Analysts see better H2 earnings momentum in banking sector

PETALING JAYA: The banking sector saw an "unexciting" second quarter where loan growth was soft while non-interest income was still subdued but analysts are expecting a better second half of the year on expectations of a pickup in lending, capital market activities, coupled with July's overnight policy (OPR) hike.
MIDF Research banking analyst, Kelvin Ong, who maintained his "neutral" call on the sector, said going forward, the loans growth outlook were mixed.
He said that banks that enjoyed stronger growth in the first half due to the retail segment generally headed for a slowdown in consumer lending activities ahead in the second half, due to the various regulatory measures introduced to cool down household indebtedness.
For banks that rely more on the corporate segment, expectations were the opposite, he said.
"Corporate pipelines remained healthy and this will help support corporate loan draw downs in the quarters ahead.
"We believe a pickup in loans growth will also need to be accompanied by stronger deposit growth. This is because some banks are operating close to their comfortable loan-to-deposit ratio (LDR) levels.
Notwithstanding the mixed outlook regarding loan growth prospects, Ong expects non-interest income growth to enjoy better momentum especially in Q3'2014.
"This is mainly because most banks are beneficiaries from a hike in OPR, which would provide a temporary relief to net interest margin (NIM) pressure. Higher deposit rates may also help improve deposit gathering activities ahead," he said.
Ong also expects non-interest income, which declined by 1% quarter-on-quarter due to weaker treasury income, to improve in the second half of 2014 as banks are expected to benefit from an improvement in capital markets.
"Banks that we expect to benefit from an improvement in capital markets include Malayan Banking Bhd (Maybank), CIMB Group Holdings and AMMB Holdings Bhd. Banks such as Alliance Financial Group Bhd and Hong Leong Bank Bhd, apart from the above mentioned banks, also have active treasury teams and could stand to benefit from better opportunities in the fixed income space," he noted.
Meanwhile, Alliance DBS Research chose Public Bank Bhd and Hong Leong Financial Group (HLFG) as its top picks in the banking sector.
"We continue to like banks with defensive earnings and consistent earnings delivery (Public Bank), and banks with opportunities to unlock value through restructuring and balance sheet optimisation (HLFG)," it said in a report yesterday.
It noted that AMMB, Affin Holdings Bhd and CIMB missed its and consensus' earnings expectations, and most banks under its coverage reported lower earnings on-quarter. However, Public Bank and Hong Leong Bank reported the most resilient set of earnings.
Its analyst believes that that there could be further consolidation in the sector which could create excitement in terms of valuations. "We believe Maybank could initiate an M&A," it added.