Asset quality key swing factor of banks’ earnings in coming quarters

KUALA LUMPUR: Malaysia’s banking system’s asset quality will likely be the key swing factor to earnings in the coming quarters, said Kenanga Research.

The firm said October had seen the system’s loans momentum moderate slightly at 4.3 per cent year-on-year (y-o-y) as the Conditional Control Movement Order kicked in while the curtains fell on the loan moratorium period for individuals and SMEs.

Household disbursements fell seven per cent yoy despite double-digit loan applications in the preceding month.

“Leading indicators are not favourable as demand for business fell with households moderated for October with subdued applications.

“Liquidity was still ample at 10.5 per cent with loan deposit ratio (LDR) and loan to fund equity ratio (LTFE) stable at 89 per cent and 72 per cent, respectively,” Kenanga Research said today.

The firm said system gross impaired loans (GIL) continued to fall y-o-y at eight per cent but saw uptick 3 per cent month on month (MoM).

System GIL ratio saw a 5.0 basis point (bps) uptick month-on-month to 1.43 per cent with business GIL ratio continued to be stable for the third consecutive months at 0.94 per cent but household saw 9.0bps uptick m-o-m to 0.95 per cent.

“On a positive note, as asset quality deteriorated slightly, build-up of loan loss reserve gathered pace at eight per cent m-o-m. Thus, system loan loss coverage (LLC) rose further to 110 per cent or 4.0ppt m-o-m,” it said.

Kenanga Research said the recent reporting season saw the banks maintaining a cautious outlook with additional provisioning.

The firm keeps its “neutral” call on the sector with preference for banks with solid asset quality (Hong Leong Bank Bhd, Public Bank Bhd and Bank Islam Malaysia Bhd).

“Their asset quality track records suggest that the pre-emptive loan provisions required should be lower relative to peers while the smaller exposure to the corporate space should shield them from chunky loan impairments. Thus, we see these banks offering investors better earnings predictability and “safer” dividend yields (assuming banks continue to be conservative with dividend pay-outs).”

It also likes RHB Bank Bhd for its solid capital position.

Source: NST