KUCHING: Banking sector earnings will remain healthy, underpinned by loan growth and supported by projects under the Economic Transformation Programme (ETP), low credit charge offs and an improved operating efficiencies via streamlining structures at banking groups.
According to MIDF Amanah Investment Bank Bhd (MIDF Research), while it expected business to be supported by financing extended to ETP projects, household sector loans were expected to continue to moderate. This was due to the establishment of macro-prudential lending measures by the central bank as well as increase in global uncertainties.
Earlier this year, prudential instruments such as 70 per cent loan-to-value (LTV) limit on third housing loans as well as a cap of two times the monthly salary on credit card limit of borrowers with less than RM36,000 annual income were established.
“In the pipeline, there have been indications of proposal being tabled for consideration by Bank Negara Malaysia to implement additional macro-prudential lending measures. Under consideration if a proposal to revise the computation of property mortgages based on the net income instead of gross income of borrowers,” said the research firm.
It believed that if this measure was implemented, the loan eligibility limit of loan borrowers purchasing higher end properties would be impacted the most as the revised computation would impact borrowers in the higher income bracket more than lower wage ones.
On top of that, margin pressure was anticipated to continue for the second half of calendar year 2011 (2HCY11) with overnight policy rate (OPR) remaining unchanged and banks raising low cost deposits by offering preferential rates to lock in deposits for a longer term.
“Despite the pressure on net interest margin, we do not expect net interest income of bank to be trend down. This is due to the positive growth of banks’ loan book. Loan base of banking groups will continue to grow but at a slower pace,” said MIDF Research.
With the softening of capital market, non-interest income for the third quarter (3QCY11) was expected to moderate compared with the previous quarter as initial public offering deals in banking groups’ pipeline would likely be deferred for listing.
With weaker market performance, the research firm was also expecting a lower trading income for 3QCY11.
On the other hand, asset quality remained less of a concern as net impaired loan ratios of most banks showed improvement in 2QCY11. The research firm said Hong Leong Bank had an increase in net impaired loan ratios due to its consolidation with EON Cap.
“We do not expect a surprise uptick in net impaired loan ratio of banks. Net impaired ratio of the banking system for 2HCY11 is expected to remain stable.
“The net impaired loan and gross impaired loan ratio for the banking system was two per cent and 2.9 per cent respectively as at July 2011,” said the research firm.
“Stringent credit policies have been established to address the situation of over leveraged borrowers and it will not be a surprise if more prudent instruments be implemented in view of the high household debt to gross domestic product which was 75.9 per cent in 2010,” it added.