Second half to be challenging for banks

  • Banking
  • Wednesday, 08 Jul 2020

PETALING JAYA: Local banks, already hit by the economic impact of Covid-19, will see further pressure on their net interest margin (NIM) following the latest cut in overnight policy rate (OPR) by 25 basis points to 1.75%.

While the rate cut came within expectation, a banking analyst when contacted, sees a challenging second half for banks, in terms of growing top line and bottom line.

Asset quality deterioration remains a core concern too.

“We foresee more challenges in the second half, underpinned by softer loan growth and additional margin compression from the OPR cut. Although the sector’s loan growth remained stable, rising 3.9% year-on-year (y-o-y) in May, we believe the impact from the period of non-activity during the movement control order (MCO) has yet to kick in, ” said the analyst.

Furthermore, expectations of banks having to absorb chunky modification loss from offering loan moratorium on some fixed rate loans, which would come to an end in September, could also result in some RM2bil-3bil in profit being wiped out from the system, she said.

On a more positive note, she said the low interest rate environment would spur some improvements in business sentiment and thus lending activities.

She expected business loans taking the lead in the coming months as small and medium enterprise and businesses seek working capital and restart operations post the MCO.

In the consumer segment, however, she expected sentiment to remain weak underpinned by concerns about employment and weak earnings visibility.

“At our brokerage, we project business loans to increase by 3.7% y-o-y in 2020, versus a growth of 1.6% y-o-y for the consumer segment.

“For the whole of 2020, we have trimmed loan growth forecast to 2.5% from 4.0% previously, ” the analyst said.

CGS-CIMB Equities Research, in a report yesterday, noted that the early impact of Covid-19 had brought the banking sector’s 1Q20 core net profit down by about 10% y-o-y, worse than the 0.9% y-o-y drop in 4Q19.

“The drag on banks’ 1Q20 net profit was the 256.5% y-o-y surge in LLP as banks took additional pre-emptive provisioning to shore up their loan loss coverage against Covid-19 risks on their asset quality.

“In addition, the growth in banks’ net interest income narrowed from 3% y-oy- in 4Q19 to 0.5% y-o-y in 1Q20 as banks’ NIMs were negatively impacted by the 50bp OPR cuts in 1Q20.

For the upcoming 2Q20 earnings, besides margin contraction due to OPR cuts, the research house envisages two more earnings risks for banks. These are a rise in loan loss provisions (LLP) and the impact of MCO implementation on fee income. It said it is forecasting about a 15% decline in net profit for Malaysian banks under its coverage in 2020.

The research house kept its “neutral” call on banks as the potential upside to its loan growth projection could partly cushion the negative impact from the increase in LLP and the contraction in net interest margin due to OPR cuts this year.

For 2021, profitability for the banking sector is likely to improve.

Among major banks, Maybank closed one sen down to RM7.80, while CIMB Group Holdings Bhd ended unchanged at RM3.70. Public Bank Bhd, which has the lowest gross impaired loan ratio in the sector, was up six sen to RM17.40, while RHB Bank Bhd gained one sen to RM4.98 yesterday.

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Banks , OPR , net interest margins , Bank Negara


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