PETALING JAYA: Banks will be releasing their results for the April to June quarter soon and the potential beatdown in their bottom lines is not unexpected.
Analysts are confident that banks will still remain in the black even after taking on the full brunt of the movement control order and the Covid-19 pandemic.
The numbers for the second quarter of 2020 will be shaped around the slashing of overnight policy rate (OPR) by 100 basis points (bps) as of June and the one-off “Day One” modification loss.
But it is not all doom and gloom with the banking sector as the brighter spots are in their non-interest income, mainly treasury activities and brokerage fees, for lenders that are also in the investment banking business.
The influx of retail investors in the stock market is set to see an interesting growth in brokerage income.
MIDF head of research Imran Yassin Md Yusof expected banks to continue facing compression in net interest margin (NIM) but it would not be severe given that the OPR cuts were expected and fixed deposits have been on a downtrend thus, having a positive impact to the banks’ cost of fund.
“While we expect net interest income to be weak, we believe that we will see strong growth in non-interest income coming from banks’ treasury activities and fee income from the increased market activities in the second quarter.
“This will provide some support to banks’ income. We also expect that loan growth will be supported by auto and mortgages given the interest we have observed following the announcement of the Penjana package, ” he told StarBiz.The research house did not expect banks to withhold any dividends as they were well-capitalised and there was no restriction from regulators.
However, Imran expected dividends to be lower this year given the contraction in earnings. Banking stocks are darlings among investors, mainly due to their half-yearly dividends.
However, due to the unprecedented wrath of Covid-19 on the economy, the market felt banks would hold back on dividends this time around.
Bank Negara uses its own set of assessments before any bank dividend can be approved.
A banking sector analyst said while banks would definitely remain profitable, they have to be prudent in their capital management, more so during times of crisis including retaining profits.
“Dividends may be lower, or none at all. But this does not mean that they are making losses. It all boils down to prudence. Perhaps, the banks could also be waiting to get a better picture of their own situation after the blanket moratorium ends next month.
“We also expect to see higher provisions in anticipation of higher non-performing loans (NPLs), ” he said.
Most banks will be posting their second quarter results for the period ended June 30, whereas AMMB Holdings Bhd and Alliance Bank Malaysia Bhd will be posting their first quarter results as their financial year ends in March.
Hong Leong Bank Bhd results for the quarter will be its fourth quarter and full year results.
KAF Equities Research said, in a note, that banks were likely to post weak revenue lines on the back of OPR cuts and the modification adjustments.
It added that it continued to expect negative, patchy and uneven earnings recovery for the next few quarters.
The research house pointed out that impaired loans may look stable due to the loan moratorium effects. Therefore, the stable impaired loans are unlikely to re-rate the share price, as it expected the market to remain fixated on the real impaired loan trends post the moratorium. “We maintain our ‘overweight’ stance, with valuations of selected banks now at multi-year lows.
“We believe the weak net interest income line is likely to be offset somewhat by better trading and investment income in the non-interest income line, on the back of good gains from lower bond yields.
“The exception would be CIMB Group Holdings Bhd, which is likely to record an ongoing muted non-interest income line, ” it said.
KAF said banks would continue to build up macro overlay general provision in anticipation of uptick in impaired loans post the moratorium.
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