In Q1-18, banks earnings indicated that customer deposits improved modestly, loan growth remained modest, interest income came in weaker, and net interest margin contracted. Also, profitability was marginally weaker as higher Cost of Funds (CoF) pressured margins. Clearly, this should filter into H2-18 (as observed from the Q2-18 filings) amid sustained moderation in the yield environment, the poor appetite for loan growth and higher rates on deposits placement.
Also, while credit quality is seemingly improving for the tier-1 banks (NPLs ex-FBNH eased to 5.1%), tier-2 players, continue to struggle with high NPLs (averaging 9.3% in Q1-18). Additionally, Capital Adequacy Ratio (CAR) eased 0.9% across our coverage universe in Q1-18 as risk-weighted assets expanded, probably reflecting the forward-looking impact of the IFRS 9 adoption in Jan-18.
Going into H2-18, we expect a slight uptick in the yield environment (compared to H1-18) to support interest income on government securities, especially for the tier-1 banks. We maintain our position that appetite for risk assets will be muted by events in the socio-political space as observed in H1-18. From all indication, the transition to IFRS 9 will pressure risk-weighted assets and lower CAR in 2018. Finally, we expect the lower yield environment to trigger local debt issuance by banks.
United Capital Research