By Sharifah Pirdaus Syed Ali
KUALA LUMPUR, Dec 9 – Malaysian banks continued to display resilience in 2021 and performed better than in the previous year despite persistent economic headwinds with prolonged movement restrictions, moratoriums and repayment assistance, thanks to the buffers and structural strength built over the years.
The year obviously kicked off on a high note with Bank Negara Malaysia’s (BNM) growth target set at 6-7.5 per cent, but it was later revised down to 3-4 per cent amid the re-imposition of COVID-19 containment measures.
“Although the banks would be impacted due to the extended repayment assistance that would affect credit costs and also in terms of profit margins due to a modification cost, structurally the Malaysian banking system has remained strong enough to withstand distress,” said Moody’s Investors Service.
“They are well capitalised and liquid enough to withstand unexpected losses that could materialise,” it said, adding that Malaysian banks had remained profitable this year with some having performed better compared to 2020.
Kenanga Research senior equity analyst Clement Chua Min Tze said banks managed to report stronger income from more optimised cost of funds (CoF) arising from BNM’s notion to keep record low Overnight Policy Rate (OPR) of 1.75 per cent consistent during this period.
MIDF Research said low OPR had depressed the net interest income (NII), though it was slightly offset by lowered COF.
The sector also continued to see higher impairment ratios, especially in small and medium enterprises (SMEs) and retail consumer as loan assistance programmes prompted banks to stock up on provisions.
“To mitigate the challenges faced in 2021, the banks had exercised more cost cutting and digitalisation process.
“They had also put a tighter loan-vetting process, expanding current accounts saving accounts (CASA) base and focusing more on stable fee income via forays into wealth management and premier banking as well as de-risking exercises and balance sheet rebuilding,” MIDF noted.
Chua highlighted that further economic restrictions could pose a threat to loan growth, especially for the already at-risk sectors such as tourism and aviation, and struggling businesses will cascade to lower private income and spending, further hampering economic reinvigoration.
“That said, market sentiment was weighed down by the possibilities of heavy impairments which impacted the near-term sustainability of banking stocks. On a long-term basis, we do not believe the events over the last two years could meaningfully undermine the banking business model,” he said.
He said all the three largest banks in Malaysia which include Maybank, CIMB and Public Bank faced similar headwinds due to the relative comparability in market share as compared to their peers, but notably, Public Bank was less affected due to it having a stronger focus on local accounts.
They had similar approach of frontloading provisions as to minimise any risk of surprises for possible worsening of COVID-19.
CIMB bore the greatest credit cost of close to 150 basis points (bps) in financial year 2020 (FY2020) while Maybank and Public Bank booked in 90 bps and 30 bps respectively, he said.
“The gravity of these provisions have been easing on a quarterly basis in FY2021 but we suspect there could be lumpy impairments in line with the implementation of the July 2021 moratorium.”
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said the banking sector looks increasingly resilient with financing activities continuing to grow at a healthy clip in tandem with more lively economic activities given the reopening of the economy.
For the month of October, total loans accelerated further from 2.9 per cent year-on-year (y-oy) in September to 3.3 per cent during October, he shared.
“Both sectors including household and businesses recorded better growth during October to 3.7 per cent from 3.2 per cent in September and 2.9 per cent against 2.5 per cent respectively,” he said.
Forward looking indicators such as loan application and approval were also growing at a rate of 4.2 per cent y-o-y in October against -7.3 per cent in September and 2.2 per cent (September: -6.3 per cent) respectively, suggesting that total loans are expected to go higher in the immediate terms, he said.
Similarly, he said the asset quality continues to exhibit positive trends as banks remained vigilant in their credit assessment.
The gross impaired loans (GIL) ratio fell further to 1.52 per cent in October from 1.57 per cent in September (August: 1.67 per cent) previously. Almost all subsectors recorded lower GIL ratio, indicating improved debt servicing ability, he noted.
“Overall, the reopening of the economy certainly will be the main factor for improving performance of the sector. When the economy starts to reopen, businesses are able to record their sales and along the way, there will be more opportunity for employment.
“By extension, sentiments among the businesses and consumers are likely to be positive, leading to better spending pattern,” he said.
Additionally, he said talks of possible OPR hike is already taking place among economists, although the odds for such a scenario to occur can be quite fluid in light of the downside risks stemming from COVID-19.
“However, should the interest rate hike materialise, it would certainly help to improve the Net Income Margin or Net Interest Margin (NIM) for banks.
At the current juncture, banks should be able to close the year with a decent set of results,” he added.
Another point to note in the sector for 2021, BIMB Holdings Bhd was delisted from the Main Market of Bursa Securities and Bank Islam Malaysia Bhd assumed the listing status of BIMB on Oct 8.
The exercise paved the way for the bank to be the only listed pure-play full-fledged Islamic financial institution in Malaysia.
Malaysia’s push into digital banking is gathering pace, with BNM in July this year announcing it had received 29 applications for a digital bank licence under the Financial Services Act 2013 and the Islamic Financial Services Act 2013, following a six-month application period, which ended on June 30, 2021.
Up to five licences may be issued and notification of successful applications will be made in the first quarter of 2022, the central bank said.
Afzanizam commented that the digital banks would certainly help propel the intense competition in the industry which can be beneficial to customers.
“Banks would need to constantly reinvent themselves in order to stay relevant. Again it would accelerate the digital adoption of traditional banks which can improve turnaround time and productivity which ultimately will translate into better earnings growth for the sector,” he said.
Afzanizam said the emergence of variant of concern (VOC) namely the Omicron virus indicates that the downside risks to the economy and sectors are still visible.
Following this, banks have remained vigilant in their credit risks assessment and this is reflected in the rise in Loan Loss Coverage ratio which has gone up to 124.3 per cent in October compared to 111.1 per cent in the same period last year, he said.
On another note, Kenanga Research’s Chua said banks will likely continue to strive next year as pent-up loan demand is expected to kick in with a friendlier economic landscape.
“Also given how the banks had optimised their CoF against interest income with the existing low OPR, it is possible that an increase in OPR in the future could hurt earnings,” he said.
Meanwhile, MIDF Research expected a higher loan growth alongside robust GDP growth with a OPR hike expected in the second half of 2022, leading to stronger NIM for banks.
Malaysia’s system loan growth was just 2.9 per cent y-o-y in the first nine months of 2021, setting 2021 on a course to match 2020’s 3.4 per cent growth which was the slowest in 20 years.
The deposit growth has outpaced loan growth for 15 of the last 16 months, which is the longest period it has done since 2008.
On another note, during the tabling of Budget 2022, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said the government is introducing Cukai Makmur or Prosperity Tax of 33 per cent for companies posting earnings in excess of RM100 million in 2022.
Commenting on this, BNM governor Tan Sri Nor Shamsiah Mohd Yunus said although the tax is expected to reduce banks' retained earnings next year, the overall profitability of local banks is expected to remain stable.
“The impact of Cukai Makmur on domestic banks will be manageable due to the fact that it is a one-time tax as well as the improvements in loan growth as the country recovers from the protracted effect of the pandemic and also a potentially lower level of provisioning next year amid some improvements in the credit risk outlook,” she added.
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