst Keith Wee Teck Keong.

The ratio of banks delivering positive earnings surprise in Q1 also fell from 44% in Q4 to 22% in Q1 as key revenue drivers remained lacklustre with fee income inching up by a mere 1.4% YoY and net interest income dipping 1% YoY.

However, downside risks to earnings may be contained as banks direct their focus on containing costs to sustain growth even amidst uncertainty as cost-to-income ratio improved to 47.2% in Q1.

“The advent of fintech should help drive banks’ productivity and hence the need to maintain a lower number of branches and with that, potentially lower operational headcount,” Keong added.

Here’s more from UOB Kay Hian:

It is too early to gauge the impact of loan growth post GE14 as potentially stronger automobile and consumer durable loans growth from the new government’s mandate to raise disposable income will be partially offset by slower construction and government-related corporate loan growth and the multiplier effect on SME loans within the construction value chain. As such, most banks have
continued to set a modest average domestic loan growth target of 5.0% yoy for 2018 (2017: +4.1%).

Automobile loans (10% of total loans) could experience a temporary uplift in 3Q18m driven by the three-month “tax holiday” before the sales service tax kicks in which should result in higher car prices and hence downward normalisation in demand post the “tax holiday” period. This could provide a mild 20bp uplift in overall loan growth, assuming a 2% growth in automobile loans vs the current -1%. However, this positive uplift will be partially offset by slower construction loan (3% of total loans) growth (currently: +11%).

Six of the nine banks under our coverage (December year-end) have adopted MFRS9 which resulted in an average 30% increase in day 1 provision taken through the balance sheet. Overall impact on CET1 was manageable, averaging -40bp, with Public Bank the only bank with zero impact on its CET1 given its large regulatory reserve buffer which it can utilise to offset the increase in provisions required. Post MFRS9, the average CET1 for banks under our coverage is expected to remain relatively healthy at 12.5%, with Maybank having the highest at 13.7%. As for net credit cost, the combination of MFRS9 and lower recoveries will lead to a 9% qoq increase in provisions with net credit cost coming in at 27bp. We are expecting sector net credit cost to gradually normalise upwards to above the 30bp level over the course of the year as lower recoveries and MFRS9 continue to play out.

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