Prospects of banking sector likely to improve

Good sign: Sia says that given the expected stability in the OPR, aggressive NIM compression is unlikely now.

Analysts say positive themes may emerge in the second half

PETALING JAYA: It’s not all bad news for the banking sector despite a challenging economic environment as positive themes could emerge in the second half of this year which could bolster the prospects of the sector.

After achieving modest improvement in earnings in the third quarter of last year, headwinds like a slower gross domestic product growth, weaker capital market activites, slower credit growth and net interst margin (NIM) compression could still persist, analysts told StarBiz.

However, they opined that this trend could improve in the second half of 2017 when short-term headwinds diminish which could result in a reduction in NIM compression and improved loan growth and earnings.

After a 25-basis points (bps) cut in the overnight policy rate (OPR) in July 2016, economists generally do not expect another cut soon due to the reasonably high inflation rate and relatively strong growth.

Hong Leong Investment Bank research head/economist Sia Ket Ee said given the expected stability in the OPR, aggressive NIM compression is unlikely at this stage.

Nevertheless, he said banks would accelerate their efforts on current account savings account (CASA) taking to counterbalance potential NIM compression.

Banks are switching focus to high-yielding loans (unsecured consumer products, small and medium enterprise or SME segment) given the stiff competition in the traditional space, he said.

All-in-all, Sia said he expected NIM for banks under the reserch house coverage to compress at a more moderate pace of five bps in 2017 compared with seven bps in 2016.

HLIB Research is projecting 2017 loan growth at 5% year-on-year (y-o-y) and 7% y-o-y for banks under its coverage.

CIMB Research, meanwhile, has retained its “overweight” recommendation on the sector as it projected loan growth of 5% to 6% for 2017. The research house opined that the loan growth for 2016 would hit the lower end of its 5% to 6% projection.

However, UOB Kay Hian Research Keith Wee envisaged lacklustre loan growth for 2017, at 4.5% to 5% due to the double-digit contraction in loan approval trend over the past 12 months. Analysts concurred that the Government’s move to boost infrastructure spending and to promote the SME segment would boost loan growth this year despite the tough business climate.

Another important theme which could enhance the sector’s prospects is the recent Bank Negara measures last December requiring, among others, exporters to convert 75% of their new export proceeds to ringgit and retain 25% of proceeds in foreign currency. The central bank has also proposed that exporters place their ringgit proceeds from exports in local commercial banks to earn a special deposit rate of 3.25% per annum.

This move, according to analysts and industry observers, will improve the banking system’s deposit growth which have been on a contraction mode judging from the high loan-to-deposit ratio (LDR). With more liquidity in the banking system, banks can give out more loans. LDR inched up 89.6% in November last year from 88.8% as at last October.

For this year, Sia expected banks under the research outfit’s coverage to report earning growth of 15% y-o-y on the back of higher loan growth expectations, stable contribution from non-interest income and continued discipline on expenses as well as ending of impairments.

Asset quality of the banking system could see further improvements with lower provisions being set aside to reclassify reschedule and restructure (R&R) loans as impaired loans since the guidelines on R&R loans came into force in April 2015. R&R facility refers to a modification to the original repayment terms and conditions of the loan following an increase in the credit risk of a customer.

Last year, banks’ asset quality weakened due to the inclusion of R&R accounts as part of gross impaired loans.

Excluding this, Sia said banks’ asset quality actually improved on the back of stringent approval process. Entering 2017, he said banks would, however, need to continue to monitor exposure to selected segments like oil and gas, steel and commodities.

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