Lenders’ growth to moderate amid gloom

Experts forecast the industry loan growth to stay flat at around 5% to 6% this year


AFTER a tricky and rollercoaster 2018, local lenders are expected to post moderate growth amid the flattening economic prospect, higher inflationary pressures, global geopolitical concerns and the competition from financial technology (fintech).

Most local banks performed within expectations in the first nine months of last year. Major banks recorded improved growth for the quarter ended Sept 30, 2018, despite economic and financial uncertainties at home and abroad.

For the July-September 2018 period, six of the eight largest banking groups posted higher earnings except for Malayan Banking Bhd (Maybank), which was affected by global volatility.

Public Bank Bhd recorded a higher net profit in the same quarter in 2017 due to a one-off gain.

The absence of large corporate mergers, acquisitions and fundraising activities hit lenders’ non-interest income — previously a substantial source of revenue, especially for lenders with a strong corporate and investment division.

Analysts believed that non-interest income at large banks was affected by market volatility and domestic corporate activity, which eased in the first half of 2018 as the corporate sector waited for the outcome of the 14th General Election (GE14).

Sentiment has somewhat recovered after GE14, but the cautious mood could spill over into 2019 as policies continue to fluctuate under the Pakatan Harapan administration. Global trade tensions remain to be a dampener to corporate growth.

While investment income, trading income and investment banking income could remain challenging for all banks, lenders are expected to record decent earnings as long as operating expenses and provisions are kept in balance and asset quality does not deteriorate.

Experts are anticipating the industry loan growth to stay flat at around 5% to 6% this year as residential mortgages moderate on a slow-moving property sector, while uncertainties in the external environment weigh on operating conditions.

Maybank Investment Bank Bhd and CIMB Investment Bank Bhd have maintained their ‘Neutral’ recommendations on the banking industry, while AmInvestment Bank Bhd is keeping its ‘Overweight’ stance on the sector.

Meanwhile, Bank Negara Malaysia (BNM) is unlikely to raise interest rates this year amid moderating economic growth and expectations for inflation to increase going forward.

The central bank recently lowered its GDP projection for 2019 to 4.9% from 5% previously on continued re-prioritisation of public sector spending, while the downturn in the electronics cycle may also impact Malaysia’s exports.

GDP growth in the first three quarters of 2018 was also affected by commodity supply shocks.

Annual average headline inflation, which BNM has projected to be lower at 1.5%-2.5% in 2018 (versus 3.7% in 2017) on stable domestic fuel prices and the zero-rating of the Goods and Services Tax, is expected to be higher this year at between 2.5% and 3.5%.

Aside from higher projected global oil prices and the prospective floating of domestic fuel prices in 2019, the reimplementation of the Sales and Services Tax in September last year is also set to contribute to higher inflation this year.

The US Federal Reserve (Fed), which recently increased rates for the fourth time last year, has also indicated a more dovish stance in 2019.

A slower pace of Fed rate hikes would ease foreign-exchange selling pressure in the region, thus leaving little reason for central banks to raise domestic rates.

In the meantime, banks should benefit from the deferred implementation of the Net Stable Funding Ratio (NSFR) to 2020.

Last October, BNM said it would extend the observation period for the NSFR to 2020 to allow for further assessment of local banks’ liquidity and funding practices amid uneven progress in global implementation of the standard.

The NSFR — a liquidity measure that requires banks to focus on longterm stable funding — had previously been set for implementation after Jan 1 this year, although no specific date was given.

Had the measure been set for implementation in 2019, competition among lenders for retail deposits would likely increase.

On the fintech side, traditional lenders could see further disruption going forward, as there appears to be no slowdown in the tide of technological advancements.

E-wallet usage is on the rise, with local players such as Boost and Grab- Pay becoming increasingly available across merchant networks, while major banks have also rolled out their own e-wallets or collaborated with third parties to build one.

On Dec 17, local banks launched DuitNow — a method of money transfer that utilises customers’ mobile phone numbers — in one of many moves towards becoming a cashless society.

Recall that BNM’s Interoperable Credit Transfer Framework took effect on July 1 last year, essentially allowing the transfer of money to and from digital wallets and banks by referring to a mobile phone number, identification number or quick response code.

As long as the traditional financial providers are able to adapt to and move with the times, there is no real reason for them to be left behind in the future.