After the doldrums, the sector is expected to pick up momentum in the second half of next year with a recovery in, among others, oil prices as well as a clear direction on US policies especially on its interest rates
KUALA LUMPUR: CIMB Equities Research has downgraded Malaysian banks from Overweight to Neutral due to the impact of MFRS 9 -- the Malaysian version of International Financial Reporting Standards – and the slower projected 2018F net profit growth, less attractive valuations.
It said on Tuesday it estimated that a 10%-50% increase in banks’ credit cost arising from the adoption of MFRS 9 will lower their FY18-19F net profit by 1.3%-8.3%.
“We project weaker net profit growth of 7.9% in 2018F versus 9.2% in 2017F. The average price-to-earnings (PE) for banks (except for Public Bank) increased from 11.5 times in November 2015 to 12.3 times in June 2017, above the five-year average of 11.4 times,” it said.
CIMB Research said it did not rate banks as an Underweight due to possible rate hike in 2018.
To recap, Malaysian banks are set to adopt MFRS 9 by Jan 1, 2018 (or at the beginning of the financial year starting in 2018, depending on the financial year-ends of the individual banks).
The MFRS 9 will change how banks provide provision for their loans (as well as the holding of fixed income securities) from incurred losses now to expected losses.
The research house said it downgraded its rating on Malaysian banks from Overweight to Neutral due to (1) the negative impact of the adoption of MFRS 9 in 2018F, (2) projection of weaker net profit growth in 2018F, and (3) less attractive valuations.
“The upside risks to our call are a strong pick-up in growth of loans and non-interest income, as well as rate hike, and the downside risks are significant deterioration in asset quality and a collapse in loan growth,” it said.
CIMB Research turned positive on banks in November 2015 due to the expected recovery in net profit growth and attractive valuations.
Net profit growth improved from a decline of 2.4% in 2015 to a growth of 0.9% in 2016 and it projects 9.2% growth in 2017F.
Over Nov 9, 2015 to June 30, 2017, the KL Financial Index surged by 17.1%, outpacing the KLCI’s 4.6% increase over the same period by a promising 11.9%.
Elaborating on the MFRS 9, it said the Malaysian banks have to will change their provisioning methodologies from incurred loss to 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.
“Our sensitivity analysis revealed that every 10-50% rise in credit cost could result in a 1.3-8.3% drop in our current FY18-19F net profit forecast for banks.
“We project slower net profit growth of 7.9% in 2018F vs. 9.2% in 2017F. We expect 2017F net profit to be driven by the anticipated normalisation of credit costs and non-recurrence of the chunky impairment for Swiber bonds.
“If we factor in the negative impact of 1.3-8.3% from the adoption of MFRS 9, net profit growth would be reduced to 0.4-6.4% in 2018F, based on our calculations.
“In our view, banks’ valuations are less attractive now after the surge in share prices, especially with slower net profit growth and adoption of MFRS 9 in 2018F. The average P/E for banks under our coverage (excluding Public Bank, which is rated as a Hold) increased from 11.5 times in November 2015 to 12.3 times in June 2017, above the five-year average of 11.4 times.
“We are not recommending investors to Underweight banks because we believe (1) the dividend yield is still decent at 3%+, (2) possible rate hike in 2018F could support net profit growth, and (3) the adoption of MFRS 9 will strengthen banks’ loan loss coverage, which could lead to an expansion in their P/Es in the longer term, in our view,” it said.
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