Friday 29 Mar 2024
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KUALA LUMPUR (March 18): While local banks recorded a strong core net profit growth in the fourth quarter of 2018 (4Q18), CIMB Research is not "overwhelmed" as the trend was mainly helped by a plunge in loan loss provisioning (LLP).

"We think that the low LLP in 4Q18 will not be sustainable going forward, as it was primarily brought down by high write-backs and recoveries by most banks," said CIMB Research analyst Winson Ng in report March 15, adding that the slump in LLP would not recur in 2019.

Malaysian banks' core net profit growth increased to 9.5% year-on-year (y-o-y) in 4Q18, from 1.5% y-o-y in 3Q18, as the 4Q18 net profit growth was primarily pushed up by a plunge of 64.3% y-o-y in LLP.

In fact, Ng expressed his concern on the weak topline growth for banks in 4Q18, as the sector's operating revenue fell by 1.4% y-o-y in 4Q18, making it the third consecutive quarter of decline.

"Although we can blame the lethargic investment income, banks' revenue was also affected by tepid fee income growth and the erosion of net interest margins at most banks," said Ng.

Ng has retained a neutral rating on banks due to the cautious outlook for the sector, reflected in the slower net profit growth projection for 2019.

"Earnings risks in 2019 could come from a slowdown in loan growth and margin contraction," said Ng. He, however, noted the sector's dividend yield is attractive at a projected 4% for CY19, adding that RHB Bank Bhd remains the top pick for the sector.

Ng is projecting a 6.8% net profit growth for the sector in CY19, mainly supported by the forecasted 11% expansion in non-interest income (NOII) due to the lower base in 2018 which was affected by adverse investment income.

However, there could be downside risk to the projected growth in NOII in 2019.

Noting that the banks' NOII is primarily comprised of fee income, investment income and foreign exchange income, Ng said: "We expect the sector's fee income to see mid-single-digit expansion y-o-y in 2019 while the movements in investment and foreign exchange incomes could be volatile, depending on conditions in the capital markets."

"Based on our forecasts, the strongest net profit growth in CY19F would be circa 9% for Public Bank and Alliance Bank," said Ng.

In view of the projected slower economic growth and weak property market, Ng is expecting the industry's loan growth to ease from 5.6% in 2018 to circa 5% in 2019.

He is also anticipating an increase in the industry's gross impaired loan (GIL) ratio from 1.45% at end-2018 to 1.8% at end-2019 with potential soft spots in real estate as well as oil and gas sectors.

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