Wednesday, 12 July 2017

(The Star) Analysts turn cautious on banking citing earnings risks

PETALING JAYA: Following the recent rally in banking stocks on strong earnings performance, analysts have now turned cautious on the sector, citing earnings risks due to the new, stricter accounting standard, MFRS 9.

The new standard, which comes into effect January 2018, will result in banks having to make additional provisioning for their existing loan portfolios, leading to higher credit costs and ultimately, affecting net profit.

CIMB Research has downgraded Malaysian banks from “overweight” to “neutral” on the impending new accounting standard, saying it could lower banks 2018-2019 net profit by between 1.3% and 8.3%, based on the assumption of between 10% and 50% increase in credit costs.

Malaysian banks will be required to adopt the MFRS 9 in 2018, which will change their provisioning methodologies from an incurred loss to an expected loss.

“We believe this will lead to higher credit costs for banks, as they will have to make provisions for new loans upon adoption,” it said.

In a report yesterday, the research house said another reason for the downgrade was the expectation that the three-year increase in banks’ net profit growth would end in 2017.

“Excluding the impact from the adoption of MFRS 9, we are forecasting a slower net profit growth of 7.9% in 2018 (for banks under our coverage), against the 9.2% rate in 2017,” it said.

It said the slower earnings growth in 2018 would be due to a higher earnings base in 2017, as 2017 net profit would recover due to the absence of the RM452mil impairment incurred by Malayan Banking Bhd (Maybank) and RHB Bank Bhd in 2016 for their exposure to Swiber bonds, and as net interest income would expand by a narrower margin of 5.4% in 2018 vs 5.8% in 2017.

However, it noted that the projected net profit growth of 7.9% for 2018 did not take into consideration the negative impact from the adoption of MFRS 9.

Factoring this in, it said banks’ net profit growth could be reduced to 0.4%-6.4% in 2018, assuming a 10%-50% increase in projected loan loss provisioning.

The third reason for the downgrade, it said, was that valuations for the banking sector were no longer attractive after the recent surge in share prices.

The share prices of all banks had outperformed the FBM KLCI since November 2015 until June 30, 2017.

For Malaysian banks under CIMB Research’s coverage, five out of six stocks recorded double-digit appreciation in their share prices during this period, led by an increase of 15.2% for Hong Leong Bank and 14.8% for Maybank.

In the first half of 2017 (H1’17), CIMB Group Holdings Bhd was the best-performing banking stock with a 45.9% jump in its share price.

CIMB Research said the forward price-to-earnings ratio for banks under its coverage, excluding Public Bank Bhd, had risen from 11.5 times in November 2015 to 12.3 times in June 2017, above the five-year average of 11.4 times.

“In our view, banks’ valuations are less attractive now after the surge in share prices, especially with slower net profit growth and the adoption of MFRS 9 in 2018,” it said.

Kenanga Research, in a recent report, said it had maintained its conservative stance as well as “neutral” call on the sector, as MFRS 9 would erode net earnings despite the expectation of a better economic environment in 2018.

“Although 2018 might see a better economic environment with improved return on equity, the spectre of MFRS 9 will see net earnings being eroded. There is no change in our conservative stance,” it said.

UOB Kay Hian Research, which has a “market weight” stance on the sector, said last week that it was turning more defensive for H2’17 as industry gross impaired loans continued to edge upwards, coupled with the eventual need to bump up provisions as the implementation of MFRS 9 draws closer.