Possible growing risks in banking sector on headwinds
KUCHING: Analysts foresee possible downside risks to earnings in the banking sector as headwinds gather momentum due to various regional and domestic factors.
TA Securities Holdings Bhd’s research arm ( TA Securities) yesterday said despite industry players guiding for more modest 2016 key performance index (KPI) targets, bad news come in tne form of the contagion effect from China’s slowdown, coupled with potential deterioration in asset quality as credit cycle turns with growing non-performing loans (NPLs).
“Uncertainties continue to loom with banks citing muted overall growth on slower regional and domestic economic outlook as dampeners to consumer and business sentiments,” it opined in a report.
It estimated that the sector’s 2016 profit could broaden by some 4.9 per cent and the increase would be underpinned by softer income growth of four per cent against modest one per cent rise in operating expenses but 20 per cent year-on-year (y-o-y) jump in total allowances.
Meanwhile, on the sector’s first quarter (1Q) performance, TA Securities noted that nanks reported weaker 1Q16 results with net profit registering its seventh quarter of y-o-y contraction.
“While we believe part of the decline was due to seasonal factors, the general slowdown in market activities and weakened sentiments had also affected
Uncertainties continue to loom with banks citing muted overall growth on slower regional and domestic economic outlook as dampeners to consumer and business sentiments. TA Securities
operating income. More notably, total allowances for loans and advances continued to increase, further dampening earnings.
“While overall asset quality in the system remained healthy, the rise in formation of new NPLs could signal further deterioration in the near future,” it added.
It further noted that the sector’s average gross impaired loans (GIL) ratio weakened slightly to 1.68 per cent from 1.62 per cent a year ago.
“While the increase does not appear alarming, we note other asset quality indicators could be pointing to a buildup of stress in the system.
“Combined, formation of new NPLs by all the banks under our coverage surged to a total of RM560.5 million during the quarter from a decline of RM32.4 million in 4Q15 and new GIL of RM259.3 million a year ago,” it said.
Adding to the weak results is a decline in operating income. Excluding the 11.8 per cent q-o-q jump in 4Q15, TA Securities said the sector’s fee income continued its descent (down 9.7 per cent qo-q) in 1Q on the back of weaker fees and service charges, wealth management fees and capital market activities.
It also noted that the sector’s investment income also decreased, underpinned by five consecutive quarters of MTM losses.
Elsewhere, it said, the sector’s net interest income (NII) dipped by 1.2 per cent q- o- q on the back of the 1.5 per cent q- o- q contraction in loans growth (based on combined loans of all the banks under the research house’s coverage).
Average net interest margin (NIM) stabilised at 2.19 per cent q-o-q but is six basis points (bps) lower compared with 2.25 per cent a year ago, TA Securities said.
“With competition from deposits likely to remain heated, further NIM compression is envisaged,” it added.
Aside from that, it noted that total deposits in the system has been contracting on the back of tighter liquidity in the system.
“In 1Q, total deposits of all the banks under our coverage declined by 0.3 per cent q-o-q QoQ - led by the fall in current and savings account (CASA) deposits (down 1.1 per cent q-o-q, up 2.5 per cent y-o-y) and fixed deposits (down 2.5 per cent q-o-q, up 5.9 per cent y-o-y),” it said.
By segment, the research house noted that banks were cautious in growing the retail portfolio as consumer loans (comprising residential mortgages, HP, cards, personal loans and purchase of securities) contracted sequentially for the first time in six years.
It added, business loans also declined in 1Q, led by a 0.7 per cent q- o- q fall in SME loans, which makes up about 35 per cent of total business loans.