Banks see worst core earnings growth since 2Q09

by **Cals** Thu 13 Jun 2013, 10:59

Business & Markets 2013

Written by CIMB Research

Thursday, 13 June 2013 10:35

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Banking sector
Maintain neutral: The first quarter of 2013 (1Q13) was a tough one for banks due to weaker business sentiment ahead of the general election. This was reflected in a slowdown of core net profit growth to only 1.9% year-on-year, the weakest since 2Q09, the result of narrower margins and an upturn in credit costs.
The results were also 6% to 9% below market and our expectations. Although we look forward to a recovery in earnings growth in the coming quarters, amid improved sentiment after the election, we expect margin compression and an upturn in credit costs to push net profit growth down to 9.9% in 2013 from 11.7% in 2012. We remain “neutral” on Malaysian banks and keep MALAYAN BANKING BHD [] as our top pick.
Stripping off one-off gains for two banks, banking core net profit only grew 1.9% year-on-year (y-o-y) in 1Q13, the weakest since 2Q09. This was primarily the result of: (i) an upturn in credit costs; (ii) margin contraction; (iii) weaker business-related and investment banking income; and (iv) a jump in overheads from the consolidation of business units acquired in 2012.
We are projecting 9.9% net earnings growth for the sector in 2013, supported by top line growth from an 11.3% y-o-y expansion of net interest income and 18.9% growth in non-interest income. Overheads are forecast to advance by 10.1% while credit costs are projected to jump 72.9%.
Business loan growth was suppressed to 9% y-o-y in March this year by weak business sentiment ahead of the general election. But consumer loan growth improved from 11.6% y-o-y in December 2012 to 12.1% y-o-y in March this year. Overall, loan growth remained flat at around 10.5% y-o-y in December and March.

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Gross impaired loan ratio stayed at 2% between December and March but loan loss coverage declined to 99.4% in March from 101.4% in December. — CIMB Research, June 12

This article first appeared in The Edge Financial Daily, on June 13, 2013.