Banks put up a fight in 2017, but 2018 continues to be uncertain

Going forward, local banks will be facing new credit and accounting rules


The domestic banking sector witnessed some notable events last year, including earnings improvements, financial technology (fintech) advancements and the inclusion of cryptocurrency in the global financial system.

A majority of the local lenders bucked the previous year’s disappointing show by posting better net profits in 2017, helped by the surprisingly high gross domestic product, improved private consumption, and strong domestic demand and exports.

The fintech space saw developments that would speed up the country’s effort towards becoming a cashless society, such as the tie-ups between Ant Financial Services Group — parent company of Alipay — and CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and Public Bank Bhd.

While China’s leading mobile payment services provider Alipay was introduced in Malaysia for Chinese tourists, Tencent Holdings Ltd’s WeChat Pay is set to be rolled out early this year for local payment services.

But local lenders are not being just “receivers”. Maybank and CIMB introduced their own smartphone payment apps in late 2016.

E-hailing service provider Grab will also launch its digital wallet service called “GrabPay” in stages this year.

Moreover, Visa payWave contact-less transactions grew in 2017 as local banks switched all debit and credit cards to payWave-enabled cards.

Cryptocurrency had the largest stage in the global financial system, triggering concerns by regulators, investment banks and monetary authorities.

Malaysia is expected to release its guidelines on cryptocurrencies and worries over an outright ban on digital currencies still linger despite assurances from authorities.

In the meantime, consolidation efforts were disappointing.

The proposed merger between RHB Bank Bhd and AMMB Holdings Bhd (AmBank) fell through as concerns over valuations had been a main concern.

The proposed RHB-AmBank union was announced in June 2017. But the two parties cited a failure to agree on the terms and conditions as the cause for the discussion fallout.

It was believed that valuation issues — which had blocked previous mergers in the banking sector — were the cause of the failure.

The now-defunct merger entailed an all-share transaction, which was said to have seen RHB issuing new shares valued at one times price-to-book (PB) value to acquire AmBank’s assets and liabilities at one times PB.

Note that RHB’s second-largest shareholder, Aabar Investments PJS, purchased its 17.75% stake from its sister company Abu Dhabi Commercial Bank (ADCB) in 2011, at similar valuations to ADCB’s original acquisition, which had been at a valuation of 2.25 times PB.

“On the assumption that RHB would acquire AmBank, the deal was seen as unfavourable to the latter. With a one times book value, AmBank’s shares after valuation would have been done at maybe 0.8 or 0.7 times. Selling at a discount-to-book value was probably not well received by shareholders,” an industry expert told The Malaysian Reserve (TMR).

But one merger that did see a fairy tale ending was the merger between Malaysia Building Society Bhd (MBSB) and Asian Finance Bank Bhd (AFB). The merger is expected to be completed by the first quarter of 2018.

MBSB in November inked a conditional share purchase agreement with AFB’s shareholders to buy AFB for RM644.95 million, via a combination of RM396.89 million in cash and the issuance of 225.51 million new MBSB shares at RM1.10 apiece.

Its president and CEO Datuk Seri Ahmad Zaini Othman said afterwards that the non-bank lender is expecting to complete the acquisition by February this year.


Datuk Seri Ahmad Zaini Othman

Ahmad Zaini says MBSB is expecting to complete the acquisition of AFB by February this year (Pic by Muhd Amin Naharul/TMR)

The deal would cement MBSB’s status as a fully-fledged bank with AFB’s licence.

Analysts pointed out that should the merger succeed, the enlarged entity will require at least one to two years to realise its growth momentum and to scale up in order to compete with the larger lenders.

More Rules

Going forward, banks will be facing new credit and accounting rules, namely the Malaysian Financial Reporting Standard 9: Financial Instruments (MFRS 9) and the net stable funding ratio (NSFR).

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

Unlike MFRS 139, which is based on the incurred loss model, the new standard requires banks to make provisions for expected credit losses, and analysts predict banks could report lower earnings due to the higher credit costs.

An analyst with MIDF Amanah Investment Bank Bhd said banks will see varying levels of volatility in terms of provisioning, depending on each lender’s loan book exposure.

“With MFRS 9, we can expect some teething problems as lenders need to find models that work for them. There will be some volatility in the first two years, which could see some impact on earnings — though as time progresses, things will normalise,” the analyst told TMR.


PWC Malaysia earlier last year found that provisioning could jump by over 50% for some local banks (Pic: Bloomberg)

Moody’s Investors Service Inc in its recent Asia-Pacific banks outlook report said a moderately negative impact on Malaysian banks’ common equity Tier-1 (CET1) ratio is expected, while a simulation study by PricewaterhouseCoopers (PwC) Malaysia earlier last year found that provisioning could jump by over 50% for some local banks.

Kenanga Investment Bank Bhd (Kenanga IB) and CIMB Investment Bank Bhd have said the new standard would be a major cause for erosion of banks’ earnings, with the latter noting that banks’ 2018 to 2019 net profits could fall by between 1.3% and 8.3% on the assumption that credit costs increase by between 10% and 50%.

UOB Kay Hian Securities (M) Sdn Bhd said industry net profit growth is expected to halve from 13.4% in 2017 to 6.5% in 2018 due to projections for net interest margins (NIMs) to compress in 2018 versus growth last year.

Affin Hwang Investment Bank Bhd also expects impaired loan allowances to gradually rise in anticipation of lesser recoveries in the future, as well as volatility arising from the adoption of the standard.

Furthermore, competition among lenders for deposits is foreseen to increase, with the upcoming NSFR which will be implemented no earlier than Jan 1, 2019.

The NSFR — a liquidity standard which forms part of the Basel III regulatory reforms — 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.

Kenanga IB in an earlier report raised the possibility of banks chasing deposits as a cheaper and easier source of funding, though the delayed implementation of the NSFR would likely ease pressure on banks’ NIMs as the risk of a sharp upward surge in cost of funds diminishes.

Last year, lenders returned to prominence in their profits, but 2018 would again be a year of reckoning.