MARKET DEVELOPMENT
Challenging Outlook for the Economy This Year
Challenging Outlook for the Economy This Year
19/01/2015 (The Star) - With the mega merger now called off, all parties are going their separate ways to run their businesses. When the merger was being worked on, it was natural for employees of CIMB Group Holdings Bhd, RHB Bank Bhd and Malaysia Building Society Bhd to be a little cautious in the risks they took.
It’s not to say the reins of those businesses were pulled back but the reason given for calling off the merger suggests that weakening operating conditions were in play that led to the merger being scuttled.
Those conditions are not unique to the three banks and the worry now is that they point to a broader sluggishness that is affecting other banks and the economy.
Banks are often a leading indicator of the economy, as credit greases the wheels of business activity. When loans growth is strong and banks are making higher profits, they often lead to economic growth heading north.
With the worry that the “current economic climate” cannot deliver the synergies the merger is assuming, the questions is just how sluggish are things out there?
The overall weakness in business has been seen as far as the third quarter of last year. While most companies missed expectations, the worse news was that the profit of companies covered by some of the bigger broking houses fell in the third quarter compared with a year ago.
Maybank notes that the profit of companies it covers fell 5.5% in the third quarter from a year ago. With oil prices falling since then and commodity prices being weak, especially palm oil, there is a worry that earnings in the fourth quarter will also disappoint.
Profits for banks though were better than the 5.5% compression seen by the broader stocks it covers but there were still a contraction in the third quarter from a year ago. One report by Maybank shows that the profit of seven banks it covers fell 2.2%.
The outlook for this year is not going to be pleasant as loan growth is expected to be lower compared with last year. With economists already cutting gross domestic product projections late last year when the price of crude oil was dropping, the worry is just how much is the economy going to suffer as investments and even activities in the oil and gas sector cool down further.
Then there is the housing sector. A number of analysts are expecting housing loans, and as a result housing sales, to ease this year. The high prices and unaffordability issues in general mean that the demand for new houses will be weak.
CIMB, in a note after merger discussions ended, says that banks in 2015 have to grapple with new earnings threats which will come from a potential slowdown in the growth of residential mortgages, implementation of the goods and services tax (GST) which will dent business/consumer sentiments, and compliance with the new guidelines for Islamic deposits, which will further tighten banks’ liquidity.
RHB says that while it has modelled in a recovery in non-interest income for 2015, visibility is still poor given the weak market sentiment and a rising bond yield environment.
It is also projecting a softer macro environment where gross domestic product growth will moderate to 5% in 2015 from 5.8% in 2014 as the introduction of the GST and lower oil prices will likely lead to a moderate increase in consumer spending and private investment.
Banks also expected to see slower income growth as the softer macro environment means that loan growth will ease to 8%-9% in 2015 from 9%-10% in 2014.
“Meanwhile, net interest margin remains under pressure largely from funding cost due to the ongoing re-pricing of fixed deposits, tighter liquidity and regulatory requirements,” says RHB.
It’s not to say the reins of those businesses were pulled back but the reason given for calling off the merger suggests that weakening operating conditions were in play that led to the merger being scuttled.
Those conditions are not unique to the three banks and the worry now is that they point to a broader sluggishness that is affecting other banks and the economy.
Banks are often a leading indicator of the economy, as credit greases the wheels of business activity. When loans growth is strong and banks are making higher profits, they often lead to economic growth heading north.
With the worry that the “current economic climate” cannot deliver the synergies the merger is assuming, the questions is just how sluggish are things out there?
The overall weakness in business has been seen as far as the third quarter of last year. While most companies missed expectations, the worse news was that the profit of companies covered by some of the bigger broking houses fell in the third quarter compared with a year ago.
Maybank notes that the profit of companies it covers fell 5.5% in the third quarter from a year ago. With oil prices falling since then and commodity prices being weak, especially palm oil, there is a worry that earnings in the fourth quarter will also disappoint.
Profits for banks though were better than the 5.5% compression seen by the broader stocks it covers but there were still a contraction in the third quarter from a year ago. One report by Maybank shows that the profit of seven banks it covers fell 2.2%.
The outlook for this year is not going to be pleasant as loan growth is expected to be lower compared with last year. With economists already cutting gross domestic product projections late last year when the price of crude oil was dropping, the worry is just how much is the economy going to suffer as investments and even activities in the oil and gas sector cool down further.
Then there is the housing sector. A number of analysts are expecting housing loans, and as a result housing sales, to ease this year. The high prices and unaffordability issues in general mean that the demand for new houses will be weak.
CIMB, in a note after merger discussions ended, says that banks in 2015 have to grapple with new earnings threats which will come from a potential slowdown in the growth of residential mortgages, implementation of the goods and services tax (GST) which will dent business/consumer sentiments, and compliance with the new guidelines for Islamic deposits, which will further tighten banks’ liquidity.
RHB says that while it has modelled in a recovery in non-interest income for 2015, visibility is still poor given the weak market sentiment and a rising bond yield environment.
It is also projecting a softer macro environment where gross domestic product growth will moderate to 5% in 2015 from 5.8% in 2014 as the introduction of the GST and lower oil prices will likely lead to a moderate increase in consumer spending and private investment.
Banks also expected to see slower income growth as the softer macro environment means that loan growth will ease to 8%-9% in 2015 from 9%-10% in 2014.
“Meanwhile, net interest margin remains under pressure largely from funding cost due to the ongoing re-pricing of fixed deposits, tighter liquidity and regulatory requirements,” says RHB.