Most banks’ 1Q16 earnings performance likely to be flattish y-o-y – HLIB Research

KUCHING: Most banks’ first quarter of 2016 (1Q16) earnings performance will likely come in flattish on a year on year (y-o-y) basis, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) says.

According to HLIB Research, 1Q16 earnings performance of most banks will likely come in flattish on y-o-y basis, as the research arm expects the 6.4 per cent y-o-y system loan growth to be partly offset by subdued non-interest income (NOII) and lower interest spread.

HLIB Research noted that asset quality of banks, on the other hand, will hold up well in 1Q16, taking cue from Bank Negara Malaysia’s (BNM) latest IL ratio.

HLIB Research was more upbeat on the sector’s fortunes for the second half of 2016 (2H16), underpinned by several positive catalysts including higher loan growth, easing of net interest margin (NIM) compression and robust asset quality.

The research arm expected the system loan growth to pick up more significantly in 2H16, underpinned by the implementation of large scale infrastructure projects, which in turn is evidenced by the record high domestic contract awards to listed contractors (RM34 billion worth of contracts awarded year to date (YTD), versus RM21.9 billion worth of contracts awarded in 2015).

Meanwhile, HLIB Research believed the erosion in NIM may be bottoming soon, on more disciplined deposit competition and potentially higher base rates or spread (based on our channel checks).

“Higher lending rates, coupled with more disciplined deposit competition will result in easing of NIM compression,” it said.

HLIB Research continued to hold the view that asset quality will remain robust, underpinned by improved financial position among corporates, contained unemployment rates, and banks’ robust credit scoring systems, which should mitigate potential widespread delinquencies.

Overall, HLIB Research kept to its ‘neutral’ stance on the sector, given the lack of prominent near term re-rating catalyst.

For exposure to the sector, the research arm’s top picks are Malayan Banking Bhd (Maybank), RHB Capital Bhd (RHB Cap) and CIMB Group Holdings Bhd (CIMB).

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