Friday 29 Mar 2024
By
main news image

KUALA LUMPUR: After enduring a considerably lacklustre 2014, it seems the banking sector will have to once again forge into what many are seeing as less-than-friendly weather ahead.

In fact, 2015 has been described as no less than “gloomy”, thanks to slower global growth and lower domestic consumption, which is expected to continue to squeeze net interest margins (NIMs) and stifle loan growth.

M&A Securities Sdn Bhd head of research Rosnani Rasul (pic) did not mince words when she told The Edge Financial Daily recently that things “could get worse next year” for banks and the industry will simply have to ride out the storm.

“There will be times when banks will prosper and there will be times when they will have to expect smaller growth. I expect that it is the latter next year. There are macroeconomic issues which will affect banks’ financial performance next year and they are out of banks’ control,” said Rosnani.

CIMB Research analyst Winson Ng too expects banks’ underwhelming earnings seen throughout 2014 to continue into the new year, and holds a “negative” rating on the banking sector.

“So far, there appears to be a disconnect between the country’s growth and the banks’ earnings. The gross domestic product growth seen in the first half of 2014 has not been reflected in the banks’ financial results in the last few quarters. This is an industry-specific problem,” Ng observed.

Ng forecasts that banks will see more moderate loan growth in 2015 from households and businesses due to the effects of the goods and services tax (GST) in April, and higher inflation.

He said households will be more cautious in their spending as disposable income shrinks in the light of rising cost of living, and this will suppress household loan growth, which is currently supported by mortgages.

But that support won’t last for long as the full effects of the government’s cooling measures on the property market on banks will become more evident in 2015.

“To date, the slowdown in the property market has not translated into weaker growth in mortgages. This is because banks are still benefiting from development projects, which have been in the pipeline in the last three years. Going forward, softer property transactions will have a stronger impact on banks’ loan growth,” reasoned Ng.

UOB Kay Hian head of research Vincent Khoo, who has a “market weight” rating on the banking sector, expects loan growth in 2015 to decline from 7.8% to 8% in 2014 to 7% on the back of moderating household loans, as well as a “weak and patchy” corporate loan growth recovery.

There is also continuous pressure on NIMs due to more intense competition for loans and deposits.

“Rising funding cost on the back of intense competition for deposits will continue to be one of the biggest challenges for banks in 2015. This is especially so with the implementation of a net stable funding ratio under Basel III and the 10-year record high system loan to deposit ratio,” said Khoo.

“Banks with relatively lower current and savings account ratio and higher loan to deposit ratio are likely to face greater headwinds, both from margin and loan growth perspectives,” he said.

MIDF Research analyst Kelvin Ong has a “neutral” call on the sector but noted that demand for business loans will be impacted by slower export growth due to slower growth in the global economy.

“As exports grow at a slower pace, we anticipate capital expenditure spending by companies to slow down. This will impact business loan demand. Against this backdrop, we expect the sector’s loan to grow at a slower pace of 8% to 9% for 2015, as opposed to 9% to 10% for 2014,” he said.

AmResearch also maintained a “neutral” rating on the sector for next year, citing NIM compression as well as credit costs to be major issues of uncertainty for 2015.

In a research note dated Dec 4, AmResearch analyst Rachel Huang said she had downgraded the banking sector’s net earnings growth assumption to 0.6% for 2015 from 12.6%. In terms of revenue assumptions, sector loan growth assumption has been lowered to 8% from 8.5% previously for next year.

Like Khoo, she expects credit costs to pose a challenge to banks. She said credit costs may remain relatively high due to “sporadic weakness in the corporate segment as well as retrenchment exercises for workers employed in the airline and media segments”.

Still, despite the gloomy forecasts, there are some good pickings to be found. One consensus top stock is Malayan Banking Bhd.

“Despite recent earnings headwinds, we believe that on the balance, valuations remain relatively compelling for a liquid, large-cap bank at 1.6 times FY15 price-to-book value and with return on equity (ROE) slightly above the industry’s average ROE of 13% and further underpinned by dividend yields in excess of 6%,” said UOB Kay Hian’s Khoo.

 

This article first appeared in The Edge Financial Daily, on December 23, 2014.

      Print
      Text Size
      Share