CIMB Research retains Neutral on banks as earnings growth peaked

KUALA LUMPUR: CIMB Equities Research has retained its Neutral call on banks given the potential negative impact from the adoption of Malaysian Financial Reporting Standards 9 (MFRS 9) in 2018 and unattractive valuations. 

The research house said on Thursday the banks’ net profit growth would have peaked at 12.1% in 1H17 and it anticipates relatively weaker net earnings expansion of 6% on-year in 2H17 and 8.3% in 2018. 

“The upside/downside risks to our call are a pick-up/slowdown in loan growth and an improvement/deterioration in asset quality,” it said in a research note.  

To recap, by Jan 1, 2018, all banks are required to adopt the MFRS 9 which is based on expected loss model unlike the existing standard – MFRS 139 – which is based on the incurred loss model. 

CIMB Research said Malaysian banks’ total core net profit showed solid growth of 20.1% on-year in 2Q17, higher than the 14.1% on-year growth in 1Q17 and the strongest since 3Q10. 

The key earnings drivers in 2Q17 were (1) a 9.2% on-year rise in net interest income, and (2) a 74.8% on-year plunge in impairment losses for Maybank and RHB Bank.  

“However, banks’ 2Q17 net profit was below our expectations as one bank missed our estimates, while none of the other banks outperformed our expectations. 

“The sole underperformer in 2Q17 was BIMB Holdings as its 1HFY17 net profit only accounted for 47% of our full-year forecast due to lower-than-expected topline growth,” it said.   
CIMB Research said the industry’s loan growth was weak at only 1.8% in 1H17, translating to an annualised growth of 3.6% for 2017. 

“In our view, the drag mainly came from the business loan segment, which we estimate to have expanded by only 1.1% in 1H17. 

“We are projecting a loan growth of 4-5% for 2017F, below the 5.3% registered in 2016,” it said.

It expects the on-year net profit growth for banks under our coverage to soften from 12.1% on-year in 1H17 to c.6% on-year in 2H17F, mainly due to the higher base in 2H16 of RM12.1bn (vs. RM10.1bn for 1H16). 

As  for 2H17F, its net profit growth would be supported by the expected (1) decline in loan loss provisioning, and (2) recovery in loan growth.    

“We project 9.2% net profit growth for banks under our coverage in 2017F, compared to a rate of only 0.5% in 2016.

“The 2017 net profit growth would be underpinned by (1) the normalisation of loan loss provisioning, with an expected increase of only 6% in 2017 vs. 67.7% on-year jump in 2016, and (2) the non-recurrence of RM452m in impairment losses incurred by Maybank and RHB Bank for their exposures to Swiber bonds,” said CIMB Research.