PETALING JAYA: After a disappointing fourth quarter, the banking sector is poised for an earnings downgrade with analysts projecting lower average net profit growth of between 6% and 7% this year.
Analysts contacted by StarBiz said post fourth quarter 2014 (4Q14) performance, earnings for the sector this year would remain subdued. Some of the key drivers that could impact earnings growth for banks are the current weak capital market activities.
These may dampen non-interest income growth, result in slower loan growth which may lead to continuing net interest margin (NIM) compression. There is also the potential rise in credit costs. Currently, non-interest income makes up about a third of banking groups’ earnings in the country.
In terms of NIM, an analyst with a bank-backed brokerage said that with the overnight policy rate (OPR) unchanged at 3.25% since July last year, it would impact NIM as well as increase funding costs as a result of stiff competition for deposits. NIM last year on average stood at 2.35%, down by an average of 8 basis points from 2.43% in 2013.
Also, analysts agree the need to comply with Basel III’s liquidity coverage ratio, which Bank Negara has set at a minimum of 60% by June 1 (2015), and 70% by Jan 1, 2016, would further fuel competition for retail deposits. The banking sector’s net profit last year was down by 1.3% year-on-year (yoy) to RM21.6bil.
UOB Kay Hian banking analyst Keith Wee, who is maintaining a market weight on the sector, said post-4Q14 results, the research house had trimmed sector earnings growth forecast for 2015 and 2016 by three percentage points (ppt) and two ppt to reflect yoy growth of 6.0% and 7.8%, respectively.
He said Q414 earnings were impacted by weak treasury and investment banking income, persistent NIM pressure and a spike in provisions (for CIMB). He added that as a result of that, the fourth quarter sector net profit declined 7.0% quarter-on-quarter (qoq) and 6.7% yoy while pre-provision operating profit declined 2.2% yoy and 0.3% qoq.
Wee said the downside risk to 2015 earnings projection prevails as part of the brokerage’s stronger earnings growth assumption, which is premised on a stronger capital market recovery, given the number of sizeable planned IPOs (eg Malakoff and Sime Darby Motors) helping to drive an estimated 7.4% growth in non-interest income in 2015.
“However, with the current capital market environment remaining fluid, we believe deal execution risk could remain a concern, and thus, potentially de-railing the expected non-interest income recovery that the market has currently factored for this year. Provisions and NIM pressure could surprise on the upside on the back of slowing recoveries and intensifying deposits,” he said in his research report.
Sector revenue declined 1.3% yoy in 4Q14 and 0.1% yoy in 2014. The key drag was broad-based weakness in non-interest income which declined 8.1% yoy.
CIMB and AMMB saw the biggest contraction in 2014 non-interest income, declining 14.5% yoy and 11.1% yoy respectively.
Maybank IB Research analyst Desmond Ch’ng, who is projecting a slower loan growth of 7.8% this year versus 9.3% last year, said the research house forecast this year’s net profit growth of 7.3% (from 8.9% earlier) and 7% in 2016. Stripping out CIMB’s earnings which have been volatile, he added that it was looking at sector net profit growth of just 4% this year and 6% next year.
Meanwhile, Maybank IB Research in a report said capital raising would be one of the themes for 2015, with RHB Capital, Hong Leong Bank and Hong Leong Financial Group (HLFG) coming to the market for equity injections, said Maybank IB Research.
Assuming a common equity tier 1 (CET1) target of 11% versus 9.8% currently for RHB Capital, it estimated that it would need to raise RM1.5bil, which would be a one-for-nine rights issue, assuming a 30% discount to its current share price.
The research house said this would take its financial year 2016 return on equity (ROE) down to 10% from 10.5% but would improve its double leverage to 116% from 137% currently.
Hong Leong Bank’s CET1 ratio was just 8.1% at the commercial bank level end-2014.
Assuming a minimum of 11%, he said it was estimated that Hong Leong Bank would have to raise about RM2.7bil, which at a 20% discount to current share price would translate to a 1-for-7 rights issue. This will lower its FY16 ROE to about 12.4% from 13.8% presently.
“HLFG will likely have to raise funds to subscribe to its 64% stake in Hong Leong Bank’s fundraising, i.e. about RM1.7bil. However, given that HLFG is a financial holding company and not a financial entity per se, we feel that it does not need to raise this entire amount in equity, and could perhaps settle for a 70:30 equity:debt ratio,” it said.
This implied it would have to raise equity of just about RM1.2bil, the research house said. Assuming a 20% discount to current share price, this would translate to a 1-for-12 rights issue, it said.