ALTHOUGH the banking sector on the whole performed well in 2012, judging from the latest round of earnings, its momentum for this year could be affected due to slower loan growth, potentially higher loan loss provisions and continued margin compression.
Alliance Research banking analyst Cheah King Yoong, who anticipates slower loan growth of between 7% and 9% this year versus the target of 11% for last year, says the key questions are whether the strong earnings growth registered last year could be sustained this year and whether investors have largely priced in the optimistic earnings outlook for 2013 in view of the sector’s outperformance in 2012. For now, the research house continues to expect domestic banks to register positive year-on-year earnings growth in 2013, although earnings prospects for the sector are turning increasingly cloudy.
He attributes, slower loan growth to net interest margin (NIM) compression and potentially higher loan loss provision. He anticipates loan growth for next year to be slower. The average lending rate (ALR) and the three month fixed deposit spread serves as a proxy for the sector’s NIM.
The significant amount of Economic Transformation Programme (ETP) related loans being disbursed this year could be repaid next year, which could drag the business loan growth momentum for 2013, he says.
As such, the research house believes that household loans will assume its role as key loan drivers for next year, compared with this year when loan growth was fuelled by ETP related corporate loans.
Cheah foresees two potential catalysts which may pose downside risks to the 7% to 9% loan growth forecast for next year.
The first, is that lending activities could decelerate in the first quarter of 2013 with slowing corporate loan disbursements and consumers turning cautious pending the upcoming general election and secondly, post-election – whether the federal government should implement the goods and services tax, resume its subsidies rationalisation programme and raise the electricity tariff to close its budget deficit.
These fiscal tightening policy he says could have an adverse impact on consumer spending and consumer loans in the later part of this year.
Cheah and other analysts also agree that NIM will continue to face downward pressure.
They attribute this to rising cost of funding for Basel III compliance (the rules and framework are expected to kick in by this month), competitive rates for ETP business loans and the loan replacement cycle.
Loan replacement cycle refers to where high-yielding loans acquired in the past few years being repaid and replaced by recent disbursements of lower-yielding new loans.
RAM Ratings co-head of financial institution ratings Wong Yin Ching tells StarBizWeek the rating agency retains its stable outlook on the Malaysian banking industry for this year and expects loan expansion to clock in at high single-digits.
While it is cautious that the rate of recovery for the global economy will be influenced by the on-going eurozone sovereign debt crisis and, the local banking industry is still fundamentally sturdy and the domestic economy remains resilient, she adds.
“Overall banking system loans have shown a strong 11.2% (annualised) growth for the first ninev months of 2012 (2011: 13.6%). We believe the credit environment will remain largely accommodative for borrowers even if there is an upward adjustment in interest rates in 2013.
The stricter retail lending guidelines and other various prudential measures introduced since late 2010 may moderate household loan growth.
“On the other hand, we anticipate stronger financing demand from corporations as well as small and medium-sized enterprises (SMEs), underscored by the rollout of projects under the ETP and the 10th Malaysia Plan (10MP),” Wong notes.
The banking system’s gross impaired loan ratio a measure of the credit quality of banks’ loans is at a commendable 2.1% as at end-September 2012, she says, which is at an all-time low, and adds that the ratio was expected to remain stable at the current level, barring any unexpected shocks to the economy.
Capitalisation, Wong says, is also sturdy, with a core capital ratio of 13% while the banking system’s funding and liquidity positions are still at comfortable levels.
Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias says should the US economy continue to give positive signals and China continues to recover from its export slump, global business sentiment will pick up, spurring more business spending in 2013.
This, he adds will once again lead to strong demand for loans.
“The growth in consumer loans, which has declined, will not likely drop significantly as the Malaysian labour market remains stable with unemployment rate at below 3.5%,” he says.
Thus far, Zahidi says the retrenchment figure has not picked up despite the lackluster performance of the export-oriented industries and for 2012, MARC is still expecting loan growth of between 10% and 11%.
While the overall growth in loans will remain commendable, he says the main challenge will be the softer loan growth to several segments such as credit card, hire purchase as Bank Negara‘s measures to curtail overzealous household sector continue to work through the economy in 2013.
Many industry players and analysts are positive on non-interest or fee-based income as the key growth driver for banks next year amid compression in NIM in view of slowing net interest income growth.
OCBC Bank (M) Bhd director and CEO Jeffrey Chew, who is forecasting the bank’s loan growth in the low to mid-teens next year, says the bank expects to see good double-digit growth in fee income in 2013 and expect this to be slightly stronger than 2012.
He adds it will come from investments made in treasury trading infrastructure, especially in product and advisory capabilities, fees generated from the bank’s aggressive growth in wealth management products and investment banking fees from increased loan syndications and capital market activity related to the ETP and infrastructure.
Standard Chartered Bank Malaysia Bhd managing director and CEO Osman Morad opines the macro backdrop that supported strong fund flows into emerging markets and Asian credit markets in 2012 is still in place and should help regional credit markets generate positive returns.
From a Malaysian perspective, non-interest income will continue to increase with deal flows fuelled by incentives for sukuks and increased transactional banking fees on forex hedging activities, he notes.
Wong says the main areas of focus for non-interest income are in wealth management, bancassurance, transaction banking, treasury and investment banking solutions and adds that new capital measures under Basel III which emphasise higher quality capital will elevate banks’ cost of capital. Coupled with anticipation of continued competition in retail-deposit space, she says NIMs will remain under pressure.
Cheah feels the increasingly competitive environment going forward could induce smaller domestic banks to consolidate and/or pursue further integration with their foreign strategic partners.
This, he adds, will lead to the emergence of stronger domestic banks with more efficient operating structure and larger footprint to face competition arising from the upcoming sector liberalisation.
He expects the re-emergence of banking consolidation theme in 2013 post general election and banks that could offer exposure for such investment theme include Affin Holdings and AMMB Holdings.
With regional central banks currently in the final stages of launching the Asean Banking Integration Framework, Osman says it will make it easier for qualified banks in the region to expand within member countries. Potential entry of banks from other Asean member countries into Malaysia could intensify competition which may induce smaller banks to consolidate and pursue further integration, he adds.
Source: The Star
Published: Saturday, January 5, 2013
By: DALJIT DHESI
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