Mixed outlook for banking sector

PETALING JAYA: The local banking industry’s outlook remains mixed following the recent release of Bank Negara’s latest data on the domestic financial system.
While several underlying economic trends, such as the improving global economic outlook and stronger commodities prices indicate a more positive outlook for the sector, concerns remain that subdued loans growth and downward pressure on net interest margin (NIM) could cause headwinds for the industry.
Affin Hwang Capital Research, which maintained an “overweight” call on the banking stocks, forecasts that banks will register an earnings growth of 10.6% year-on-year (y-o-y) this year, followed by a more modest growth in the next two years. “Favourable domestic demographic trends which drive consumption and housing needs, ample infrastructure projects in the pipeline and accommodative monetary policy are supportive reasons for the growth in earnings.
“Key risks for the sector are new non-performing loan formation, net interest margin compression, higher funding costs, weaker loan growth and higher provisions on FRS 9 adoption,” said the research house.
Banks saw total loans accelerate slightly by approximately 5.7% y-o-y, primarily attributed to the rebound in the business loan segment, which rose by 6.5% y-o-y.
Despite the improvement in loans growth, a 15.3% y-o-y decline in the growth rate of loan applications was recorded as applications of both household and non-household credit tumbled. On the other hand, total deposit growth eased marginally to 3% compared to a year earlier, primarily driven by across-the-board weakness. Banks’ gross impaired loans remained solid at 1.64%, with absolute non-performing loans higher by 5.2% y-o-y.
Affin Hwang Capital Research highlighted that the average lending rate in June saw a pullback of 13.9 basis points month-on-month, a possible indication that banks were stepping-up lending activities and potentially competing by lowering lending rates.
“On a year-on-year basis, outstanding system loans were up 5.7% or an annualised 3.55%, which is short of our 2017 target of 6%.
“Nonetheless, we maintain our target, as we believe that moderation in loan repayments and strong private investments will underpin system loan growth,” it said.
Meanwhile, Kenanga Research reiterated a “neutral” stance on banks, stating that there would be no change in the prevailing conditions.
“There is no concrete catalyst and game changer on the horizon and structural and cyclical headwinds are still prevailing, such as the moderating economy, subdued loans growth and downward pressure on NIM.Our view of moderate loans growth ahead still stands with system loans expected to grow between 5.5% and 6% for 2017. Growth will be supported by the resilient household as cost-push inflation is expected to be contained in the second half of 2017,” it said.
Source : http://www.thestar.com.my/business/business-news/2017/08/02/mixed-outlook-for-banking-sector/#bbmSeygyj7G84vGP.99
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