LOCAL banks, whose pre-tax profits collectively grew 5% quarter-on-quarter during the first three months of the year despite weaker interest income, are expected to improve their performance in the second half 2004 with a recovery in loan growth, said ING Financial Markets, which has maintained its overweight rating on the banking sector.
A significant 28% rise in loan loss provisions was attributed to “isolated instances of some non-performing loans (NPLs) relapsing” and not seen as a trend towards deteriorating asset quality.
In a performance review of seven of the 10 Malaysian anchor banks’ first-quarter financial numbers, ING said their results during the period were driven mainly by non-interest and Islamic banking income, but were slowed by stagnant or falling interest income due to poor loan growth.
Weaker margins of between one and seven basis points was one reason why net interest income for the sector contracted by 1% to RM3.39bil in the first three months of 2004, compared with the previous quarter. Its share of the banks’ total income fell to 62% from 68% in the fourth quarter last year.
The financial services firm said Public Bank and AMMB saw their net interest income rise by 4% and 9% respectively, while EON Capital saw flat net interest income in the first quarter. AMMB alone saw an increase in its net interest margin – of five basis points due to lower funding costs – while Public Bank and Commerce Asset-Holding Bhd (CAHB) achieved the top two highest margins of 0.89% and 0.72% respectively during the period.
Poor loan growth of only 1% quarter-on-quarter was another reason for the lower net interest income, ING said. Although retail loan growth was 3%, driven by demand for housing and vehicle financing, manufacturing sector loans fell by 2%.
ING said that among the banks Public Bank had clearly outperformed with its 6% quarter-on-quarter loan growth.
Retail loans are expected to continue leading the banks’ loan growth this year, although this may broaden later to other sectors like manufacturing and commerce, it said. ING said it was maintaining its 2004 loan growth forecast of 7.2% with the broader sector loan growth already showing encouraging signs, particularly in lending to the manufacturing and commerce sectors.
“While Public Bank, AMMB, EON Capital and Hong Leong Bank Bhd continue to be the lead retail plays, with more than 50% of their loan book exposed to the sector, CAHB, Maybank and Hong Leong Bank are our picks for playing the manufacturing sector,” it added.
While interest income fell during the first quarter, the banks’ non-interest income grew 31% quarter-on-quarter on stronger stock market conditions to RM1.64bil, accounting for 30% of total income. Islamic banking income, accounting for 8% of the total, rose 17% over the same period.
Loan loss provisions saw a significant 28% quarter-on-quarter rise to RM882.1mil, although ING said there was a divergence among the individual banks.
Maybank, RHB Capital Bhd and Public Bank all reported lower loan loss provisions but CAHB, Hong Leong Bank and EON Capital reported significantly higher numbers, while AMMB posted a marginal rise.
“We believe the increase in loan loss provisions for the four banks did not reflect a trend in NPLs turning up again. Our conversations with the banks indicated that there were instances where there were relapses with some of the restructured NPLs as well as tail-end provisions on some earlier NPLs,” ING said.
“We believe there is generally a time lag between a rebound in the economy and the state of NPLs. Consequently, we believe the higher loan loss provisions in the first-quarter 2004 did not reflect a deterioration of asset quality,” it added.
Industry gross NPLs on a three-month classification remained relatively unchanged at RM65.9bil or 13.7% of gross loans for the first quarter 2004.
Operating expenses rose 6% to RM2.36bil, leading to a 10% rise in underlying profits for the banks in total. Pre-tax profits increased 5% quarter-on-quarter but net profits contracted by 6% over the same three-month period, due in part to higher taxation.
RHB Capital and AMMB reported lower underlying profits, contracting by 13% and 5% respectively, but CAHB’s grew by 37% quarter-on-quarter, followed by EON Capital with a 16% rise.
In terms of underlying profitability, ING said Public Bank retained its lead with the best ratio of 0.76%, followed by Maybank with 0.61% and CAHB with 0.57%.
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