RETAIL BANKING | Staff Reporter, Malaysia

Malaysian banks' earnings growth to slip to 6.5% in 2018

It's a steep decline from the 13.4% profit growth in 2017.

Malaysian banks' sector net profit growth is projected to fall from 13.4% in 2017 to 6.5% in 2018, whilst return on equity remains relatively flat at 10.1% (vs +60bp in 2016). This slump can be attributed to reversal in NIM expectations from 2017’s +2bp to -2bp in 2018 and a slight upward normalisation in net credit cost, UOB Kay Hian reveals.

Moreover, pre-provision operating profit growth reported 1.2% QoQ in 3Q17 versus 6.0% QoQ growth in 2Q17 on weaker non-interest income and sequential NIM compression. Out of nine banks, only Hong Leong Bank (HLBank) and Bank Islam Malaysia (BIMB) (22%) delivered positive earnings surprises. On a pre-provision operating profit (PPOP) level, only HLBank surprised on the upside due to stronger-than-expected earnings contribution from associate, Bank of Chengdu.

According to the report, sector earnings growth from 3Q17 moderated to 12.6% YoY from 19.0% YoY in 2Q17 (9M17: +13.7% YoY). The robust 9.6% QoQ sector earnings growth was driven largely by lumpy provision write-backs in Maybank, AmBank and BIMB. However, dragged by weaker non-interest income, sluggish loan growth and QoQ NIM compression, pre-provision operating growth declined from 6.0% QoQ in 2Q17 to 1.2% QoQ in 3Q17.

Here’s more from UOB Kay Hian:

RHB and AmBank registered 3.3% and 6.0% YoY declines in net profit respectively on the back of modest loan growth and weaker non-interest income. Alliance Bank and Affin were impacted by higher opex cost.

BIMB and CIMB registered the strongest earnings growth rates in 3Q17 at 30.5% and 29.6% YoY respectively. However, CIMB’s earnings growth was more balanced, supported by 6bp NIM expansion, 17% non-interest income growth, strong cost discipline and improvement in credit cost. BIMB’s strong earnings growth was largely supported by strong fee income growth and lumpy provision recoveries. Other banks that registered double-digit earnings growth were HLBank (+17% YoY) and Public Bank (+13.5% YoY).

The market is likely to remain defensive as we head into the MFRS9 implementation in 2018 which will entail higher provisions. Coincidently, two of our top picks for the sector – Public Bank and BIMB – have the two highest loan loss coverage ratios (inclusive of regulatory reserves). We also recommend banks that are expected to display above industry earnings growth and CIMB is an ideal pick in this space with an expected 2018 EPS growth of 13.3% vs sector’s 7.2%. Maintain MARKET WEIGHT on the sector as loan growth remains weak while earnings growth is moderating. This is compounded by expectations of rising provisions with the implementation of MFRS9. However, asset quality remains benign and banks remain well capitalised (average CET1 ratio: 12.5%) which help to cushion downside risk.

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