Banking sector to remain challenging in 2020
PETALING JAYA: The banking sector is expected to remain challenging in 2020 with the uncertainties in earnings, due to the lingering external headwinds.
Businesses are still in a cautious mode while sentiment in the consumer segment are still weak, on the back of volatilities in the market from a lacklustre 2019.
CGS-CIMB Research sees potential risks in the banking sector earnings next year due to two rounds of possible cuts in the overnight policy rate (OPR), weak loan growth from 4% to 4.5% and an upturn in loan loss provisioning for banks.
It said that every 25-basis-point (bps) cut in OPR is expected to reduce banks’ net profit by 2.2%. Bank Negara cut the OPR by 25 bps to 3% in May last year.
There is also a concern in the rise of gross impaired loan (GIL) ratio, which rose to 1.62% as of October 2019 from 1.48% in December 2018. This is expected to continue rising to between 1.8% and 1.9% by the end of 2019.
The research house also projected a net profit growth of 6.1% in 2020, primarily supported by the expected increase of 2.4% in net interest income and 12.4% in non-interest income.
Despite the attractive dividend yield of over 4% for the forecast calendar year 2020 (CY20F), it retained its “neutral” call on the sector due to the cautious earnings outlook in 2020.
Its top picks are PUBLIC BANK BHD, which it believes would be most defensive against the rise in the industry’s GIL, and RHB Bank Bhd as the benefits from its transformation programme would partly offset some of the impact of the industry’s headwinds.
TA Securities Research forecast a net profit growth of only 1% and 2.8% for CY19 and CY20, respectively, while maintaining its “neutral” stance on the sector.
It foresees shrinking targets as downside risk to earnings gather pace, driven by softening top line growth, rising vulnerabilities due to heightening non-performing loans (NPLs) and increasing cost pressures.
“We gather that business activities could remain in cautious mode, which could result in softer demand for loans and capital market activities going into 2020.
“In the consumer segment, we also foresee sentiment to remain weak, going forward, underpinned by ongoing market volatilities and rising macro uncertainties.
“Cushioning the impact while we envisage some net interest margin (NIM) compression in CY20, we believe the pressure is less intense as competition for deposits soften and asset pricing stabilises, ” it said.
It recommended a “buy” on CIMB GROUP HOLDINGS BHD, RHB Bank, AMMB HOLDINGS BHD and Affin Bank Bhd. It also upgraded Alliance Bank Malaysia Bhd from “hold” to “buy” due to its recent decrease in share price which now gives a more favourable risk-reward trade-off.
Alliance Bank group chief executive officer Joel Kornreich said it remained challenging for the sector and loan growth would continue to be relatively subdued in 2020.
He said the two most important factors to look at for the year would be the employment rate and also properties, due to its high overhang.
Maybank Kim Eng Research foresees a stable operating environment for the banking sector but still a challenging one into 2020, where it forecast faster operating profit and net profit growth of 4.8% and 4.7%, compared with 3.2% and 1.1%, respectively, in 2019.
This is on the back of moderating net interest margin compression and stable albeit still elevated credit cost.
Cumulatively, it expects return on average equities to average at 10.3% and 10.1% in 2019 and 2020, respectively. On a more positive note, the research house expects dividend yields to average about 5%.
It also foresees another OPR cut by 25 bps over the next 12 months.
The research house said an issue to watch out for in the guidelines would be whether Bank Negara imposed capital requirements on virtual banks and whether existing brick-and-mortar banks could participate in securing such licences.
“The imposition of such a requirement would curtail the number of players in the virtual banking space and work to the advantage of the existing banks that are already investing heavily in digital banking, ” it said.
Source: TheStar