More downside risks may prevail for the banking sector this year as loan growth is marred by weak loan leading indicators, according to banking analysts.
CIMB Research analyst Wilson Ng Gia Yann said in a report that the recovery of both loan applications and approvals in January proved to be short-lived, as both fell 1% to 9% year-on-year in February 2013 with weaker performance for loans for the purchase of big-ticket items.
“But the indicators for working capital loans improved from a fall of 21% to 37% year-on-year in January 2013 to declines of 5.2% year-on-year for applications and 5.7% year-on-year for approvals in February 2013,” he said, projecting loan growth to stand at 10% to 11% for 2013.
Despite a 11.4% year-on-year loan growth in February, loan indicators turned negative with all new applications contracting 17.1% month-on-month with new household loan applications falling 24.7% month-on-month and new business loan applications dropping 7.2% month-on-month.
New loan approvals also declined by 12.9% month-on-month, as well as loan disbursements which fell 15.6%.
“However, we foresee less compression of net interest margin in 2013 compared with 2010 and 2011, as banks are likely to be more disciplined in their pricing. Also, we see minimal risk of an upward reversal of the impaired loan ratios,” he said.
Given the weak leading loan indicators, he said there was limited upside to the loan growth of 11.4% recorded in Febraury 2013.
“Although growth of business loans could recover after the general election, the pace is set to soften for consumer loans as banks are tightening their lending practices.
“On the other hand, we think that the erosion of net interest margin will be less severe this year as banks will be more rational in their pricing of loans after the stiff rate competition seen in the past two to three years,” he said.
Meanwhile, Hong Leong Investment Bank said it was not overly concerned of the lower disbursements, applications and approvals, as it was likely skewed by the holiday-shortened month.
“We maintain 2013 loans growth projection at 9% or two times our gross domestic projection of 4.5%. Continued loan growth will mitigate net interest margin erosion, and month-on-month improvement to provide temporary reprieve.
“Asset quality will remain intact which make banks' earnings resilient and defensive amid external uncertainties given the proxy to sustainable (albeit slower) domestic growth,” it said.
Affin Investment Bank also said the overall pick-up in loans growth was lackluster in February 2013 as a result of the Chinese New Year holidays and also a shorter working period and partly due to the attraction of cheaper funding via debt capital market.
“February 2013 also saw loan indicators turning negative vs January 2013, for applications and approvals in both household and business segments.
“Nonetheless, this is only temporal and from historical trends, growth will normalise after the festive period,” it said.
It said it maintained a neutral stance on the banking sector as most of the positive underlying fundamentals in the sector have more or less been priced-in.
“Not only would net interest margins subject to further compression albeit moderately, loans growth is also expected to remain slow given the moderation in consumer loans growth though downside is well-supported by the expansion in business and commercial loans,” it said.