Highlight Better outlook for banks in second half

Highlight Better outlook for banks in second half
Business & Markets 2013
Written by Kamarul Azhar of theedgemalaysia.com
Friday, 06 September 2013 19:00

ANALYSTS are still optimistic about the outlook for Malaysian banks in the second half of this year, on expectations of stronger economic growth fuelled by the ongoing Economic Transformation Programme’s (ETP) projects. This is despite the turbulence that has hit emerging markets in recent weeks.

The analysts’ sanguine outlook may come as a surprise to some, given the deteriorating macroeconomic conditions in Malaysia as well as other major Asian economies so far this year. Indonesia is grappling with a widening trade deficit and a battered currency, while Thailand is in a technical recession after recording a contraction in two consecutive quarters.

“We are maintaining our industry loan growth forecast for 2013 at 10.5%, although we acknowledge there is further upside potential should the loan growth momentum pick up in the second half, particularly with the accelerated disbursements of ETP-related loans as general election-related risks dissipate,” says Cheah King Yoong, vice-president of equity research at Alliance Research.

Nonetheless, with the combined effects of Bank Negara Malaysia’s macro prudential measures targeting mortgage and personal loan segments that were implemented in early July, and potential fiscal tightening by the federal government via its subsidy rationalisation programme in the later part of the year, Cheah expects loan growth momentum in the retail segment to be dampened.

In 1HFY13, MALAYAN BANKING BHD [] and PUBLIC BANK BHD []’s financial performance met analyst expectations. CIMB Group Holdings Bhd recorded flat year-on-year growth, with many analysts trimming their earnings target for the rest of the year while HONG LEONG BANK BHD [] recorded a modest growth in net profit for FY2013 ended June 30.

Maybank’s net profit rose 10% y-o-y in 1HFY2013 to RM3.074 billion, while that of Public Bank increased 6.4% to RM1.992 billion. Hong Leong Bank recorded a 6.5% increase in net profit for FY2013, while CIMB’s core earnings stood at RM2.125 billion, flattish compared with 1H2012.

“Our view that the sector’s earnings momentum is set to accelerate in 2H2013 has not changed. This will be underpinned by a pick-up in business activity as the implementation of projects under various economic programmes gains pace,” says David Chong, a banking sector analyst with RHB Research.

However, the likelihood of several big ticket projects being scrapped or postponed have grown lately, following Fitch Ratings’ downgrade of Malaysia’s credit rating outlook to “negative” from “stable” in July. It has been reported that the federal government will review some of the big public sector projects to reduce the strain on its coffers.

In the first half of the year, CIMB Group recorded the highest loans growth among the Malaysian “Big Three” banks at 13.8% on an annualised basis to RM222.7 billion. This compares with Maybank’s 9.2% y-o-y growth to RM332.36 billion and Public Bank’s 11.8% increase to RM209.4 billion. Hong Leong Bank recorded a 7.3% y-o-y increase in gross loans and financing to RM97.2 billion in FY2013.

“Although economic growth has been slower this year, banks still managed to chalk good growth in terms of net profit and loans growth. However, the challenging macroeconomic environment coupled with Bank Negara’s measures to curb rising household debts may put pressure on the bank’s net interest margins (NIM),” says an analyst with a local bank-backed research firm.

In the first half this year, Malaysia registered GDP growth of 4.2% y-o-y compared with 5.4% a year ago. Bank Negara lowered its full-year forecast to 4.5% to 5% from 5% to 6% earlier, owing to the economy’s weak performance in the first half.

CIMB saw its NIM shrink in the first half of the year, compared with the same period last year, due to its high exposure to regional economies, especially Indonesia, which is facing high inflation and a plunging rupiah resulting from the outflow of foreign funds.

PT CIMB Niaga Tbk’s NIM dropped 67bps in 1HFY2013 from a year ago, dragging the group’s NIM down by 24bps to 2.89%. Maybank and Public Bank saw their NIMs compressed, but to a lesser degree — 3bps to 2.45% and 15bps to 2.31% respectively. Hong Leong Bank’s NIM was largely unchanged at 2.13%.

In 1HFY2013, CIMB Niaga recorded 8% y-o-y increase in its net earnings to RM664.53 million. Its net earnings contributed 31.3% of CIMB’s core earnings for 1HFY2013. Meanwhile, CIMB Thai Bank pcl reported a net profit of RM55.95 million in 1HFY2013, contributing 2.6% to the group’s total core earnings.

“NIM at its Indonesian operations could still be under downward pressure going forward ... As a whole, we understand that the sharp NIM contraction in Indonesia could drag CIMB’s NIM down by 20bps to 25bps, exceeding the group’s initial guidance of 5bps to 10bps contraction,” says Cheah of Alliance Research.

In comparison, 28.4% of Maybank’s profit before tax (PBT) of RM4.216 billion in 1HFY2013 was derived from its international banking operations. Its exposure to Indonesia is minimal, with PT Bank Internasional Indonesia Tbk contributing only 6.76% to Maybank’s net profit during the period under review.

“Further NIM compression, albeit moderating, is inevitable arising from higher funding cost and expansion in deposit base. Management, instead of focusing on group NIMs, has shifted its focus to improving customer profitability and increasing fee income via the cross-selling of different consumer products,” states Tan Ei Leen, a banking analyst with Affin Investment Bank.

Loans growth momentum at CIMB’s Indonesian operation is expected to be under pressure in the second half of the year, as CIMB Niaga undertakes a more conservative credit underwriting policy, given the increasingly challenging prospects in Indonesia, states Cheah in his Aug 27 research note.

Bank Negara’s measures to control rising household debt is also not expected to impact local banks’ credit growth substantially in the second half, the analyst with the local bank-backed research firm says. This is because stringent procedures are already in place to vet potential customers.

The conclusion of the 13th general election (GE13) in May has also lifted a barrier, which slowed investment and reduced loan application appetite earlier, says the analyst. While household loans grew faster than corporate loans in the first half of the year, the second half will see a faster increase in corporate loans, he adds.

“A pick-up in system loans growth post-GE13 would be more meaningful in the corporate lending space. Management does not expect the recent measures to rein in household debt to impact the bank too significantly, citing stringent credit underwriting processes that are already in place,” says Chong of RHB Research.

While the likelihood of a repeat of the Asian financial crisis is minimal, banks being the proxy for the state of the economy are expected to feel the brunt as the region’s economies slow down. Competition in the banking sector in Malaysia, Singapore and to some extent, Indonesia, is expected to further compress the NIMs of banks in the second half of the year.

Nevertheless, the stronger economic growth expected in the second half and ongoing ETP projects are mitigating factors for Malaysia.


This story first appeared in The Edge Malaysia Weekly Edition, on September 2 - September 8, 2013.