Banks primed for continued growth

By NG MIN SHEN / Graphic By TMR

Local banks are expected to continue seeing growth this year, with corporate lending demand to drive loan growth although competition for deposits could challenge the resilience of funding profiles.

According to credit rating firm Moody’s Investors Service in its “Banks — Malaysia: 2017 Foresees Asset Quality Stabilise, Profits Improve” report, most banks driven by steady revenue growth, stable net interest margins and a moderation in credit costs showed better profitability last year.

These favourable conditions should continue going forward, especially with the ongoing digital transformation efforts to support stronger revenue growth, as well as cost efficiencies.

The report also said banks’ asset quality, both domestically and regionally, will benefit from stronger macroeconomic conditions this year.

Moody’s VP and senior analyst Simon Chen said the six banks covered in the report showed better asset quality and profitability in 2017, while their capitalisation and funding remained adequate.

He added that lenders with exposure to the oil and gas sector should also see their asset quality stabilising on stronger oil prices.

“We anticipate the loan demand to recover further in 2018, which will not only strengthen profitability but also tighten funding conditions. As a result, profit growth among banks with weaker deposit franchises could be limited by higher funding costs,” he said.

The impaired loan ratios of most banks remained stable during the previous year, despite the fact that banks with sizeable operations in other parts of South-East Asia recorded higher gross impaired loan ratios due to asset quality issues among commodity-related corporate borrowers.

Loan growth, however, is anticipated to rebound in 2018, underpinned by greater demand for corporate loans and stable consumer lending.

These developments along with stable net interest margins should drive bank profits going forward.

Loan-to-deposit (LDR) ratios due to sluggish loan growth fell slightly for most lenders last year, although Moody’s expects them to rise this year when loan growth recovers.

“Most banks target to cap LDR ratios below 100%. This suggests that while their reliance in short-term wholesale funding will remain low, competition for customer deposits is likely to rise and push up funding costs of banks with weaker deposit franchises,” it said.

Overall credit costs will increase slightly, largely from higher credit charges required under the Malaysian Financial Reporting Standard 9 (MFRS 9), which came into effect on Jan 1, 2018.

Capital ratios also increased last year from muted growth in risk-weighted assets, dividend reinvestment plans, as well as risk-weighted asset optimisation initiatives undertaken by some players.

Although the banks will generally be able to support their balance sheet growth through steady retained earnings in 2018, some have estimated that the implementation of MFRS9 will result in a 20 to 80 basis points drop in their common equity tier 1 ratios.

The six banks analysed in the report are Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and AmBank (M) Bhd.