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Monday, June 16, 2014

Analysts see earnings momentum pickup for banking sector


PETALING JAYA: Despite slower growth in earnings in the first quarter partly due to lower non-interest income, the worst since the second quarter of 2010, analysts expect earnings momentum for the banking sector for the year to pick up amid headwinds facing the sector.
Some are projecting earnings growth for the sector at between 6% and 12% for the year. MIDF Research is projecting earnings growth at 6.2% to RM23.02bil in 2014 and 9.7% to RM25.26bil in 2015.
Its banking analyst, Kelvin Ong. who is maintaining a “neutral” call on the sector, said with the upward revision of the gross domestic product for this year and steady growth in exports, he expected private sector investments to gain traction ahead leading to financing requirements for capital expenditure.
This would bode well for small and medium enterprises and corporate loans moving forward, he noted.
Ong said though consumer loan momentum would be slower this year due to higher inflation and the tightened measures by Bank Negara to manage household debts, he still expected business loan momentum to pick up in the quarters ahead based on a steady export growth scenario.
“We are starting to see loans to the manufacturing sector expanding gradually with a marginal increase as of now. Hence, we maintain our loan growth expectation for this year of 10%-11% for the sector,’’ he said in a research note.
On possible challenges, he said the regional capital markets business would likely continue to be tough and that investment banking business for the larger cap banks would continue to look challenging ahead in view of the slow execution of deals, in particular the equity market as well as slower regional brokerage business.
This, he said, would impact the growth of non-interest income of banks.
The slower first-quarter earnings this year was partly due to the 3.7% year-on-year drop in non-interest income, the worst since the second quarter of 2010, due to softer capital markets-related income and net interest margin compression.
Net profit for the first quarter (of 2014) stood at RM5.4bil compared with RM5.37bil in the previous corresponding quarter last year.
CIMB Research is forecasting stronger net profit growth of 11.5% for banks in 2014, above the 9.2% recorded in 2013.
Banking analyst Winson Ng added this would be partly underpinned by lower minority interest at BIMB Holdings following the completion of its acquisition of the remaining 49% stake in Bank Islam.
At the operating level, Ng said the key drivers for banks this year would be the expected improvement in net interest income growth from 3.9% in 2013 to 7.4% this year. This could be offset by wider expansion of 9.4% in overheads versus 8.8% in 2013, weaker growth in non-interest income and jump in loans loss provisioning.
Affin Investment Bank Research analyst Tan Ei Leen, who is downgrading the sector from “overweight” to “neutral”, said in a research note that she believed the sector lacked meaningful re-rating catalyst in the near term to further lift valuations beyond its current mean average – at a price earnings multiple of 12.4 times and a price to book value multiple of 1.79 times.
“With headwinds going into the second half (of 2014), a re-rating will be tough for banks on the back of weaker trading/investment gains (due to the outlook of a flattish yield curve), a slower loan growth momentum (vs our forecast of 9.5%), a tighter liquidity situation, concerns over a slowdown in deposit growth due to negative real-interest rate, normalisation in credit costs and the lack of meaningful spillover effect from the Economic Transformation Programme projects,’’ she added.
The research outfit hence has downgraded banking sector earnings forecast by 3% for 2014, 2.7% for 2015 and 2.1% for 2016.

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