KUALA LUMPUR: CIMB Equities Research is retaining its Overweight call on Malaysian banks and its had recently replaced RHB Bank with BIMB as the top pick for the sector.
It said on Tuesday the banks’ gross impaired loan (GIL) ratio remained tame year-to-date (YTD) to August 2016, easing concerns of a further increase in credit costs in 2H16.
“Overall, we remain Overweight on banks, predicated on the attractive valuation and the expected recovery in EPS growth in 2017.
“The downside risks for our sector call would be a steep increase in GIL and further deterioration in loan growth,” it said.
To recap, CIMB Research said despite the market’s ongoing concern about deterioration in banks’ asset quality, the industry’s GIL unexpectedly fell 1.2% on-month to RM24.4bil (US$6bil) in August 2016.
This helped to marginally reduce the GIL ratio from 1.68% in July 2016 to 1.66% in August 2016 and increased the loan loss coverage from 88.7% in July 2016 to 89.6% in August 16.
“In view of the benign YTD trend, we think that the GIL ratio would not be significantly above our projected 1.8% by end-2016.
“The industry’s loan growth continued to soften, from 5.1% on-year in July 2016 to a dismal 4.2% on-year in August 16, the worst since May 2003,” it said.
CIMB Research said the culprit was the unexpected further deceleration in business loan growth from 3.7% on-year in July 2016 to a mere 1.9% on-year in August 2016 but it is positive on the sustained pace of 5.7% on-year for the consumer loan momentum.
“We expect loan growth to recover towards year end due to the potential stimulus from the rate cut. We are projecting 6%-7% loan growth for 2016.,” it said.
Following the downtrend in the past nine months, the growth in residential mortgages, the biggest loan segment with a 31% share of the industry’s total loan in August 16, stabilised at 10.1% on-year in July-August 2016.
Meanwhile, the business loan momentum was dragged down by the wider contraction of 4.7% on-year for manufacturing loans in August 2016, vs. a decline of 2.5% on-year in July 2016.
Also, almost all the business loan segments registered weaker growth in August 201.
CIMB Research is positive on the strong 19-21% on-month recovery in the leading loan indicators in August 2016.
“This led to an improvement in the on-year trend – the decline in applications narrowed from 18% on-year in July 16 to 1.6% on-year in Aug 2016 while approvals inched up by 0.2% on-year in Aug 16 compared to a 19.4% on-year plunge in July 16.
“The improvement mainly came from the better performance in the residential mortgages and auto loan segments,” it said.
