Hong Leong Investment Bank (HLIB) cut its view on Malaysian banks to “Neutral” from Overweight on July 2, weeks after the 14th general election (GE14) ended 60 years of Barisan Nasional rule and brought the Pakatan Harapan government to power. The brokerage said the result raised risks for the financial sector over the near to mid term.
“We are turning cautious on the sector, given our concerns on near- to mid-term prospects,” HLIB analyst Khairul Azizi Kairudin told clients in a note.
Two things worried HLIB: unclear economic policy from the new government, and reviews of several mega infrastructure projects. Either could dent bank earnings and put asset quality at risk.
Loan forecast trimmed
HLIB lowered its 2018 loan growth forecast by 0.5 percentage points, to 4.5%-5% from 5%-5.5%. Before the election, it had held to the higher range even though loans grew by less than 5% in the first four months of the year, because it expected activity to pick up with more big projects.
“However, the unprecedented GE14 results have heightened risks on loan growth, as certain projects were being reviewed and this will likely put pressure on system loan growth, at least in the near term,” Khairul said.
Bank Negara Malaysia’s May figures pointed the same way. Overall loan applications fell by 9.2% in May 2018, after a 20% reading in April, while loan approvals grew by 0.6%, a steep slowdown from 21.6%.
CIMB and Maybank cut to Hold
HLIB also moved the two largest lenders, CIMB Group Holdings and Malayan Banking (Maybank), to Hold from Buy, and reduced its target prices by 6% to 19%. Shaky financial markets could weigh on their non-interest income, it said, and project reviews could hold back lending.
Khairul named three pressure points for that income: lower mark-to-market gains or bigger losses from bond and equity sell-offs, weaker fundraising and thinner retail trading. A choppy market usually helps trading desks, but he expected the extra income “will be more than negated.”
Margins and asset quality
On net interest margin, HLIB saw little room to improve. The two basis point widening in the first quarter of 2018 was unlikely to last, it said, as longer-term deposits and no further rate rise for the rest of the year pulled it back. From 2019, the net stable funding ratio rules, which Bank Negara starts rolling out in January, could add uncertainty. Banks will need longer-dated deposits that usually cost more, and HLIB thought that might start another, milder round of deposit competition.
For now, HLIB judged household asset quality, especially mortgages, to be well contained. The corporate side could surprise on the downside, it said, particularly construction and manufacturing loans. Bank Negara data showed the gross impaired loan ratio edging up to 1.6% at end-May from 1.58% a month earlier, while loan loss coverage slipped from 95% to 94.4%.
One upgrade
HLIB did find a winner. It raised Public Bank to Buy from Hold and lifted its 12-month target price to RM26 from RM22. Public Bank trades at around 2.5 times book value, among the richest in the sector, but HLIB expects it to gain the most from a recovery in consumer sentiment, since retail loans make up 64% of its book.
Sources
- HLIB Research turns cautious on banking industry, downgrades sector to Neutral
- HLIB Research maintains 'neutral' call on banking sector
- Banking Sector Set For Earnings Rebound In 2H 2025, Says HLIB Research
