More mergers and acquisitions and loan growth seen in banking sector

PETALING JAYA: Although inherent challenges in the banking sector
continue to exist post-general election (GE), industry observers and
analysts on the whole are confident of encouraging loan growth and more
merger and acquisition (M&A) activities this year.
Analysts
are forecasting loan growth for the year to be around 7% to 10%.
Moody's Investors Service, which has maintained its stable outlook for
the Malaysian banking system for the next 12 to 18 months, expects a
loan growth of 10%, while Alliance Research estimates it to be between
7% and 9%.
OCBC Bank (M) Bhd
country chief risk officer Choo Yee Kwan said post-GE, loan growth for
the sector would be supported by the quicker pace of capital spending
in domestic-oriented sectors, the oil and gas (O&G) industry and
the ongoing implementation of infrastructure projects, particularly
those arising from the Economic Transformation Programme (ETP) and the 10th Malaysia Plan.
“Lower
valuations in segments of the equity market may present opportunities
for M&As, plus providing windows for privatisations. Exports of
Malaysian palm oil have held steady, partly due to the fact that the
extension of the 4.5% export tax on crude palm oil continues to provide
a competitive advantage over Indonesia, whose export tax for the
commodity currently stands at 10.5%. For OCBC Malaysia, we have set our
loan growth target at the mid-teens level this year, with some
variations for the different business segments and products,” he told StarBiz.
Analysts
agree that the ETP projects and the construction sector, among others,
would further drive business loan growth this year. Many of them had
already re-rated upwards the construction sector, the O&G sector
and certain segments of the property sector.
The construction
sector, said Choo, would be one of the main drivers of the Malaysian
economy, and we can expect construction activities to pick up pace, one
salient example being the rail infrastructure projects.
Another
segment of business loans that is expected to show robust growth would
be lending to small and medium-sized enterprises, he noted.
Figures
from the Statistics Department showed that construction activity grew a
significant 18.4% in the first quarter of 2013 year-on-year to nearly
RM2bil. Out of this, the civil engineering sub-sector contributed 38%
to the overall sector.
Malaysian Rating Corp Bhd (MARC)
chief economist Nor Zahidi Alias maintains the view that loan growth
would moderate slightly this year, following the implementation of
stricter lending guidelines in January 2012.
The repercussions
from the prudent lending guideline would likely continue to cause
further moderation in loan growth to the household sector, although
loans to the business segment would remain vibrant due to the resilient
momentum in private investments, he added.
“Slower loan growth
in the household sector is a welcome development, as the level of
household debt remains elevated, at 80.5% of gross domestic product,
the highest in at least a decade. Tempering households' enthusiasm for
taking loans is necessary in my view, as an overstretched household
balance sheet would pose a risk to the consumer segment, a sector that
has become an important pillar to the Malaysian economy since the Asian
Financial Crisis.
“Notwithstanding this, we do not foresee a
significant drop in the overall loan growth, as robust economy activity
and stiff competition in the banking sector would continue to support
loan growth in 2013,” he said.
Thus far, MARC noted that loan
growth had picked up by an average of 11.1% in the three months through
March, after slowing to 10.4% as at end-December 2012 (13.6% in the
previous year). However, loans to the household sector had slowed to an
average of 11.8% in 2012, compared with an average of 12.9% in 2011.
Loans
for the purchase of residential properties, said Zahidi, would likely
remain robust, even though efforts had been made to reduce the exposure
of certain segment of borrowers to this sector.
This was due to
the fact that home prices had remained elevated and were expected to
remain high due to strong demand, especially in the Klang Valley,
Penang, Johor and Negri Sembilan, he said.
However, he felt loan
growth for consumption credit (ie, credit card and personal loans) had
moderated and would likely remain softer this year, as the impact of
stricter guidelines continue to bite.
Alliance Research banking
analyst Cheah King Yoong, meanwhile, said it was maintaining a loan
growth target of 7%-9% for this year.
Cheah expects M&A news
flows in the banking sector to re-emerge, with the stabilisation on the
political front. “Other than the recent news about Hwang-DBS being
potentially acquired by AMMB and Affin,
we believe that the increasingly competitive environment going forward
could induce smaller domestic banks to consolidate, and/or pursue
further integration with their foreign strategic partners.
“We
maintain that AMMB and Affin serve as good proxies for exposure to the
domestic M&A theme, where foreign strategic shareholders are
expected to be raising their shareholdings in the domestic banks,'' he
added.
Besides giving Malaysia's banking system a stable
outlook, Moody's analyst Simon Chen cautioned on the looming risk posed
by the twin trends of household leveraging and pronounced house price
appreciation, which could, in less favourable conditions, undermine
asset quality.
“Any upward movement in current low official
interest rates would have a negative effect on various asset classes,
such as export-oriented manufacturers, high loan-to-valuation mortgages
and highly-leveraged households. Moody's estimates that these asset
classes accounted for less than 20% of all loans in the banking
system,” it noted.
The major challenge for the banking industry,
Cheah said, remained falling net interest margins (NIM). “We believe
that NIM would continue to be compressed mainly due to loan replacement
cycles, competitive rates given to the ETP-related business loans, and
potentially rising cost of funding to comply with Basel III liquidity
requirements for net stable funding,'' he added.