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Malaysia: Asset deterioration remains a risk to Malaysian banks
PETALING JAYA: While Malaysian banks are generally strong enough to withstand any potential shocks, they still need to be cautious on the risks of asset deterioration.
According to analysts, banks in the country remain exposed to a potential increase in gross impaired loans (GIL) and credit costs that could weigh on their earnings growth.
CIMB Research, for one, has projected that the industry’s GIL would rise to 1.8% by the end of this year from 1.58% at the end of July.
“We agree with Bank Negara’s view that Malaysian banks have strong capital buffers against any shock in the system and its view of the stable credit risks in the first half of 2018,” the brokerage wrote in its report.
“However, we think that the expected increase in the GIL ratio and credit costs from the low levels in recent quarters could drag down banks’ earnings growth, going forward,” it explained.
CIMB Research said it remained neutral on the banking sector, citing the unfavourable operating environment, with potential earnings risks from the expected moderation in loan growth and an increase in the GIL ratio.
Its top pick is RHB Bank Bhd.
Conversely, MIDF Research remained positive on the banking sector, citing the sector’s continued resiliency and profitability.
“While there remain some headwinds stemming from the external environment and the potential net interest margin (NIM) compression, we believe that the banking sector will be able to weather this,” MIDF Research said.
“The stress test by Bank Negara showed that the banking sector will be able to absorb any shocks to the economy,” it added.
MIDF Research said NIM compression could be mitigated by operating expenditure savings and lower provisions.
The brokerage’s top picks are those with scale, especially in domestic operations, and/or good asset quality. These would include Malayan Banking Bhd 
, CIMB Group Holdings Bhd and Public Bank Bhd .
Meanwhile, UOB Kay Hian noted that the financial results for the quarter ended June 2018 showed a rather “challenging revenue growth environment, with most banks having to meet profit targets via stringent operating cost controls and lower provisions via loan recoveries.
“NIM compression in the second half of 2018 could also pose a slight dampener to earnings. That said, capital ratios remain healthy and asset qualities were largely intact and this helped keep a lid on overall provisions,” UOB Kay Hian wrote in its report.
The brokerage has retained its “market weight” call on the Malaysian banking sector, citing an unattractive valuation of 1.35 times the estimated price-to-book value for 2018 against a return on equity of just 10.5%.
Its top pick is CIMB Bank, which it said could be perceived as an excellent large-cap banking laggard play, especially in view of a potential capital market-driven non-interest income recovery in the third quarter ending September 2018.
Source: https://www.thestar.com.my/business/business-news/2018/09/28/asset-deterioration-remains-a-risk-to-banks/#Dvys8Y8ASKlAgZgY.99