Lenders had a year to forget in 2016. Loan growth grew at a snail-pace of 5.2%, provisions were rising and the share prices of most of the banking stocks were hovering at year’s lows.
However, things are looking up for these lenders. And the worst might be over despite remained challenges for the sector.
In the first three months of 2017, banking stocks are among the best performing counters as investors bought into the narrative that better earnings await this year for these lenders.
Shares of the country’s largest bank based on asset, Malayan Banking Bhd (Maybank), rose 9.51% this year, while its competitors RHB Bank Bhd saw a 12.31% increase and AMMB Holdings Bhd (14.61%).
The biggest mover would be CIMB Group Holdings Bhd, which saw its share price jumping 25.94%. The industry’s crown jewel, Public Bank Bhd, has only risen 2.43% but that was expected as the counter did not fall last year despite the very challenging business environment.
“Based on our observation, there appears to be an upward momentum in the earnings of banks under our coverage in the fourth-quarter of current year 2016 (4QCY16),” according to MIDF Amanah Investment Bank Bhd in a note at the end of last year.
MIDF said the banking earnings momentum will spill over into 2017, driven by expected better loans growth, stable net interest margin (NIM) and lower provisioning, given the normalisation of the pro-active measures that banks had taken previously.
Maybank saw its share price increased from RM8.20 on Dec 30, 2016, to RM8.90 yesterday.
In its recent financial results, Maybank reported a 43% rise in 4Q profit on loan growth and a rise in investment income, and forecast stronger loan growth in its core markets of Malaysia and Indonesia.
Maybank’s net profit surged 42.9% to RM2.36 billion in 4Q of financial year 2016 (FY16) ended Dec 31, compared to RM1.65 billion in the same period a year ago.
Its revenue increased to RM11.24 billion from RM11.05 billion, while earnings per share (EPS) rose to 23.19 sen from 17.08 sen.
For the full year, Maybank’s net profit eased 1.3% to RM6.74 billion from RM6.83 billion, partially bogged down by higher provisions. Revenue was higher at RM44.65 billion from RM40.55 billion previously.
Kenanga Research has maintained its ‘Market Perform’ call on Maybank with a higher target price (TP) of RM8.70 from RM8.04.
CIMB, the second-largest lender by assets, beat market expectations with a 5% increase in 4Q net profit, helped by a surge in loan demand in its home market, as well as in Indonesia and Thailand.
The bank’s net profit for the quarter ended Dec 31, 2016, was RM854.4 million, up from RM825.7 million a year earlier and beating analysts’ average estimate of RM805 million, according to Thomson Reuters data.
Maybank and CIMB had benefitted from cost-cutting measures and stronger demand for corporate loans.
CIMB shares were trading 25.3% higher yesterday at RM5.65 compared to RM4.51 on the last trading day of 2016.
Public Bank, whose market capitalisation quietly surpassed that of Maybank last year but is back at No 2 this year, saw an increase of 8.74% in its share price to RM20.14 yesterday from RM18.52 at end-2016.
A check on Bloomberg showed that Public Bank has a market cap of RM77.98 billion as of yesterday, while Maybank is No 1 with RM90.78 billion.
Public Bank registered a 2.9% increase in net profit for FY16 to RM5.21 billion from the RM5.06 billion recorded the year before.
The banking group attributed the year-on-year (YoY) increase in net profit to higher net interest income and higher income from its Islamic banking business.
The lender saw its share price sink to a 52-week low in March 2016 at RM18.52 and hit a 52-week high of RM20.28 on Jan 26, 2017.
Shares of RHB Bank experienced an increase of 12.52% from RM4.71 on Dec 30, 2016, to RM5.30 yesterday.
Its 52-week high was RM5.22 on March 20 last year and its 52-week low was RM4.03 on Feb 29, 2016.
However, RHB Bank’s net profit for 4QFY16 declined 28.1% to RM261.24 million from RM363.37 million in the previous corresponding quarter, mainly due to higher impairment on loans and financing, lower non-fund- based income and higher operating expenses.
Revenue fell 9.25% to RM2.56 billion from RM2.82 billion in the same period last year.
UOB Khian Malaysia Research, Nomura Securities Malaysia Sdn Bhd and KAF Investment Bank Bhd have ‘Buy’ calls on RHB Bank with TPs of RM5.40, RM5.60 and RM5.70 respectively. However, Maybank Investment Bank Bhd (Maybank IB) has a ‘Hold’ at a TP of RM5.25.
AMMB, the sixth-largest lender in the country, also saw a significant increase in share price to date with a total increase of 14.61% to RM4.94 from RM4.31 on Dec 30, 2016.
At the current price, it is among the cheapest banking stock as it is trading at a price-to-earnings of 11.75 times.
Analysts are expecting AMMB to hold up fairly well in 2017 on the back of stronger loan and deposit growth, as well as stable margins expansion.
The banking group had beaten the consensus in 3Q ended Dec 31, 2016, with a higher net interest income and loan growth, mainly driven by mortgages, and the small and medium enterprise sector.
“AMMB remains an ‘Add’ in our books, premised on expected recovery in FY17 earnings growth, pick-up in loan growth and attractive valuation,” said CIMB Research in a report.
“We are impressed with the strong rebound in loan growth of 3.9% YoY at end-December 2016, the fastest quarterly expansion in the past seven to eight years,” it said.
AMMB, posted a 4.3% rise in net profit in 3Q to RM313.17 million from RM300.15 million a year ago. Revenue for the quarter, however, fell 6.5% to RM1.98 billion.
“The 2016 results season ended with no major surprises as all banks reported results that were within our expectations save for RHB Bank, which saw some earnings disappointment on the back of a spike in credit costs,” said Maybank IB.
A further plus for the sector, RAM Ratings Services Bhd reaffirms its stable outlook on the Malaysian banking industry.
RAM Ratings believes the banking system’s loan growth is likely to remain flat at 5%-6% this year, asset quality to hold up well and earnings to remain pressured but sound.
“Given the expectation of a potential increase in credit costs and unrelenting competition putting a lid on NIMs, banks’ earnings are envisaged to remain pressured this year,” it said in a statement.
MIDF Research reckoned that the banking sector has turned around the corner and it expects any surprises this year will be on the upside.
“We expect recovery in earnings in most banks and our views are rein-forced by the 4QCY16 results, which suggest good momentum for CY17.
“We have recently upgraded Maybank to ‘Buy’ (TP: RM9.40) and continue to like CIMB (‘Buy’, TP: RM5.90) as we expect both these banks to continue its earnings recovery coupled with solid asset growth,” MIDF said in a note.
The research firm is also in favour of Public Bank (‘Buy’, TP: RM22.60) and Hong Leong Bank Bhd (HLB) (‘Buy’, TP: RM15.50) due to its good asset quality and sustained profitability.
The outlook for HLB is slightly more positive after the fifth-largest lender by assets in Malaysia posted strong numbers for the first-half of its FY17.
HLB’s net profit increased 30% to RM1.09 billion for 1H17 from RM847 million in the previous corresponding period, resulting in the group’s EPS increasing to 53.41 sen from 47.83 sen previously. The group’s revenue rose 8.5% to RM2.27 billion in 1H17 from RM2.1 billion a year ago.
HLB’s shares rose 1.77% to RM13.74 yesterday from RM13.50 at end-2016.