Harder times for banks in first quarter as profits drop, margins erode

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Quarter on quarter, the banks’ reported net profit fell marginally by 2.3 per cent to RM5.05 billion, it said in a note, on the back of lower net interest income, lower NOII and higher provisions.

Quarter on quarter, the banks’ reported net profit fell marginally by 2.3 per cent to RM5.05 billion, it said in a note, on the back of lower net interest income, lower NOII and higher provisions.

KUCHING: Most Malaysian banks missed the mark for analysts at Hong Leong Investment Bank Bhd (HLIB Research) mainly on weaker-than-expected loan growth, net interest margins and net operating income.

Quarter on quarter, the banks’ reported net profit fell marginally by 2.3 per cent to RM5.05 billion, it said in a note, on the back of lower net interest income, lower NOII and higher provisions.

On a yearly basis, banks’ reported net profit was flattish at RM5.05 billion as higher net interest income – amidst stable NIM and loan growth – was offset by lower NOII and higher provisions.

“On a quarterly basis, net interest margins remained on a downtrend for most banks,” it said in the report. “On a year on year basis, net interest margins of most banks either stayed flat or slightly higher.

“We believe the erosion in net interest margins may be easing soon, as several banks have recently raised their lending rates via a 10 basis point increase in base rates — and we believe morebanks will follow suit, either via higher base rates or higher spread.

“Higher lending rates, coupled with more disciplined deposit competition will result in stabilisation in net interest margin compression.”

Researchers with Kenanga Investment Bank Bhd (Kenanga Research) observed that banks’ liquidity position continued to improve.

“Industry loan growth decelerated in 1Q16 falling by 1.4 per cent q-o-q and slowing down to 6.6 per cent y-o-y. The fall in the quarter was dragged by the heavyweights such as CIMB Group Holdings Bhd, Malayan Banking Bhd and RHB Capital Bhd, which saw their loan book falling between one and four per cent q-o-q.

“Industry deposit growth was flattish on a quarterly basis at zero per cent but slowery-o-y at 6.1 per cent with Alliance Financial Group Bhd, Hong Leong Capital Bhd  and Public Bank Bhd performing above the industry average at 5.7, 1 and 1.8 per cent q-o-q respectively.

“As loan growth fell more than deposit growth, aggregate loan-deposit-ratio (LDR) fell by 125bps q-o-q, indicating that liquidity position continued to improve.”

Meanwhile, overall aggregate credit charge increased in 1Q16 by 6.7bps q-o-q and 10.1bps y-o-y despite most banks’ loans loss provision descending, save for BIMB Holdings Bhd, Public Bank and Maybank.

Banks’ capital position still above the regulatory mark. Most of the banks saw their common equity tier 1 (CET1) ratio improved with the exception of BIMB and Hong Leong Bank.   “The drop was due to lower retained earnings and other reserves (for Hong Leong Bank) and risk weighted assets outpacing growth in CET1 (for BIMB) from the previous quarter. Overall, the banks’ CET1 ratio is still comfortably above the regulatory  requirements of seven per cent.”

Kenanga Research reiterated its neutral call on the sector, making no change in our views on structural and cyclical headwinds plaguing the banking industry.

“Furthermore, there are no concrete catalysts and/or any game changers going forward. Hence, there is no change to our cautious stance.”

HLIB Research is keeping its neutral stance on the sector, given the lack of prominent near term rerating catalyst.