Banks not affected by cooling measures yet

THE EDGE WEEKLY ISSUE#1004

THE WEEK OF MARCH 3 – MARCH 9, 2014

By: ESTHER LEE

The banking industry’s latest results for the quarter ended Dec 31, 2013, revealed that loan growth for the residential property segment remained strong in the period, surprising some, given the slew of cooling measures imposed by the government.

In their gross loan books for the residential property segment, most banks still see double-digit growth on a year-on-year (y-o-y) basis, while quarter-on-quarter (q-o-q) loan growth for the segment averaged 3%.

Analysts say the “surprisingly good” loan growth for the residential property segment in 4Q2013 could be attributed to the influx of housing loan applications towards the end of last year, before the property cooling measures under Budget 2014 took effect.

The influx of applications should temporarily drive mortgage loan disbursements towards the end of this year and next year, since it generally takes a bank two to three years to complete full disbursements of property loans on primary purchases, say Alliance Research.

However, it is only a matter of time before banks feel the pinch from the effects of the cooling measures, as property loans make up a huge chunk of consumer loans.

The present loan pipeline for bank looks strong enough to be able to sustain loan growth for the first half of 2014, but what comes after that needs to be monitored closely, analysts say.

“New loan approvals will surely see the impact from the cooling measures implemented,” one analyst notes.

Another analyst says once the existing loan pipeline is exhausted, the impact on loan growth in the banking sector will kick in.  He expects the slowdown to become apparent in 2015.

(BNM)’s monthly statistical bulletin for December reveals that loans approved in 4Q2013 grew 38.1% to RM32.98 billion from RM23.89 billion in the previous corresponding period, while loans disbursed grew 20.72% to RM21.82 billion compared with RM18.07 billion the year before.

The government, together with (BNM), has introduced several measures to curb speculation in the property market and combat soaring household debts.  Among the measures introduced were the responsible lending practices in July 2013, which shortened the property loan tenure to 35 years from 40 years previously.

Meanwhile, those that took effect on Jan 1 this year include the prohibition of the (DIBS) scheme, the increase in the minimum purchase price for foreign property buyers to RM 1 million and the hike in the (RPGT).

Analysts say while consumer lending is expected to continue to moderate this year, the banking industry expects business loans to grow and support the moderation from the consumers’ end.

The expectation of the a growth in business loans comes on the back of the continuous mega-scale projects under the Economic Transformation Programme, such as the (MRT) and West Coast Expressway.

Analysts are projecting total loan growth for the banking sector to be between 9.5% and 11% in 2014.  The industry’s average for 2013 was 10.6%.

For the quarter ended Dec 31, 2013, the banks’ earnings came in within analysts’ expectations.  Most analysts continue to remain neutral on the sector, as they see limited catalyst for the sector.

Alliance Research, which has taken the contrarian view, giving the sector an overweight call, is expecting to see higher non-interest income for the year.

“Following a slow growth momentum in 2013, we are optimistic that banks’ non-interest income could rise in 2014, supported by resilient capital market activities,” it says.

It adds that the increased volatility in interest and foreign exchange rates due to quantitative easing tapering could induce more corporates to undertake hedging activities, which could improve non-interest income.

Nevertheless, other analysts say the margin pressures on the sector as well as the uncertainty of capital market activities will continue to weigh down the sector.

Interestingly, one analyst notes that there are early signs of an uptick in impaired loans, but it is not alarming for now.

(BNM)’s monthly statistical bulletin reveals that the total impaired loans for 4Q2013 has increased 2.8% to RM70.11 billion from RM68.16 billion a year ago.

Nevertheless, q-o-q comparison show that total non-performing loans have declined by 1.1% from RM70.9 billion in the (3Q)2013.E