Banks' earnings growth to lose steam

Analysts expect the momentum of net interest income growth to slow amid a weakening global economy.

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Kuala Lumpur: Malaysian banks had a good second quarter, with earnings coming in better than in the first, but analysts expect the growth momentum to slow amid a weakening global economy. Each of the eight local banks turned in a net profit that was largely in line with expectations, with the exception of CIMB Group Holdings Bhd which came in slightly below. Research house RHB Research Institute said it was maintaining its "neutral" call on the banking sector. "Overall, despite another quarter of record profits, there is no change to our sector call. We see net interest income growth slowing ahead, amid loan growth that may have already peaked and net interest margin pressures due to intense competition to grow both sides of the balance sheet," its banking analyst David Chong wrote in a note to clients yesterday. The banks' aggregate net profit in the second quarter was 5.1 per cent higher when compared with the previous quarter, and 13.4 per cent higher when compared with the same quarter a year ago, to hit a net high of RM4.4 billion. The record earnings were boosted by stronger non-interest income and lower provisions for bad loans, which reached a new low. "Both these, in our view, are sensitive to economic conditions and the situation could reverse if economic conditions deteriorate," Chong cautioned amid worries that debt problems in the US and Europe may lead to another global recession. Banks tend to underperform the broader market in any economic downturn. "At this stage, we are not calling for a 'double-dip' recession but think that the risk of a slower-than-expected economic recovery is rising. Thus, pending further economic data, we are 'neutral' on the sector," he said. At home, the rollout of government projects under the Economic Transformation Plan (ETP) may help cushion banks' slowing growth, but much also depends on the execution of these projects, he noted. Banks such as Malayan Banking Bhd, CIMB Group Holdings Bhd and Alliance Financial Group Bhd surprised the market by paying better-than-expected dividends in the second quarter. Other positive trends noted in the quarter were resilient annualised loan growth of 17.4 per cent and slight NIM (net interest margin) expansion from the previous quarter as banks benefited from a 25 basis points hike in the Overnight Policy Rate in May. Banks' asset quality improved further, with aggregate gross impaired loan ratio at 3.3 per cent compared with 3.5 per cent three months ago.