Banking sector
Maintain neutral: In July 2016, Bank Negara Malaysia (BNM) unexpectedly trimmed the overnight policy rate (OPR) by 25 basis points (bps) to 3%. Nevertheless, we observe that the reduction did little to help spur loan growth.

 
Similarly, we do not foresee the recent 25 bps cut to have any material impact on overall loan growth.

While not able to assess the full impact from the OPR reduction in May as yet, year-to-date (YTD) loan growth has been rather muted thus far, having risen by 1.4% YTD versus 5% a year ago.

Business loans have been a drag on overall demand for credit. YTD, total business loans have contracted by 0.1%, versus an increase of 3.4% in July 2018.

Supporting overall loan growth however, consumer loans rose 2.5% YTD, although we noted that the momentum has also softened significantly from a growth of 6.3% YTD in July 2018.

Despite minimal correlation between changes in the OPR and loan growth, we lower our loan growth forecast for 2019 to 4.5% from 5% previously, where we adjust our assumptions for business and consumer loan growth to 3.2% and 5.5% from 5.2% and 4.8% respectively.

We foresee consumer loans supporting overall loan growth. Within the consumer segment, we believe loans will continue to be largely supported by a decent pipeline of mortgages and ongoing Home Ownership Campaign (HOC), which has helped improve sales. Residential mortgages account for around 60% of total consumer loans.

Going forward however, mortgage loans should grow at a more moderate pace of 6% to 7% as the overall market remains subdued.

Furthermore, we are not expecting the government to propose any new measures to relax and/or withdraw existing cooling measures in the upcoming Budget 2020.

We also foresee demand for loans to remain lacklustre in the first half of 2020 (1H20). In addition to softer consumer loans, overall business loans could remain rather lacklustre due to the challenging market environment.

That said, we are of the view that BNM will keep the OPR steady at 3% throughout the year. However, given the lack of visibility due to uncertainties compounded by escalating trade conflicts and concerns of synchronised global slowdown, we see room for BNM to trim the OPR to 2.5% by 1H20.

Recovery in loans, as we expect it, would likely be gradual. The downside risk to our loan growth assumptions, however, are muted sentiments.

We had, in the last second quarter of 2019 results season, trimmed loan growth assumptions for all the banks under our coverage.

In addition, we lowered NIM assumptions along with growth assumptions for fee income, in line with a more tepid outlook for the sector.

In all, we lowered 2019/2020/2021 net profit estimates by 2.2%/7.4%/4.3%. Taken together, we are now forecasting net profit growth of some 3.1%/2.3%/4.4% for 2019/2020/2021.

We maintain our “buy” calls on CIMB Group Holdings Bhd, RHB Bank Bhd and Affin Bank Bhd, with “hold” calls for Hong Leong Bank Bhd and AMMB Holdings Bhd.

We downgrade Alliance Bank Malaysia Bhd to “hold” from “buy” as the total upside to its target price has narrowed to between 7% and 12%, and reiterate “sell” for Malayan Banking Bhd and Public Bank Bhd. — TA Securities, Sept 20