Banks to see competition for deposits in next few years

However, the general outlook for the country’s lending sector is still upbeat


Local banks are expected to see some volatility in provisioning and competition for deposits in the next few years due to new funding rules, but the general outlook for the country’s lending sector remains upbeat.

An industry analyst with MIDF Amanah Investment Bank Bhd said some degree of volatility is expected due to the implementation of the Malaysian Financial Reporting Standard 9: Financial Instruments (MFRS 9).

MFRS 9 will come into effect on Jan 1, 2018, replacing the existing MFRS 139 “Financial Instruments: Recognition and Measurement” financial reporting.

Unlike MFRS 139, which is based on the incurred loss model, the new standard requires banks to make provisions for expected credit losses.

“Looking at local banks, their common equity Tier-1 (CET1) ratios are above the requirements as set out by Bank Negara Malaysia (BNM). With MFRS 9, we can expect some teething problems as banks search for the models that work for them,” the analyst told The Malaysian Reserve.

He said the level of volatility depends on the individual banks’ portfolio as different lenders are more exposed to certain segments.

“For certain banks, they are very strict in their risk assessments, so their assets would be of much higher quality. So, the impact may not be as big as we expected,” he said.

The analyst said most banks expect credit costs to rise slightly, but not to a worrying point.

“There will be some volatility in the first couple of years in terms of provisioning. So, we might see some impact to earnings as the banks are refining their models.

“But within one to two years, things will normalise,” he said.

CIMB Investment Bank Bhd earlier this year predicted the standard could lower lenders’ 2018 to 2019 net profit by 1.3% up to as much as 8.3%, assuming that credit costs increase by between 10% and 50%.

Impaired loan allowances are also expected to gradually rise, Affin Hwang Investment Bank Bhd said last month in anticipation of fewer recoveries in the future, as well as volatility arising from the adoption of MFRS 9.

Meanwhile, BNM announced last month that it would delay implementation of the Net Stable Funding Ratio (NSFR) to no earlier than Jan 1, 2019, giving banks more time to meet the operational requirements.

The Chase for Cheaper Fund

The NSFR is a liquidity standard published by the Basel Committee for Banking Supervision which forms part of the Basel III regulatory reforms.

It requires financial institutions to maintain a stable funding profile to support their assets and off-balance sheet activities.

The standard is similar to the liquidity coverage ratio (LCR), though it focuses more on a lender’s long-term liquidity, while the LCR promotes short-term resilience of a bank’s liquidity risk profile through holdings of liquid assets.

“In 2018, banks will be preparing for the NSFR which might cause some deposit competition, so we expect some deposit risk to go up, squeezing banks’ margins. Yet this will be subdued because 75% of banks are already complying with NSFR requirements, so the deposit competition will be among the remaining 25%,” the analyst said.

As at June 2017, the average industry NSFR stood at 107% with more than three quarters of banks at above the minimum requirement of 100%, while the banking system LCR stood at 141% — also above the minimum of 100%.

Kenanga Investment Bank Bhd in a recent report said the extended grace period from the deferment of the NSFR implementation would likely ease pressure on banks’ net interest margins, as the risk of a sharp upward surge in cost of funds minimises.

“However, we still do not rule out banks chasing a cheaper and easier source of funding, which is deposits (against capital funding) that could be at the expense of marketing cost, as credit demand accelerates ahead.

“We also do not rule out the banks reducing their exposure to long-term loans, as higher long-term loans will put pressure on NSFR and the banks will have to compensate by having higher long-term funding — thereby adding pressure on their funding costs,” it said.

Going into 2018, lenders are expected to perform slightly better than this year, tracking economic growth expectations as the country’s gross domestic product (GDP) has outperformed projections for the first six months of the year.

“Banks have been doing well this year, with the majority of their earnings coming from net interest income. As long as there is loans growth and margins hold steady, their earnings for the rest of 2017 will not be badly affected,” the MIDF analyst said.

Malaysia’s GDP expanded 5.6% in the first-quarter of 2017 (1Q17) and 5.8% in 2Q17, leading to experts upping their estimates for the full year.

The World Bank revised its forecast for Malaysia’s 2017 economic growth to 5.2% from 4.9% previously on favourable indicators in the private sector, while the Malaysian Institute of Economic Research amended its full-year GDP projection to 5.4% from 4.8% prior.

“Loans growth in 2018 will be around 6% or slightly better than this year. If the economy improves further this year, then we’ll see better loans growth next year — though a high double-digit growth is not expected yet,” the analyst said.