Tough year for banks with regional ops, says MIDF Research

by **Cals** Wed 05 Feb 2014, 08:26

Posted on 5 February 2014 - 05:38am

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PETALING JAYA (Feb 5, 2014): Banks with regional operations will face more challenges in 2014 as emerging market (EM) in Asian need to manage capital outflows due to the third quantitative easing taper as well as manage currency stability and inflation.

MIDF Research said the equity raising by CIMB Group Holdings Bhd recently through private placement of new shares was due to the depreciation of Indonesian rupiah which impacted the group's capital accumulation plans. Also, the cash call was done to address the potential further weakening of the rupiah.

"Overall, we see more challenges for banks with operations in EM Asian countries such as Indonesia and Thailand. This is due to the weakness in the Asian currencies, higher inflation and the impending presidential elections which are likely to slow down economic growths of these countries," its analyst Kelvin Ong said in a report yesterday.

Meanwhile, the research house said the loan growth of 10.6% for 2013 was higher than its expectation of a 9% to 10% growth and maintained its expectation of 10% to 11% for 2014.

"Higher inflation coupled with tighter regulatory measures are expected to moderate growth of retail loans this year.

However, we are looking at improvement in business loan growth due to the pickup in external trade which will provide an uplift in Malaysia's gross domestic product growth for 2014. We expect the stronger business loan growth to offset the slower momentum for retail loans hence resulting in a loan growth of 10% to 11% for the industry in 2014," said Ong.

It expects banks net profit to trend higher in 2014 than 2013 with the continued expansion of the groups' assets.

Outlook for banks in 2014 will continue to be challenging as net profits are still expected to be impacted by net interest margin (NIM) pressures albeit milder than last year, the continuing normalisation of credit cost and challenges in growing non-interest income due to capital market uncertainties.

It maintained a neutral recommendation for the banking sector, premised on continuation of NIM pressures, normalising credit cost and the volatile markets contributing to tougher operating conditions for investment banks and hence resulting in more challenges for growth of non-interest income.

Its buy calls are on Malayan Banking Bhd (Maybank), RHB Capital Bhd, AMMB Holdings Bhd and Hong Leong Bank Bhd.

Maybank IB Research said the industry loan growth saw a last hour sprint to finish the year 2013 by 10.6% compared with its forecast of 9.8%, hence marginally raising its loan growth forecast to 9.8% from 9.6% for 2014 and to 9.4% from 9.2% for 2015.

"Overall, a very strong finish to the year with some last minute loans/bond issuances flowing through. The primary concern for 2014 remains the fact that consumer loan demand is likely to moderate amid rising inflation.

"Undoubtedly the resilience of the consumer sector is reflected in the demand for housing and commercial properties where loan growth continues to be strong. We do nevertheless expect mortgage growth to taper off this year in light of the recent property restrictions that should serve to moderate demand," said its analyst Desmond Ch'ng.

It is still neutral on the banking sector, with its top buys being BIMB Holdings Bhd, AMMB, Hong Leong Bank and HL Financial Group Bhd.

Alliance Research retained its industry loan growth forecast for 2014 at 9%, reiterating its overweight recommendation on the banking sector.

"Our bullish view on the sector is premised on underlying fundamentals of the domestic banking sector remain solid, foreign shareholding levels are at the lower end of historical range, ongoing merger and acquisition theme to spice up the sector, and valuations of selective banking stocks are decent at present level," said its analyst Cheah King Yoong.
Maybank and RHB Cap serve as its top picks of the sector.