Banks’ performance lifted despite margin squeeze due to low rates

PETALING JAYA: Non-interest income was the key earnings driver in the recent second quarter bank results, led by transaction banking, treasury and capital market activities as well as asset portfolio investment gains.

Rising by 29% in the second quarter, non-interest income has become the focus lately as banks are increasingly pressured by margin squeeze from low interest rates and intense competition for loans.

Despite the surge in non-interest income, HwangDBS is cautious of volatile capital markets and the sustainability of investment gains.

Retaining its growth target of 13% for non-interest income in 2011, the research house expects banks to continue building traction in sustainable fee income, especially in transaction banking.

Not all banks will be able to sustain the higher non-interest income.

OSK Research noted that AMMB Holdings and Alliance Financial Group (AFG) experienced a surge in trading gains on sale of available-for-sale (AFS) securities as both groups capitalised on the flattening of the yield curve in the first quarter to lighten their portfolios.

“However, yields of longer term fixed income securities have not dropped as drastically as they did in the first quarter; hence, the opportunity to repeat first quarter gains is likely to be muted in the subsequent quarters,'' said OSK in its strategy review yesterday.

On the trend of non-interest income, the research house noted that:

● at AFG this was lifted by transactional banking and treasury activities as well as loan recoveries;

● at AMMB higher-than-expected non-interest income for the first quarter of financial 2012 was unsustainable as they were largely related to gains from sale and revaluation of AFS and high frequency trading (HFT) portfolios. Net interest margin (NIM) fell 23 basis points (bps) and further contraction was expected;

● at CIMB fees and commissions, as well as gains from AFS investments, had resulted in higher non-interest income;

● at Maybank this was led by transactional banking and stronger mandates in the capital markets; strong loans growth and fee income supported earnings;

● at RHB Capital higher non-interest income was offset by higher provisions, especially in the export-oriented small and medium-sized companies (SMEs) portfolio. NIM pressure especially from competiton for deposits remains a key concern.

Continued pressure on NIMs resulted in the sector's aggregate net interest income expanding by only 1.6% versus 6.2% in the preceding quarter, OSK Research noted. This was despite stronger second quarter loans growth of 15.3% year-on-year and 4.6% quarter-on-quarter.

“NIM was weaker except at CIMB (where Bank Niaga's NIM has bottomed out); AFG (where loans of SMEs have picked up) and Hong Leong Bank (following the consolidation with EON Bank),'' said HwangDBS.NIM will be supported by loans growth, which HwangDBS has targeted at 15% for 2011, driven by consumer and business loans. There is also potential upside from economic transformation project loans.

On the trend in interest income, OSK noted that:

● Among banks with weak interest income included AMMB, AFG and CIMB, which were affected by the rising cost of deposits as a result of aggressive growth in the money market and longer tenure fixed deposits;

● RHB Capital's strong loans growth of 20.2% was more than sufficient to offset the pressure on NIM.

NIMs were expected to remain, at best, flattish from current levels, said OSK, citing the absence of further rate hikes in the medium term and re-pricing of deposits.

ECM Libra noted that:

● Even though Public Bank's NIM improved by 10bps for second quarter (compared with 2.6% in first quarter), the margin expansion was temporary, in view of the earlier re-pricing of lending compared with deposit rates amid rate hikes by Bank Negara in May.

Overall, Public Bank experienced higher non-interest income from its fund management business and Islamic banking, strong loans growth, lower impaired loans and cost-to-income ratios;

● At CIMB, NIM expanded from 3.08% in first quarter to 3.15% in the second quarter, helped by re-pricing of lending rates and NIM recovery of 10bps at CIMB Niaga on a quarter-on-quarter basis. However, CIMB experienced a drop of 27bps in its NIM in the first half to 3.11%, compared with the corresponding period last year.