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Fairly muted bank prospects, sector lacks meaningful rerating catalysts in Malaysia

Publication Date : 02-07-2014


While Malaysian banks can boast of healthy asset quality, their growth prospects are expected to be fairly muted, as leading indicators are pointing to a slower loan growth this year.

Analysts polled by StarBiz have a consensus “neutral” stance on the Malaysian banking sector, which they said currently lacks any meaningful rerating catalysts.

“A consistent message that came out of our recent meetings with banks was that business lending has been subdued, while capital markets remain quiet,” RHB Research analyst David Chong noted in his report.

The local brokerage said it also expected the net interest margin of banks to remain under pressure due to falling asset yields and increasingly rising funding costs.

“If credit demand continues to stay muted, then we sense that some banks may be willing to sacrifice margins to help give loan growth a lift,” Chong explained, adding that if loan growth did gather pace, then some banks would need to compete more aggressively for deposits as a source of funding, thus driving costs up further.

RHB Research on Tuesday downgraded its rating on Malaysian banks to “neutral” from “overweight”.

Statistics from the Central Bank showed that loan growth had slowed to 9.7 per cent year-on-year (y-o-y) in May 2014 from 10 per cent y-o-y in April 2014, due mainly to a slowdown in business loan growth, which fell to 7 per cent y-o-y from 7.8 per cent y-o-y, while consumer loan growth only improved marginally to 11.8 per cent y-o-y from 11.6 per cent y-o-y.

“The lacklustre leading loan indicators from April to May did point to limited loan growth upside from the current levels over the next two to three months,” CIMB Research analyst Winson Ng said in his report.

CIMB Research forecasts loan growth in 2014 to come in weaker at around 9.5-10.5 per cent, compared with the 10.6 per cent recorded last year.

According to Affin Investment Research, meanwhile, a slower loan growth momentum, along with weak trading/investment gains potential and a tighter liquidity situation, meant that a rerating would be tough for banks in the second half of 2014.

“Holding all else constant, a 1 per cent decline in loan growth will negatively impact sector earnings by about 1.1 per cent,” Affin Investment Research analyst Tan Ei Leen wrote in her report.

She noted that on a year-to-date basis, banking system loans have grown 2.9 per cent, which would translate into an annualised growth of 6.9 per cent, behind Affin Investment Research’s 2014 target of 9.5 per cent.

Meanwhile, Hong Leong Investment Bank (HLIB) said the banking sector remained the best proxy to the impact of the country’s ongoing Economic Transformation Programme (ETP), and that the sector would benefit from Malaysia’s growing consumerism and economy.

In his note, HLIB research analyst Low Yee Huap expressed confidence that the ETP and oil and gas projects would sustain the business loan segment.

He, however, maintained a neutral stance and a loan growth projection of 10 per cent for 2014 for the industry.

Despite the consensus view of neutral growth prospects for Malaysian banks, analysts, in general, believe that Malaysian banks are now better capitalised, and that their asset quality would continue to hold up well throughout the year.


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