MARGIN contraction and slower loan growth acted together to suppress net interest income growth in the sector from 9.8% year-on-year in the third quarter to only 4.1% in the fourth quarter. This brought down year-on-year net profit growth from 13.6% in the third quarter to 9.4% in the fourth quarter, despite a plunge in credit costs.
For 2013, we are projecting stable loan growth of 10% to 11% but continued margin slippage, albeit a milder one.
Despite the stable impaired loan ratios, credit costs should be higher in 2013 as we anticipate lower recoveries or writebacks. We remain “neutral” on Malaysian banks, with Malayan Banking Bhd (Maybank) staying as our top pick.
Net profit growth for the banks in our coverage weakened from 13.6% year-on-year in the third quarter to 9.4% in the fourth quarter. The culprit was net interest income growth which halved from 9.8% in the third quarter to 4.1% in the fourth quarter because of margin compression and slower loan growth.
This was partly offset by a 43.4% plunge in loan-loss provisioning (LLP).
We are projecting 12.2% net earnings growth for the sector in 2013, catalysed by topline growth arising from 13.7% expansion of net interest income and 17.4% growth in non-interest income. On the cost front, overheads are forecast to advance by 10.7% while LLP is projected to jump 58.3%.
Loan growth continued to soften from 11.9% year-on-year on Sept 12 to 10.4% on Dec 12.
The slowdown came mainly from business loans' growth deceleration from 12% in Sept 12 to 9% in Dec 12. Consumer loan growth slowed by a much smaller margin from 11.9% on Sept 12 to 11.6% on Dec 12.
The gross impaired loan ratio improved by another 10 basis point quarter-on-quarter to 2% on Dec 12 but loan-loss coverage slid marginally from 101.7% on Sept 12 to 100.9% on Dec 12.
We expect the impaired loan ratio to continue to drop to 1.8% to 2% in 2013.
Banks' returns on equity (ROE) eased from 16.3% in the fourth quarter of 2011 to 15.4% in the same quarter last year due to slower net profit growth of 9.4% versus a 16.2% rise in shareholders' funds. Only three banks, i.e. Hong Leong Bank, AMMB Holdings Bhd and Affin Holdings Bhd managed to increase their ROEs by 0.6% to 1.4% year-on-year in the fourth quarter last year.
All other banks saw dips in ROE, ranging from 0.2% for Maybank to 3.2% for RHB Capital.