KUALA LUMPUR: Core earnings in the banking sector is expected to grow by 4.6% in 2019 underpinned by modest growth of 3.6% and supported by higher net interest income from loan expansion.

In its sector update, Ambank Investment research said loans for the Malaysian banking industry is expected to grow 4% to 5% premised on a slower GDP expansion of 4.5% to 4.8%. 

It expects the overnight policy rate to be unchanged at 3.25% in 2019 while net interest margins are expected to be slightly compressed or flat compared with 2018.

“Meanwhile, NIMs of banks’ subsidiaries, namely Maybank Indonesia and CIMB Niaga, are likely to still encounter margin pressures in 2019 although lesser than in 2018. 

“This will be engendered by the rise in interest rates in Indonesia to mitigate the impact of another two Fed rate hikes this year.”

Meanwhile, 10-year MGS yields are unlikely to trend significantly lower going into 2019 due to potential further interest rate increases in the US. 

Ambank expects markets to remain volatile in the near term and to be challenging on banks’ fee income particularly the investment bank and fund management business, impacting non-interest income for the larger capitalised banks, Maybank and CIMB.

The research house said asset quality for banks is expected to remain stable in 2019 albeit an a slight uptick in gross impaired-loan (GIL) ratio.

“GIL ratio for domestic loans could inch up in 2019 from 1.5% while that of overseas loans is expected to be holding up, barring any significant deterioration in oil prices and escalation in the US-China trade war.”

Provisioning for loan losses are expected to be slightly higher in 2019 owing to the slowdown in economic growth after implementing MFRS 9. 

“We have factored in a moderately higher credit cost assumption of 27bps for the sector in 2019 vs. 25bps in 2018.”

Ambank expects a sector return on equity of 11% versus 11.3% in 2018. Its top picks are Public Bank, Maybank and RHB Bank.