THE calendarised earnings of banks for the first nine months of 2019 improved marginally by 1.3% with net interest margin (NIM) ticking upwardsj, said AmInvestment Bank Research.

It added that the hike was due to banks repricing their deposits post the 25 basis points (bps) cut in the overnight policy rate (OPR) by the central bank in May coupled with sale of bonds which provided a boost to non-interest income (NOII).

Loan growth decelerated to 0.8% qoq or 4.6% yoy in 3Q19. Corporate loans continued to decline as these were impacted by repayments. Deposit growth also slowed in tandem as banks release some of their expensive deposits to manage liquidity, thus lowering the funding cost. The sector’s net loan-to-deposit (LD) ratio stood at 92.3%.

NIM staged a recovery, expanding by 5bps qoq in 3Q19 as funding cost improved as a result of deposits repricing to lower rates after the OPR cut in May.

The research house expects NIMs to further improve in 4Q19 as more fixed deposits (FDs) are repriced to lower rates upon reaching maturity. The sector’s average NIM in 3Q19 improved by 5bps qoq to 2.24%, supported by margin improvements of AMMB Holdings Bhd, Malayan Banking Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and CIMB Bank Bhd. Current account savings account ratio for the sector improved modestly to 29.8% during the quarter.

Gross impaired loan (GIL) ratio increased for most banks with the exception of Bank Islam Malaysia Bhd and Public Bank Bhd. The banking sector’s GIL for 3QFY19 increased to 2.04% from 2% in the preceding quarter.

Meanwhile, the sector’s cost to income ratio (CIR) inched up to 48.2% in 3QFY19 from 47% in 2Q. According to AmInvestment Bank, this was due to the accelerated investment expenses for CIMB’s Forward23 strategy.

According to Maybank IB, banks still offer decent dividend yields of around 5%. The research house has maintained its 2019 sector operating profit growth estimate of 3.2% but lower net profit growth to just 1.1% from 2.1%. For 2020, the research house forecasts faster operating profit/net profit growth of 4.8%/4.7% on the back of lower NIM compression and stable credit cost.

It also expects ROAEs to average 10.3/10.1% in 2019/20 while capital ratios are now comfortable across the banks. It believed RHB is the most likely to surprise on the upside where dividend payouts are concerned.

Individually, Maybank saw the strongest growth in 3Q19 core operating profit of 18% yoy, buoyed by gains from the sale of investments during the quarter. CIMB and AMMB were next with an operating profit growth of 11% yoy each. CIMB’s operating profit growth was supported by NPL disposal gains of RM100 mil at CIMB Niaga as well as higher investment gains.

AMMB’s operating profit growth was supported by the sale of investments (partially offset by lower insurance income) and positive JAWS. Public Bank’s 3Q19 core operating profit was flat yoy amid ongoing NIM compression of 7bps qoq and negative JAWS, which offset NOII growth of 19% yoy (also from higher investment and forex income).

At the core net profit level, Hong Leong Bank and CIMB eked out growth of 8% yoy each. Hong Leong Bank benefited from credit recoveries during the quarter while CIMB benefited from robust operating profit growth and stable loan loss allowances.

The worst performing was Alliance Bank which saw its credit cost jump to 72bps in 3Q19 from 52bps in 2Q19, arising from a 30% qoq increase in absolute gross impaired loans.

Maybank IB’s top picks in the banking sector are RHB, CIMB, AMMB and BIMB while AmInvestment Bank’s top recommendations are Hong Leong Bank, RHB and Maybank.

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