KUALA LUMPUR (Jan 18): Asean banks will likely continue to face slower loan growth and higher credit costs in 2016, Nomura's equity research said, but is of the view that attractive valuations together with a favourable change in the direction of interest rates could lead to stronger share performance for the Indonesia and Singapore banks.

However, the research firm is cautious about Malaysian banks as it believes that they will likely continue to face net interest margin (NIM) compression and high credit costs.

"We are neutral on Malaysia banks despite their strong balance sheets and attractive valuations because we are concerned about their weak top-line growth, due to slower loan growth and narrower NIMs," it said in a report dated Jan 15, which was released today.

"We think (Malaysia banks') earnings in 2016 would be constrained by a combination of lower loan growth, NIM compression and high provisioning. We think NIMs will likely continue to be under pressure as the banks chase deposits in order to defend their positions under the liquidity coverage ratio requirements.

"We think this is a multi-year theme," it added.

Nomura noted that the slowdown in the country's gross domestic product growth to lead to lower loan growth of 6% to 7% in the near term.

"The lower loan growth and narrower NIMs should result in only mid-single-digit earnings growth in 2016F, which we think is unlikely to excite the market," it said.

Nomura's top pick among Malaysian stocks is Malayan Banking Bhd as it believes that its formidable current account and savings account deposit franchise together with a diversified asset base augurs well in the current environment.

"Our least preferred is CIMB Group Holdings Bhd because we think its Indonesian exposure could keep its provisioning high for some time, and its lower capital ratios could limit dividend payouts," it said.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)