KUALA LUMPUR: The banking sector could come under further pressure this year with earnings expected to decline due to weaker loan growth and contraction in fee and capital market related activities.
Maybank Investment Bank Research said on Tuesday it was trimming this year’s loan growth forecast to 6% from 6.5% and lower the aggregate net profit growth estimate to 2.1% from 5.3%.
“We expect 2016 return on equity (ROEs) to slip to 10.4% from 11.2% in 2015. A consequence of the weak first quarter earnings (Q1 16) is that we have lowered our 2016 operating profit forecast to 5.0% from 5.5%, while core net profit growth is cut to 2.1% from 5.3% previously.
“This compares against 0% core earnings growth in 2015. We expect operating profit growth to be a tad faster in 2017 at 6% year-on-year (YoY) while core net profit growth is estimated at a marginally higher, albeit still subdued growth pace of 4% YoY,’’ the research house noted.
Maybank Research is maintaining its neutral stand on the sector, added that the two financial institutions for which it expects to see a YoY expansion in returns on equity (ROE) would be CIMB (faster earnings growth from cost savings and lower credit costs) and RHB (group restructuring and cost savings from its career transition scheme (CTS) ).
ROEs for these two banks along with AMMB’s are nevertheless expected to continue trending below 10% this year, he noted.
The research house in its latest note said that cumulative gross loan growth for the seven banks under its coverage moderated to 6.3% YoY as at end-March 2016 from 10% YoY end-Dec 2015.
Maybank and CIMB’s loan growth continued to be inflated by the weakness of the ringgit, it added.
The one positive takeaway, the research outfit said from this results season was that net interest margins (NIMs) had held up better than expected at about 2.19% on a cumulative basis.
Among the banks, AMMB saw the biggest 41 basis points (bps) YoY plunge in NIMs due to the ongoing portfolio rebalancing of the auto book and asset repricing with the addition of better quality
mortgages and corporate loans at lower yields.
Maybank Research said the improvement in banks margins may be attributed to factors such asset repricing, a focus on higher yielding loans, particularly in the SME sector and the shedding of more expensive fixed deposits.
Meanwhile, UOB Kay Hian Malaysia Research said post Q1 16 results, it has revised downwards its 2016 sector earnings growth expectations from 3.4% to a flattish growth outlook (+0.1% yoy) after taking into account slower loans growth, weaker fee income and higher provision assumptions for the likes of Maybank (48bp to 60bp credit cost assumption).
The brokerage added its current 2016 and 2017 sector earnings growth forecasts of 0.1% and 3.2% were significantly lower than consensus’ 1.9% and 9.1% respectively, adding that loan growth could face some downward pressure from its 6% growth estimate.
“Slowing macro growth outlook, lumpy repayments within the business loans segment and stricter overall loan approval processes have also contributed to slower-than-expected loans growth trend.
“Mortgage loans, which helped to underpin overall growth for consumer loans in 2015, is expected to undergo fairly sharp moderation from 11.9% in 2015 to 8.6% in 2016 as structural affordability issues and banks’ tighter approval processes continue to play out in 2016,’’ the research outfit added.
