PETALING JAYA: Banks are unlikely to gain as much from their treasury activities in the second half as in the first half of the year given that the low interest rate environment will cap trading activity in the bond market.
“Equities only cover a small portion of the portfolio while trading profits from the bond market are unlikely to be as substantial as in the first half year because of the low interest rate regime,” Jupiter Securities head of research of Pong Teng Siew told StarBiz.
Brokerage fees and commission, in contrast, might still boost banks’ earnings given that trading volume on the stock market was still relatively high, he said via telephone.
A banking analyst said most banks started to mark their securities held in trading based on market prices since the last quarter of 2008.
These banks were not affected much by the move as very few bonds in their portfolio were downgraded or became illiquid.
“Banks are holding mostly government and related bonds and, even among the corporate ones, there are very few that became illiquid or downgraded,” she said.
A foreign research house, in a report, said banks’ earnings were anticipated to be stronger in the coming months driven by topline growth as net-interest margins recovered from temporary compression of interest rate cuts and loans growth stayed steady at 6% to 8% while fee-income business picked up on improved economic activity and capital market conditions.
The risk of rising provisions is also mitigated by the declining risk of higher non-performing loans since the fears of prolonged recession is diminishing.
“Although consumer banking business will benefit from improved loan growth and lower loan-loss provisions, the impact of the recovery on banks’ bottomline is likely to be felt, at the earliest, in the first half of 2010,” the research house added.
Another foreign brokerage said banks might have more flexibility on capital management, which offered potential upside to net dividend yield forecasts, by year-end.
“Banks that appear most vigilant on capital efficiency and conscious of return-on-equity, like CIMB Bank and Public Bank, are expected to respond quickly if authorities ease up on capital requirements,” it said, adding that CIMB had the most potential on the back of its rich core capital ratio and management’s track record on capital management.