Asia Bank Margins to Dip as Rate Hikes Sink in, Bad Loans Grow

Lending margins will be in focus this week when Asia’s largest banks report earnings, amid peaking interest rates chipping away at margins. Chinese lenders are also grappling with soured loans from the troubled real estate sector.

(Bloomberg) — Lending margins will be in focus this week when Asia’s largest banks report earnings, amid peaking interest rates chipping away at margins. Chinese lenders are also grappling with soured loans from the troubled real estate sector. 

Asian banks have so far avoided negative earnings surprises — the report card from India’s HDFC Bank Ltd., the world’s sixth largest lender, was received positively. Meanwhile, investment banking and trading challenges have been a drag on the overall performance of Wall Street giants Goldman Sachs Group Inc. and Morgan Stanley, and the global markets segment of Japan’s Nomura Holdings Inc. may have faced similar headwinds.

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This week, United Overseas Bank Ltd. and Standard Chartered Plc should report sequentially flat-to-lower margins as deposit repricing catches up with loan repricing, with financial markets absorbing the full extent of rate hikes. Property loans probably soured for China Construction Bank as the debt crisis deepened for builders like Country Garden Holdings Co. Analysts have attributed a sharp sequential decline in net interest margin at ICICI Bank Ltd. and Kotak Mahindra Bank Ltd. to one-offs and said the fall in margins would be more gradual going forward.

Analysts at RHB said much of UOB’s results ride on how well the treasury and investment unit performed. In India, analysts including Kunal Shah at Citi Research expect sequentially lower treasury income to drag bank results.

Mukesh Ambani’s Reliance Industries Ltd. is also set to report strong results this Friday, helped by a rebound in the refining business and buoyant consumer segment performance.

Highlights to look out for:

Monday: Nidec’s (6594 JP) second-quarter operating profit probably rebounded, aided by restructuring. Automotive segment sales should remain solid thanks to demand for second-generation E-Axle motor systems for electric vehicles, which would improve its cost structure and operating profit margin, according to BI. Global EV adoption and a potential boost in mini-EV motor shipments, as well as electric motorcycles in China and India markets, are a tailwind for its sales growth in the next five to 10 years, BI said.

Tuesday: CNOOC’s (883 HK) third-quarter earnings may be dragged down by lower energy prices despite volume gains, BI said. Sluggish global demand and high inventory caused prices for Asia LNG to drop more than 73% in the third quarter from a year ago. Prices for WTI crude also fell almost 10% from a year earlier. A 6% growth in sales volume, based on management’s 2023 full-year production target, might not be enough to offset cheaper prices.

Wednesday: SK Hynix’s (000660 KS) third-quarter revenue probably grew, estimates show. DRAM sales could rebound, while NAND sales may stay flat, IBK Securities said. The South Korean chipmaker and rival Samsung Electronics Co. got an indefinite waiver from tightened US chip export curbs last week, allowing them to continue importing advanced chip tools from the US to its China plants. The waiver clears concerns for Hynix, which has 50% and 20% of its DRAM and NAND production capacity in Wuxi and Dalian, respectively, according to BI.

Thursday: Singapore’s UOB (UOB SP) earnings in the third quarter were probably supported by a larger Asean portfolio following the acquisition of Citigroup’s Southeast Asian consumer assets. Non-recurring operating expenditures from the Citi deal should start to drop off from the third quarter, RHB analysts said. Mainland China’s sluggish economy will be in focus as UOB’s exposure there stood at S$21.9 billion as of June 30, which includes non-bank debt, bank debt and debt securities.

  • Standard Chartered (STAN LN) could see net interest income rise 15.5% in the quarter, estimates show. The results may shed light on how slowing Chinese growth is affecting Asian economies, BI said. Strength in net interest income and wealth management will help the bank meet its 2023 income target, Jefferies said in a note last month that cited Asia CFO Saleem Razvi.
  • China Construction Bank (939 HK), the first Chinese bank to report, may post sluggish earnings in 2023 and into next year, according to BI. An aggressive loan push might be more than offset by a margin plunge and looming property loan risks, while its net interest margin could drop more than 20 basis points this year. ICBC (1398 HK) and AgBank (1288 HK) are expected to report later in the week.

Friday: Nomura’s (8604 JP) second-quarter adjusted pretax profit may be little-changed sequentially, according to MUFG Morgan Stanley analyst Natsumu Tsujino. Earnings from the US securities business have been lackluster, SMBC Nikko Securities Inc. analysts Masao Muraki and Takayuki Hara said in a note. Developments related to Nomura’s plan to offer a private buyout fund to rich investors in Japan will be in focus as the conglomerate expands beyond traditional asset markets.

–With assistance from Felix Tam and Saket Sundria.

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