Not so rosy outlook for banking sector

PETALING JAYA: Although the banking sector loan growth inched up in May despite the implementation of the goods and services tax (GST) on April 1, analysts on the whole are not bullish of the attractiveness of the sector.

While some of them are maintaining their loan growth projections at between 7.5% and 8% this year after revising them downwards, they told StarBiz that the outlook for this year would not be rosy as some of the glaring challenges would continue to rear its ugly head on the industry.

Margin compression, slower loan growth, upturn in credit costs and lacklustre capital market activities would continue to put a drag on the sector’s performance for the year, according to most banking analysts.

Among the signs which showed weakness in the sector were declining household loans growth as well uninspiring leading loan indicators.

CIMB Investment Bank Bhd analyst Winson Ng said residential mortgages, which had been the key driver for the industry’s loan growth in the past two to three years, continued to moderate from 13% year-on year in April to 12.8% in May due to the weaker property market.

Ng, who is still upholding an underweight call on the sector, said he foresaw further downside risk for loan growth in the next few months given the weak leading loan indicators although hopeful that loan growth would recover in the fourth quarter as consumers and businesses adapts to the GST regime.

“The consumer and business loan growths have been converging in the past few months, which is in line with our expectations. The consumer loan momentum was dragged down by the softening of the growth in residential mortgages, while other consumer loans continued to expand at mid-to-low single-digit rates. Business loan growth has been gaining traction, primarily from the small and medium enterprise (SME) loan segment, partly catalysed by the push by most banks.

“Going forward, we expect this trend to continue, with both consumer and business loans growing at our projected rate of 8.5-9.5% for the industry in 2015. The downside risk to our forecast would be from the unsustainability of the business loan momentum. We expect the gross impaired loan ratio to be stable at around 1.8% this year,’’ he noted.

Based on Bank Negara’s statistics, the industry’s loan growth inched up from 8.8% in April to 8.9% in May amid the weak consumer sentiment with the implementation of GST.

CIMB Research in its note added that the momentum for business loans picked up from 8% in April to 8.8% in May but the pace for household loans eased from 9.4% to 9% in the same period. The momentum of leading loan indicators according to Ng remained uninspiring judging by the growth in loan applications and approvals. Loan applications fell by 2.9% in May versus +0.7% in April while loan approvals barely rose by 0.6% (-2.4% ).

Both indicators the research house added exhibited similar trends, with a 24-66% year-on-year jump in the working capital segment but a 16-22% plunge in property loans. The applications and approvals of auto loans also declined by 2-15% in May.

The industry’s gross impaired loan ratio stayed at 1.6% in March-May but loan loss coverage fell from 101.8% in April to 100.6% in May. The average lending rate (ALR) slid by 4bp month-on-month to 4.61% in May, signifying continued pressure on banks’ lending yields.

Ng said he was advising investors to reduce their positions in banks, premised on the gloomy earnings outlook arising from a slowdown in loan growth, margin compression, and an upturn in credit costs.

Meanwhile, Maybank IB Research analyst Desmond Ch’ng, who has a neutral stance on the sector, said the industry’s 3% rise in NPLs month-on-month to RM21.9bil was broad-based across almost all asset classes, adding one possible cause could be due to the reclassification of restructured and rescheduled (R&R) loans as impaired.

He said while this uptick had been anticipated, the research house did not expect any material upswings in NPLs from this measure as the impact on each individual bank remained to be disclosed.

Ch’ng is maintaining an industry loan growth forecast of 7.8% this year.

The guidelines on R&R loans came into effect on April 1 where banks are required to comply with two additional guidelines for the classification of impaired loans.

First, the classification of R&R loans as impaired loans, and second, the reclassification of R&R loans from impaired to non-impaired only after a consistent repayment has been observed for a period of at least six months.

Under the guidelines, new R&R loans effective April 1 in the Central Credit Reference Information System (CCRIS) would be classified as impaired. CCRIS is used by banks as part of their assessment of borrowers’ creditworthiness.

The R&R facility is where a modification has been made to the original repayment terms and conditions of the loan following an increase in the credit risk of a customer.

RAM Ratings also anticipates a softer earnings outlook for the Malaysian banking sector this year, noting that banks first-quarter (2015) results have generally been characterised by larger-than-expected margin compression and a more moderate loan growth.

Alliance DBS Research analyst Lynette Cheng in a recent note said she projected net interest margin to contract by seven basis points (bps) this year due to intense deposit competition which would continue to pressure the cost of funds.

For the first three months of the year, the banking sector net profit on the average fell 2% quarter-on-quarter and 6% year-on-year, according to the research house.