Since our call on the Malaysia Banking sector early this year, it has posted a rather respectable return of 4.6% on YTD basis, outperforming the broad index, FBMKLCI index by 6.8%. In fact, prior to the GE 14, the Financial sector delivered an even outstanding YTD return of about 8.9%. However, given the increasing political and policy uncertainty amid the unexpected GE-14 results – a change in new government for the first time in 61 years, Malaysia equity market witnessed significant foreign outflow since a week before the GE14. As a result, the Financial sector which has previously benefited from the strong foreign inflow experienced inescapable intense selling pressure, posting -4.8% of losses over the past one-month period. In this article, we would like to reassess the overall healthiness of the local Financials sector and to assess if the recent selloff presents investors a good buying opportunity.
|Figure 1: FBMKLCI Index vs Bursa Malaysia Finance Index
How Has The Banking Sector Performed YTD?
Loan Growth Rebounded in April
According to the latest Bank Negara Malaysia’s monthly highlights for April, despite a lower loan approval rate, the total
loan in Malaysia Banking system grew by 4.8% y-o-y in April 2018, the fastest rate over the past 7 months. The strong loan growth in April was a result of the robust growth in both the total loan applied (+20.1% y-o-y) and loan demand (+21.6% y-o-y). On YTD basis, we also witnessed a strong expansion in loan demand by more than 9% as of end-April 2018, doubling the growth rate that we have seen in the corresponding period last year, underpinned by the improving consumer sentiment.
|Figure 2: Malaysia Banking System Loan Applied and Approved Growth (y-o-y, %)
1Q 2018 Earnings Growth Remains Strong
At the point of writing, with almost all the Banking players delivering their 1Q 2018 results, we saw quite a number of them maintaining strong earnings momentum over the first quarter of 2018 with an average earnings growth of about 10% y-o-y. Among all, Maybank Berhad and Public Bank Berhad which have the largest market capitalizations within the banking industry, posted earnings growth of 9.9% y-o-y and 12.6% y-o-y respectively underpinned by healthy non-interest income (NOII) expansion and also the robust net interest income (NII) growth. In fact, not only the bigger names but the smaller banks like Affin Bank Berhad, BIMB Holdings Bhd and Alliance Bank Malaysia Berhad also registered decent earnings growth in 1Q2018. Overall, the banking sector delivered a rather strong earnings growth in 1Q 2018 as compared to FBMKLCI index as a whole.
Insignificant Impact from MFRS 9
Generally, the impact of the new accounting standard, MFRS 9 on bank capital was insignificant. In fact, on average, the actual impact of about 40bps and 20bps reduction in banks’ Common Equity Tier 1 ratio and Total Capital was much lower than the consensus estimates of about 50bps to 80bps reduction. On top of that, after the reduction in the capital ratio since the implementation of new accounting standard, these ratios for Malaysia’s Banks continue to stand comfortably above the minimum regulatory capital adequacy requirements for CET1 and Total Capital of 4.5% and 8.0%. In addition, the credible rating agency, Moody’s Investors Service mentioned that the adoption of the new accounting standard is largely credit neutral on Malaysian Banks as they expect that the underlying economics of bank asset will remain unchanged. All in all, after assessing the 1Q 2018 financial results, the impact of MFRS 9 was manageable for the Malaysian Banks and not as bad as what was predicted earlier.
Prospect Ahead Remains Bright
Moving forward, the household loan which accounts for more than 54% of the total loan applied is expected to further improve due to the several recent policies announced by the new government such as the zero-rating of GST, abolishment of toll collections, stabilizing the RON 95 Petrol price as well as the Hari Raya special assistance to civil servants and pensioners which are expected to return about RM 20.7 billion to the people pocket. Prior to the implementation of SST in September 2018, we believe the consumers are likely to utilize the window of opportunity to purchase the big-ticket items which would further drive the loan demand moving forward. This is exactly the reversal of what we have seen in the local private consumption when GST was first introduced in mid-2015 (see figure 3).
|Figure 3: Malaysia's Private Consumption
All in all, we believe that the fundamental for the Banking sector remains intact despite the recent sell-off due to the heavy foreign outflow.
Although we are generally positive on the Banking sector, investors are reminded that there will be some potential risk especially the possible sovereign downgrade which could eventually trigger an even hefty sell-off by the foreign investors. On top of that, the recent decision made by the new government to cancel several mega infrastructure projects might also dampen the business loan growth moving forward.
However, given the expectation that the economic activity is likely to remain healthy in the quarters ahead coupled with the improving loan demand especially and the decent fundamental of the banking sector, we believe the sector could outperform the broad index in the next few quarters.