EARNINGS GROWTH: Pedestrians are seen walking past a Maybank branch. The bank is HwangDBS Research’s top pick as the research house forecasts a seven per cent earnings growth for the banking sector this year. — Bloomberg photo
KUCHING: The banking sector is expected to see a seven per cent earnings growth for this year, supported by non-interest income and other positively contributing factors.
HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) analyst Hon Seow Mee stated, “We factored in nine per cent non-interest income (NII) growth for 2012, but quicker acceleration of the Economic Transformation Programme projects could boost growth.
“Net interest margin (NIM) is expected to dip mainly from competitive pressures, but short-term implications of a policy rate cut could further exacerbate NIM compression, particularly for Alliance Finance Group Bhd (AFG) and Hong Leong Bank Bhd (HLB).”
The analyst pointed out that HwangDBS Research’s sensitivity for 2012 showed that every 25 basis points (bps) of decline in the policy rate would reduce Malaysian banks’ earnings by circa four per cent, with other variables being constant. However, over time as deposit rates re-price, NIM should recover.
Pre-provision profit for the fourth quarter of 2011 (4Q11) sector grew five per cent quarter-on-quarter (q-o-q) while non-performing loan (NPL) ratios improved with low asset quality stress.
Absolute NPLs fell five per cent q-o-q while gross NPL ratio improved to 2.8 per cent, easing concerns of asset quality stress.
Loans grew 14 per cent in 2011, but Hon expected moderation in 2012. Competition for low cost deposits was expected to intensify, putting further pressure on NIMs.
NIIs for Malayan Banking Bhd (Maybank) and AFG beat the analyst’s expectations while figures for the other banks were in line. Net interest income was supported by robust loan growth (up three per cent q-o-q), while NIM was stable.
Banks generally set aside higher provisions in line with loan growth, while CIMB Group Holdings Bhd (CIMB) booked extra provisions pursuant to a change in default probability under Financial Reporting Standard (FRS) 139.
CIMB’s corporate investment banking profits were lower in 2011 in the absence of ‘mega deals’ and loan growth (consumer and corporate) was about 12 to 13 per cent, lower than the group’s initial target.
Meanwhile, RHB Capital Bhd’s (RHBC) earnings were dragged down by RM76 million mark-to-market losses from hedging positions, RM40 million impairment charge for collateralised loan obligations (CLOs) and RM20 million one-off human resources (HR) expenses.
Moving on to the outlook for this year, Hon stated, “We forecast seven per cent earnings growth for 2012, premised on robust 13 per cent loan growth, three bps NIM contraction, and stable noninterest income and provisions.
“We do not expect upticks in asset quality. Taking 2008-09 as a cue, although banks turned extremely cautious, we did not see major NPL risks.”
The analyst’s top pick was Maybank, with the assumption that the bank would maintain 70 per cent dividend payout ratio, implying six per cent yield.
She also mentioned AFG for its scalable domestic franchise and non-interest income traction, and HLB for merger synergies.