Lower earnings seen for banks in H2

Non-interest income, net interest margins could take a further hit

PETALING JAYA: Non-interest income and net interest margins (NIMs) of banks could take a further hit, resulting in lower earnings for banks in the second half (H2) of the year.

This is expected to happen amid a softer capital market and stronger competition for deposits, resulting in a margin squeeze.

Analysts contacted by StarBiz said growth in non-interest income is expected to be impacted with the softer capital market fuelled by a rising trend in Malaysian govern- ment securities (MGS) yields, which could dampen bank investment and trading income.

Slower capital raising from the equity market is anticipated, which could dent non-interest income earnings.

AmInvestment Bank analyst Kelvin Ong noted that non-interest income of banks is now expected to be more challenging than expected earlier.

He attributed this to softer capital market activities based on the rising MGS yield trend in line with other Asian countries. This is due to the

tightening in the United States with rising yields in the latter’s treasury securities.

He said the issuance of initial public offerings and capital raising under the equity market are likely to remain slow.

He added that he expected higher yields to affect banks’ investment and trading income with a marked-to-market impact on securities, coupled with lower trading gains.

Analysts foresee stiffer competition for deposits resulting in compression in NIMs, as fixed deposits are expected to be repriced upwards in the second and third quarters.

NIM is a measure of the difference between interest income generated by banks and interest paid out to depositors. The average lending rate and the three-month fixed-deposit spread serves as a proxy for the banking sector’s NIM.

With Bank Negara maintaining its overnight policy rate (OPR) and stronger competition in fixed deposits in the subsequent quarters, NIM is expected to remain compressed, hence putting pressure on banks’ margins.

Ong said that in the second half, he anticipated the NIM of banks to taper from the first quarter that was boosted by an OPR hike of 25 basis points (bps) in January 2018.

He said the tapering of margins is also expected to be partly attributed to pressures on the asset yield of banks’ subsidiaries in Indonesia (Maybank Indonesia and PT Bank CIMB Niaga Tbk).

Ong, who is maintaining his “overweight” stance on the sector, said he expected banks’ NIM to expand by two bps for 2018 against a projection of a three-bps increase previously.

Apart from the repricing of banks’ deposit rates from the increase in OPR since January, analysts noted that they expected competition for fixed deposits to flare up moving closer towards the implementation of the net stable funding ratio (NSFR).

The upcoming Basel III NSFR is to be implemented no earlier than Jan 1, 2019. The NSFR measures a bank’s funding stability over a one-year period and complements the liquidity coverage ratio requirement, which measures liquidity over a 30-day horizon.

AmInvestment Bank expects the sector’s core earnings to grow by 7.6% in 2018 (previously: 9.2%) after lowering its expectation for banks’ non-interest income.

Meanwhile, UOB Kay Hian banking analyst Keith Wee expects the banking sector’s performance in the second half of the year likely to be more muted.

He said post-14th general election (GE14), policy uncertainties may pose downside risk to gross domestic product growth and consequently overall sector growth in the second half.

“The surprise election results, escalating trade tensions between China and the US, and the global monetary tightening will be the key factors prompting foreign funds to adopt a more cautious approach post-GE14.

“Consequently, the sector’s outperformance in the first half is unlikely to repeat itself in the second half, until investors are able to gain greater clarity of the unfolding policy changes of the new government on near-term growth.

“In fact, the sector had underperformed the FBM KLCI after the GE14, declining 9.5% versus the FBM KLCI’s 8.4%,” he said.

On loan growth, Wee said due to the deferment and scaling down of a number of mega-infrastructure projects, the research house is expecting a sharp slowdown in construction-related loan growth.

He added that this would offset the potential positive effect from stronger consumer spending during the three-month “tax holiday period”.

This has prompted Wee to retain his 5% full-year 2018 loan growth assumption with a slight downside bias.