PETALING JAYA: The banking sector, which reported subdued earnings in the first quarter (Q1 19) of the year, is expected to face headwinds in terms of net interest margin (NIM) moving forward, said analysts.
According to AllianceDBS Research, the overnight policy rate (OPR) hike in January 2018 led towards deposit competition and repricing, which translated into thinning NIMs up till Q1 19.
“NIMs are expected to face additional pressure from the OPR cut in May, on top of deposit competition that has not abated meaningfully yet. That said, some banks like Maybank and Hong Leong Bank have guided for minimal impact from the OPR cut at 1-2bps,” it said in its report.
The research house said that industry loans growth would need more time to ramp up, noting the slow 2% year-to-date loans growth in April.
“We have assumed 5% growth in 2019. Barring a meltdown in market sentiment, non-interest trends should see some improvement as capital market activity picks up beginning in Q2 19. Credit costs should normalise from a lower level in 2018,” it said.
AllianceDBS trimmed its FY19-20 sector earnings by circa 1% after accounting for some additional NIM compression arising from the OPR cut and lower non-interest income trends, specifically at AMMB and Hong Leong Bank.
Its large cap top pick is RHB Bank due to compelling valuations and steadily improving earnings trajectory while its small cap top pick is BIMB Holdings for its resilient earnings profile on the back of strong franchise in personal financing, supported by contributions from insurance business.
Hong Leong Investment Bank (HLIB) Research said the average lending rate decreased 1bp versus a 1bp rise in the three-month board fixed deposit, hence the interest spread has narrowed 2bps to 1.86%.
“Overall, we still see challenging NIM outlook on a sequential basis given the recent OPR cut and diminishing flexibility to optimise loan-to-deposit ratio (LDR). Also, banks are now stuck with higher cost of funds, as a result from the prior retail fixed deposit competition cycle,” it said.
HLIB noted that LDR in April stood at 87%, with the highest being 89% in February last year. With LDR near its 10-year high, it expects deposits competition to persist, but with less intensity compared with two to three quarters ago as banks strive to avoid excessive negative carry.
It maintained its 4.5-5% loans growth for the year, as repayment rates are seen normalising downwards in the upcoming months and as economic activities regain momentum. It also maintained its “neutral” call on the sector.
Meanwhile, CGS-CIMB expects a recovery in loan growth in the near term, despite the marginal growth in the industry’s loan base of 0.5% in the first four months of the year, which translates into an annualised rate of 1.5%.