Business

Monday March 2, 2009

Banks' performance in first half expected to be weaker

By ELAINE ANG and YVONNE TAN


LOCAL banks are expected to be hit by lower earnings, higher non-performing loans (NPLs) and loan loss provisions, among others this year despite a relatively fair showing in the recently-released fourth-quarter results, acording to analysts.

TA Securities senior analyst Wong Li Hsia said the current tough economic environment had yet to be reflected in the fourth-quarter results as banks were still registering good loans growth and asset quality.

Loans growth was 12.8% in 2008 versus 2007 while net NPL ratio stood at 2.2% as at January.

“There is nothing to be alarmed yet based on the fourth-quarter results. I believe banks’ results in the current quarter will be a better gauge of how the banking industry will perform this year,” Wong said.

Nevertheless, Wong cautioned that there were indications in the recent results that banks were in for quite a rough ride this year.

Among the signs were the lower net interest margins experienced by industry players due to the cut in the overnight policy rate (OPR) in November and higher loan loss provisions, which would result in lower earnings.

Malayan Banking Bhd’s massive RM6bil capital raising exercise will also stoke fears that more banks will seek additional fresh capital to bolster their balance sheets as the impairment cycle gathers momentum.

Statistics from Bank Negara also indicate a lower loans application – a sign of an impending slowdown in loans growth.

A banking analyst said the performance of banks in the first half of the year was going to be “substantially poor.”

“A lot of projects and other market activities have been put on hold for fear of a global meltdown, loans growth will slow and the numbers will be quite ugly,” he said.

In addition, the rapidly deteriorating macroeconomic conditions have prompted Bank Negara to slash the OPR by a further 50 basis points to 2% on Feb 24, thus putting more pressure on banks’ margins.

All in, the OPR has been reduced by 150 basis points since November 2008.

OSK Research estimates that the earnings of banks under its coverage will be negatively impacted by 2.7% to 4.6% due to the rate cut.

However, AMMB Holdings Bhd and EON Capital Bhd might experience 2.3% and 3.3% in earnings enhancement due to their large proportion of fixed rate loans, it noted.

OSK expects AMMB, which has the largest proportion of fixed rate loans at 60.1%, EON Capital (45.2%) and Public Bank Bhd (37.7%) to be less affected than those that have a large proportion of variable rate loans, including RHB Capital Bhd (76.2%), Hong Leong Bank Bhd (73.2%) and Malayan Banking Bhd (70.9%).

This is because the margin on fixed rate loans will widen as the banks’ cost of funds declines in an environment where interest rates are falling.

“AMMB would be the least impacted, while RHB Capital, which has the largest proportion of floating rate loans, would be the most affected among the large cap banks,” the research house said.

RAM Rating Services Bhd financial institutions ratings head Promod Dass concurred that the overall profits for commercial banks in particular would be shaved given that interest income was very much a core income stream.

“Interest income will be squeezed, therefore banks will be trying to partially compensate for it through fee and transaction-based income,” he said.

To mitigate the margin squeeze, he sees the likelihood of banks building up more current account and savings account deposits, which typically offer lower interest rates, to reduce their cost of funding.

The more challenging economic environment is also expected to result in a rise in NPLs.

Dass noted that although in the fourth quarter NPLs had come within expectations, he expected a gradual uptick throughout 2009.

“We need to realise that the numbers in the fourth quarter are historical. NPL figures typically lag real economic conditions by at least three to six months,” he said.

His sentiment is shared by Hwang-DBS Vickers Research banking analyst Lim Su Lin, who is forecasting a net NPL ratio of 4% this year.

“We expect a sharper increase in NPLs in the second half of the year,” she said.

A Kenanga Research banking analyst expects some margin compression for banks, at least over next six months even as NPLs experience an uptrend.

“With unemployment rates expected to increase, this is inevitable. NPLs will increase but whether drastic or not, we don’t know. So far there has been no significant increase,” he said.

Nevertheless, Dass still views the fundamentals of the country’s banking sector to be sturdier compared with during the economic crisis in 1997/98.

“However, maintaining asset quality and loan growth in this current environment would still be a challenge for the industry,” he said.


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