New guidelines may affect banks’ earnings next year

(Published in the Star Biz 23rd November 2011 issue: page 3)

By DALJIT DHESI 

PETALING JAYA: The new lending guidelines aimed at containing household debt could put a dent on banks’ earnings next year by restricting loans growth and compressing net interest margins (NIMs), analysts said.

The guidelines, effective Jan 1, covered home and vehicle financing, credit and charge cards, overdraft facility as well as loans for the purchase of securities.

ECM Libra Capital head of research Leong Hon Sze told StarBiz he expected banks’ earnings and loans to moderate to 5% to 10% next year amid global economic uncertainties, adding that banks would also be more cautious and selective.

For the first nine months of this year, the overall banking system loans grew by 10.1% compared with 9% in the same period last year.

NIM, a measure of the difference between the interest income generated by banks and the amount of interest paid out to depositors, has been under a lot of pressure as the average lending rate of banks had been declining over the past few quarters while deposit rates had gone up due to competition in the industry.

A bank-backed brokerage analyst said the new guidelines might restrict loans growth and further squeeze NIM resulting in banks intensifying their non-interest income to boost earnings.

Malaysian Rating Corp Bhd vice-president and head of financial institutions ratings Anandakumar Jegarasasingam said that while the guidelines would affect the banking sector loan growth and revenue, the impact could be mitigated should corporate lending activities pick up.

“In the long term this regulation would help to improve the stability of the banking sector and lower household sector debt level. This regulation would also help to protect ‘stretched borrowers’ from more debt,” he added.

Dr Yeah Kim Leng, RAM Holdings Bhd’s chief economist, said the impact would vary according to the individual bank’s lending practices as well as the business segments it was targeting.

“The more prudent banks have been imposing stringent credit checks and limits on retail loans since the onset of the global financial crisis of 2008/2009. Banks which have relaxed their in-house lending and credit controls recently due to intense competition may need to refocus their lending strategy on segments other than the loans covered by the new guidelines.”

With more stringent guidelines to make lending practices more transparent, Yeah expected banks to be less pressured by delinquent loans .

The new guidelines required banks to explain clearly to the borrowers the implications of the loans they take, including how much more they would have to pay should the base lending rate go up.