MALAYSIAN banks can expect a tougher year ahead, given the shaky global economic outlook and strong competition, and this is likely to impact their earnings growth.
Earnings growth, while still decent, would likely moderate to between three per cent and five per cent this year from an anticipated 11 per cent last year, analysts said.
Growth will falter because of an expected slowdown in loan growth, possibly to between nine per cent and 10 per cent, due to a slowdown of the local economy, further margin compression, a potential uptick in bad loans and higher credit costs.
The industry's loan growth was expected to come in at 12 per cent to 13 per cent last year. It stood at 12.8 per cent in November. Continued volatility in capital markets is also expected to affect banks' fees and investment income.
Still, any earlier-than-expected acceleration of mega projects under the country's Economic Transformation Programme (ETP), which may filter through the capital markets, could lift banks' earnings momentum, said banking analysts from HwangDBS Vickers Research.
Analysts currently have a cautious investment stance on the sector, with most keeping either a "neutral" or "underperform" call on it, noting that banks tend to underperform as economic conditions soften.
Their caution has nothing to do with the fundamentals of the banking system, which they believe are probably stronger than they were prior to the recent global financial crisis.
"Malaysian banks are, on various accounts, sounder today than they were heading into the global financial crisis," said Desmond Ch'ng, an analyst at Maybank Investment Bank Research, which has a "neutral" call on the sector.
He said his wariness on the sector stemmed from external uncertainties - what with Europe still trying to resolve its debt issues and the United States trying to emerge from a recession - which will drag the local economy and inadvertently affect banks.
Of the local banks, only Malayan Banking Bhd (Maybank) has meaningful exposure to the eurozone, but even then, he noted that the exposure accounted for just 3.3 per cent of its shareholders funds and took the form of investment in government bonds rather than exposure to European banks.
HwangDBS expects Malaysia's economy to moderate to 4.5 per cent this year from an expected five per cent last year.
Bank Negara Malaysia could begin cutting interest rates "sooner rather than later" to help spur growth, analysts said.
It might lower the Overnight Policy Rate possibly by 50 basis points in the first quarter, said HwangDBS.
Any tightening will squeeze banks' net interest margins.
Alliance Financial Group Bhd and Maybank are seen to be the most adversely impacted by a cut in interest rates due to their higher proportion of variable rate loans.
Analysts don't see banks improving their dividend payout ratio this year, not with earnings growth slowing and capital conservation a priority.
Analysts also felt local banks shouldn't have much problems meeting tighter capital rules under Basel III.
Their capitalisation levels are strong as it stands, with the core capital ratio of the banking system averaging 12.7 per cent as at end-November last year. compared with 10.3 per cent as at end-January 2006.
The sector's risk-weighted capital ratio stood at 14.8 per cent, compared with 13.4 per cent previously.
"We expect most domestic banks to register a common equity Tier 1 ratio of at least seven per cent in compliance with the minimum that global banks have to attain by 2019," said Ch'ng.
Meanwhile, some of the key things to watch out for this year is whether Bank Negara moves to further cool household debt, which is running high.
Merger and acquisitions will likely continue to be a strong feature in the sector, particularly within the stockbroking and investment banking space.
A proposed merger between RHB Capital Bhd and OSK Investment Bank, which is currently being worked out, will be finalised by March, according to a recent news report.
CIMB Group Holdings Bhd is also in the midst of negotiating a stake buy in the Philippines' Bank of Commerce.
Bank Negara might increase the 30 per cent foreign ownership limit in local banks on a case-by-case basis, analysts said.
Investors will also be looking to see if Indonesia follows through on a plan to potentially limit foreign shareholding in its banks to less than 50 per cent.
The move will mean Maybank and CIMB having to reduce their controlling stakes in their respective subsidiaries in Indonesia.