Slower earnings growth for Malaysia’s banking sector this year

AmResearch expects the banking sector’s core earnings growth to come in lower at 5.8% this year from the earlier projection of 7.6% in anticipation of slower economic growth.

The Q2 core earnings fell marginally by 0.4% quarter-on-quarter after excluding CIMB’s one-off gain of RM928 million from the partial disposal of CIMB-Principal Asset Management and CIMB-Principal Islamic Asset Management and an additional gain of RM11 million from the sale of a 50% stake in CIMB Securities International as well as adding back Hong Leong Bank’s one-off loss of RM27 million from the dilution of stake in its associate Bank of Chengdu.

However, first-half earnings registered a commendable 10.3% growth.

For 2019, the research house foresees the sector’s earnings to grow 6.2% in 2019, with the inclusion of BIMB’s expected improvement in profits.

AmResearch also expects a better loan growth in the second half of the year with consumer loans gaining traction in the third quarter as consumer spending rises with the tax holiday, while business loans are expected to improve judging from better momentum for domestic non-household loans in the recent months.

“We retain our loan growth assumption of 5% for 2018 with a slight downside bias based on a GDP growth of 4.8-5% for the year.”

The banking sector’s average net interest margin (NIM) fell 6 basis points qoq to 2.3% in Q2 after an Overnight Policy Rate (OPR) hike of 25 basis points in January 2018.

“The decline of the NIM in the second quarter was due to the upward repricing of deposit rates after the OPR increase in Q1 and higher funding cost from deposit competition moving close to the adoption of the net stable funding ratio. We expect pressure to remain on funding cost in the near term due to deposits’ competition.”

Nevertheless, AmResearch expects NIM for the second half to be either flat or slightly compressed compared with the first half as the deposit repricing from the earlier OPR hike has already largely worked its way through banks’ funding cost.

Despite an uptick in the gross impaired loan ratio for the banking sector in Q2, it said the sector’s asset quality is expected to remain stable in the second half.