Challenging time ahead for banks


BY KATHY FONG

THE latest financial results reported by banks reveal the fact that earnings are mainly driven by lower provisions for non-performing loans and growth is rather difficult to achieve amid the continued slow loans growth in the country. 

Moreover, stiff competition in consumer loan sector has also started to eat into banks' profit margin. 

“Topline growth is not so exciting?it's not a surprise because of the subdued loan growth. The external uncertainties have curbed in- vesting interest,'' OCBC Research head Franklin Tan said. 

Apart from soft investment spending, many large companies with good credit rating, which the banks are willing to lend their money to, have headed to the private debt market to raise funds at rates lower than that of banks. 

Given the patchy global economic outlook, banks are also prudent in terms of giving out loans to the business community, having learnt a lesson from the Asian financial crisis.  

“The results released recently have largely confirmed our concerns that the banks' operating profit growth will be slow,'' said AmResearch executive director Gan Kim Khoon, who has re-rated the banking sector to “neutral” since January. 

Most banks' earnings numbers came within analysts' expectation, with lower loan loss provision, except for AMMB Holdings whose provision increased by 8% in the 3rd quarter ended Dec 31 from the preceding period.  

Malayan Banking Bhd (Maybank) saw its pre-tax profit increase to RM696.1mil for the quarter ended Dec 31, 2002, from RM659.8mil a year ago. However, the improvement in the group's profitability levels came mainly from a RM125mil reduction in loan loss and provision during the October-December quarter. 

For the six months to Dec 31, Maybank's pre-tax profit rose to RM1.24bil from RM1.21bil, and net profit improved to RM897.8mil from RM753.2mil.Net interest income, however, fell to RM1.93bil from RM1.96bil previously. 

Analysts said the generous 35 sen dividend payout had somewhat indicated the management was not able to find a better way to utilise its cash pile against the backdrop of soft demand for bank borrowings. 

Consumer loans, mainly car loan and housing credits, have been the main pillars supporting the banks' lending activities since the post financial crisis. 

Competition in the segment is heating up: banks need to slash rates to attract customers, at the expense of sacrificing profit margin. 

Public Bank's net interest margin declined 0.45% in the financial year ended Dec 31, 2002, while Maybank's net interest margin also came under pressure, sliding 0.07% to 2.63% in its 2nd quarter. 

UOB Kay Hian research head Lim Beng Leong has downgraded Maybank's net interest margin by a further 0.17% to factor in more intense competitive pressure and potential rate cuts by Bank Negara. 

Hong Leong Bank, which is considered as a more consumer-oriented bank, showed uninspiring organic growth in its latest financial results, said an analyst. 

The bank's gross loans continued to shrink by 0.4% (quarter-to-quarter) for the 3rd straight quarter. It was losing market share in car loan to the competitors. But, one consolation was that the bank's housing loan was on an uptrend. 

“Without an expansion in the higher yielding car loans, net interest margins continued to fall. It dropped to 0.08% to 2.645,” said Lim. 

Nonetheless, the bright spot in the banking sector is that non-performing loan has stabilised.  

Gan from AmResearch noted that new NPLs were on the decline. 

Analysts in general find that asset quality in the banking sector has improved substantially compared with the pre-crisis period. 

Tan from OCBC Research, who maintains an “overweight” on the sector, said the downside risk for the banking stocks was minimum as non-performing loan had peaked and the banking stocks were good proxies for economic recovery. 

With the tough operating environment, the banks would also work hard in cost management to enhance earnings, he said.  

“The merger between commercial banks and finance companies will help to drive their earnings in the long run,'' said Tan. 

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3
   

Did you find this article insightful?

Yes
No

Next In Business News

Kenanga 'slightly positive' on Sime Darby disposal of Jining ports
Trading ideas: Vizione, UWC, Samaiden, Uzma, Top Glove
KESM expects gradual recovery
FDA chief Hahn says mid-December vaccine approval just 'possible'
House seen backing bill that could block Chinese firms from US securities markets
Salesforce to buy workplace app Slack in $27.7 bln deal
Oil slides as OPEC+ delays decision on output cuts
Global equity markets jump, bonds dip, on hopes of vaccine-led recovery
Malaysia gets RM110bil worth of investments
Manufacturing PMI at new low

Stories You'll Enjoy