By GEORGE BODO
Banks have just concluded the release of third
quarter results and looking at those numbers, I would advise against
further exposure to bank stocks. The third-quarter outcomes are just too
business-as-usual to excite current valuations.
Looking at the topline keenly, there was visible pressure on
the core business. For the nine months to September, while gross loans
and advances grew by 21 per cent year-on-year, interest income earned
from the same only grew by 18 per cent year-on-year.
This year-on-year growth mismatch in the two key
line items is a clear evidence of the existence of pressure on the
business. Although you could also argue out the mismatch in two ways.
First, that maybe most of the loans could have been
booked in the last month of the quarter, but then again, it’s not
practical for all banks to book a good chunk of their loans in the last
month of the period. Second, that lenders re-priced their loans
downwards during the period, which did not happen anyway.
Still staying with this topline issue, it looks to
me that banks may eventually have to consider recalibrating their niche
to the extent that the less risky players will be forced to move down
the risk-curve.
This will mean investing in new product roll-outs
as well as building scale to handle new segments. This can also mean
even acquiring a player that is already a well-established in the target
niche.
Otherwise, I just don’t see how banks will start
recording exceptional business periods and posting year-on-growth rates
in excess of 20 per cent.
The performance of the midline should also worry investors.
First, funding costs have escalated. In fact, in
the nine-month period, funding costs rose by 30 per cent year-on-year.
The worst affected were medium-sized (Tier II banks), who saw their
combined funding costs rise by 33 percent year-on-year. And this is
largely because of their reliance on wholesale deposits for balance
sheet funding.
Even the large Tier I banks, that often have a
strong reliance on low-cost current and savings account liabilities,
weren’t spared either and saw their balance sheet funding costs rise
notably by 29 per cent.
However, funding costs are very cyclical and often
track prevailing ‘risk-free’ rates. But the fact that banks, across the
board haven’t built enough resilience to the upward swings, as has been
demonstrated over the last two upward cycles (2011 and 2015), should be a
worry point.
Second, the rise in third quarter loan loss
provisions is eye catching. For the period under review, loan loss
provisions rose by 21 per cent year-on-year, which is quite significant.
And as the spotlight now turns on banks’ bad loans
recognition system, especially in the wake of the two recent failures,
provisioning levels could escalate in the fourth quarter.
So you can see that the year-on-year growth rates in the two midline items dwarfed the topline.
When this trend spills into fourth quarter, which
is highly likely, and combined with the fact banks may be required to
beef up their balance sheets over the next 24 months, investors should
brace for reduced dividend payouts.
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