Stage set for caution on banking sector

PUBLIC Bank Bhd, which started the results season rolling for banks this week, reported earnings that were within expectations but had nevertheless slipped.

Could this be a prelude to weaker results from fellow counterparts which are due to release their results over the one next month? One thing’s for sure, the stage for more cautiousness within the sector has been set, analysts agree.

Public Bank, the country’s third largest bank in terms of asset size saw its earnings slip 1.5% in the third quarter ended Sept 30, 2018 (Q3’18) in the absence of a one-off capital gain that was recorded a year ago.

Nevertheless, Public Bank said its Q3’18 earnings would have grown 1.6% to RM1.38bil from the RM1.36bil operational net profit, if the one-off gain on investment of RM43mil recorded in the previous corresponding period had been excluded then.

Still, in its latest results, Public Bank, often seen as the most prudent and wellrun among local lenders saw its non-interest income (NOII) dip, and its operating expenditure rise.

“We believe that demand for Public Bank’s retail loan will slow down in the upcoming quarter with the end of tax holiday period in September,” Hong Leong Investment Bank told clients in a note after the release of the results on Thursday.

Despite stronger current account savings account or CASA growth of 4.1% year-onyear (y-o-y) (3.8% y-o-y in H1’18), total deposits growth eased to 3.8% y-o-y (vs. +4% y-o-y in H1’18) caused by slower FD growth of 3.4% Y-o-y (vs. 4.4% in H1’18), the research house pointed out.

It also said net interest margin (NIM) remained in compression mode, declining by 8 basis points to 2.16% (9M18) attributed to the more expensive funding cost in view of the overnight policy rate hike in January.

In its note to clients, AmResearch, which has maintained its “buy” call on Public Bank pointed out that the lender’s overall asset quality remained robust as it contin- ued to record a low gross impaired loans or GIL ratio of 0.5%, which remained the lowest among its peers which have an average of 1.6% GIL.

All said and done, the banking sector will continue to see growth moving forward, albeit at a slower pace due largely to increased earnings risks, such as weak business loan growth and margin erosion amid rapid competition. For banks with regional and significant investment banking exposure, lingering pressure on emerging market currencies, coupled with a relatively quiet capital market front, should see them experience some kind of impact on their earnings in the coming quarter.