PETALING JAYA: Despite being backed by resilient and strong fundamentals, the Malaysian banking sector is expected to see downside risks from the impact of higher external risks (moderating economic growth) and a more cautious business/consumer sentiment.
Affin Hwang Capital said these two key factors may pose downside risks to its 2019-2020 earnings forecasts.
The research house highlighted some downside risks factors to its earnings forecasts, including the risk of another 25bps interest rate cut – resulting in an aggregate 1.7% reduction in sector earnings; a 1% decline in loan growth – resulting in a 1.1% decline in sector net profit; as well as a 10bps increase in net credit cost could result in a 6.3-6.4% decrease in net profit.
The research house said potentially, the commercial/residential property sector could pose some risks to the system, though impaired loans remain minimal to total loans.
However, it noted the resilient and strong fundamentals of the banking sector, such as adequate capital ratios, ample liquidity, a relatively low gross impaired loan ratio and healthy loan loss cover.
“We maintain our sector neutral call, noting that business and consumer outlook in 2H19-1H20 will likely stay cautious due to external uncertainties and a lack of domestic catalysts,“ it said.
For 2019, after some earlier revisions to its universe’s loan growth forecasts, Affin Hwang now set a 3.8% target for 2019’s system loan growth.
It is currently projecting a core net earnings per share growth rate of -0.9% for 2019 and a 1.2% and 1.6% expansion for 2020 and 2021, respectively.
“Our slightly negative growth rate in 2019 is underpinned by the negative impact of the OPR cut, which moderated banks’ fund-based income; a 2.2% increase in operating expenses; and a 15% increase in impairment allowances.”
On stock picks, Affin Hwang remains selective and prefers RHB Bank Bhd for banking exposure.
“For non-banking stocks, we like Aeon Credit Service (M) Bhd and ELK-Desa Resources Bhd due to their higher receivables growth and attractive return on equities.”
Meanwhile, Kenanga Research said while it sees moderate loans growth ahead, the resilient asset quality translates into stable credit cost, sustaining profitability.
“Valuations are attractive and undemanding with most of the banking stocks under our coverage rated as ‘outperform’ with top picks being CIMB Group Holdings Bhd and Alliance Bank Malaysia Bhd.”
