Malaysian bank earnings up 5% in Q2

Investment and trading income drove quarterly profit gains.

Although the Malaysian banking sector saw profits rise by 5% YoY in Q2 amidst stronger investment and trading income, the positive earnings growth may be short-lived, according to UOB Kay Hian. 

Only two banks reported earnings above expectations in Q2 including Ambank and AFFIN with the latter outperforming because of lumpy provision write-backs. 

"The breadth of earnings disappointment increased from 22% of banks under our coverage in 1Q19 to 44% in 2Q19," analyst Keith Wee Teck Keong said in a report. "The more stable sources of revenue streams were lacklustre with net interest income remaining flattish yoy and fee income declining 4.9% yoy." 

The sector's profit outlook remains subdued in Q3 as banks continue to grapple with weakening loan momentum. Loan growth fell to 3.9% in July from 4.2% in Q2.

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Moreover, the rise of gross impaired loans especially within the manufacturing sector also poses a risk to profitability. 

"Assuming sector net credit cost were to rise to the GFC average of 66bp from our current average assumption of 28bp in 2020, we estimate that this could impact our overall sector earnings by 22% and with sector P/B potentially declining to 0.90x from its current 1.10x," Keong added. 

Sector NIM also fell 4bp QoQ and 9bp YoY in Q2 following the recent 25bp policy rate cut and fierce competition in the deposit space.

"We expect NIM to remain under pressure as time deposits of most banks are only expected to start re-pricing downwards in 4Q19 (average 6months tenure) following the OPR cut in May 19. This is likely to offset the modest system loans growth expectation of 4.0-4.5% and should lead to flattish overall net interest income trends in 2019 vs 2.2% yoy growth in 2018."