Top 6 banks’ total loan growth in 2014 forecast at 10.6%

by **Cals** Fri 07 Mar 2014, 10:13

Business & Markets 2014

Written by Maybank Kim Eng

Friday, 07 March 2014 09:28

Banking sector
Most of the banks ended 2013 with results that were within expectations, with the exception of BIMB Holdings Bhd which surprised on the downside due to a non-recurring tax charge.

Cumulative core net profit growth for the big six banks was 6.3% year-on-year (y-o-y) with Malayan Banking Bhd (Maybank) being the only bank to report double digit growth at both the operating and net profit levels.

(RHB Capital Bhd’s earnings were 5% above our forecast on faster than expected expansion in non-interest income [NII]. BIMB’s earnings were 15% below our estimate due to a spike in its tax rate on dividend income received from Bank Islam.)

Loan growth was a decent 11.5% but this was partially negated by a decline of 11 basis points (bps) in net interest margins (NIM). Earnings support came mainly from NII.

For 2014, we forecast total loan growth, including foreign loans, of 10.6% for the big six banks and have imputed a seven bps compression in NIMs.

NOII should rise as banks target wealth management and small and medium enterprises (SME), while efficiencies should improve amid reduced integration cost.

Credit costs however are expected to remain elevated. All in, we see a pick-up in operating profit growth to 10.3% in 2014 versus 8.4%in 2013. We see a further dip in return on equity to average 14.9% in 2014.

Year-to-date (YTD), share prices of Malaysian banks are underperforming their Asean peers, but price-earnings ratio (PER) valuations continue to be at a premium at 14%. Coupled with just about average dividend yields, Malaysian banks are unlikely to excite from a valuations perspective just yet.

The banking sector continues to trade at a 21% discount to the KLCI on a 2014 PER basis. Forecast sector earnings growth is nevertheless slightly faster at 9.6% versus the KLCI’s 8.1%.

A point to note is that the banking sector has historically traded at an average discount of 20% to KLCI valuations since 2001. Last year saw share prices of Malaysian banks outperforming their regional peers on a relative basis but this position has since reversed.

On a YTD basis, the Bursa Malaysia Finance Index is down 2.9%, just slightly better than the FTSE ST Financials Index in Singapore. The Jakarta Finance Index has since risen 14.8% YTD while the Philippines Financials Index is up 9.4%, followed by the Thai Financials Index with an 8.4% gain.

Despite the YTD underperformance, Malaysian banks continue to trade at an average 14% premium to Asean banks in terms of 2014 and 2015 PER, with 2015 earnings growth of 9.8% trailing 11.2% for the region.

Dividend yields, meanwhile, are now just about in line with regional peers. These are factors that are likely to keep investors at bay, in our view, unless higher volatility returns to the region yet again. — Maybank Kim Eng, March 6, 2014.

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This article first appeared in The Edge Financial Daily, on March 07, 2014.