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Banking analysts say cooling effect is temporary, earnings intact – Business loans dip

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PETALING JAYA: Business loan growth is expected to slow down although not significantly in the coming months and will not be a drag on overall earnings of banks, according to analysts.

Many quarters viewed the slowdown in the latest business loan indicators in July as temporary and much would depend on the roll-out of mega projects and the state of the country’s economy.

A banking analyst with MIDF Research told StarBiz that he expected business loans for the second half to be softer compared with the first half partly due to slower capital market-related loans.

Nevertheless, he felt the moderation in business loan growth would be short-lived.

He added that the slower business loan growth would not impact the overall earnings of banks as there were other sources of income besides business or corporate loans.

Some of the other sources of income included non-interest income or fee-based income like investment banking and treasury activities, wealth management and bancassurance, transaction banking apart from Islamic banking.

He said banks were strategising to have a stronger base in the non-interest income or fee-based activities in view of the compression in net interest margins, adding that he anticipated overall loan growth of between 10% and 11% this year.

A foreign-based investment bank analyst said she did not expect bank earnings to be affected, judging from the latest business loan indicators, as the demand for corporate loans and small and medium enterprise loans was still strong, noting that she expected business loans to grow after tapering in the first half of the year.

The analyst said that business loans were expected to hold up partly due to the fact that the Responsible Lending Guidelines had affected the growth of other consumer loans.

Alliance Research banking analyst Cheah King Yoong said the contraction in business loans was not alarming and would not slowdown significantly.

The research house anticipated business loans stemming from the roll-out ofEntry Point Projects (EPP) under the Economic Transformation Plan (ETP) would accelerate in the coming months while domestic economic activities would remain resilient despite external uncertainties, supported by the Government’s pump-priming activities, robust consumption pattern and conducive monetary environment.

He believed Maybank, CIMB Group and RHB Capital were well-positioned to capitalise on the pick-up in business loans stemming from the roll-out of EPP under the ETP.

Cheah expected earnings trend among banks to continue to surprise on the upside in anticipation of accelerated disbursement of ETP-related corporate loans and higher contributions from the investment banking operations in the second half of this year.

While many banks have accounted for the major portion of fee income related to the listing ofFelda Global Ventures in their first half earnings, he expected investment banking fees to remain strong in the second half of this year.

Cheah attributed this to the upcoming large initial public offerings such as that of Astro Malaysia Holdings Bhd and IGB REIT, coupled with the imminent new bond issuance to finance ETP-related projects.

Bank Negara’s statistics for July showed that lending indicators have contracted for a second consecutive month. The contraction was not due to the adverse impact from the Responsible Lending Guidelines, as the drag on the lending indicators was due to business loans.

Business loan applications, approvals and disbursements declined by 37.8%, 25.9% and 10.6%, respectively, on a month one month basis.

Outstanding business loans as at July inched up by 0.5% on a month-on-month basis, at a slower pace compared with the 1.5% month-on-month growth in June. As a result, business loan grew by an annualised 13.7% in July, a moderation compared with 15.9% in June.

Cheah was maintaining a forecast of 11% in domestic loan growth this year for now, reiterating that there was increasing likelihood of an upside risk to its forecast.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said despite the anticipation of slower economic growth in the second half of this year, growth in business loans was not expected to decelerate significantly as domestic economic activity would provide a strong support to the overall economy.

The notable increases in the momentum of investment in the past two quarters (first quarter: 16.2% growth and second quarter: 26.1% growth) suggested that going forward, investment activity would likely remain robust, underpinned by mega projects such as the My Rapid Transit, Petronas Refinery and Petrochemical Integrated Development and others.

As such, stronger construction and investment activity would drive more demand for loans from the corporate sector, offsetting the weakness in household loans in the next few quarters, Zahidi said. – The Star