Domestic banking sector to face ‘increasing challenges’ ahead, say experts

Moderating global economic growth will continue to ‘negatively impact business and financial market sentiment’

by NG MIN SHEN/ pic by MUHD AMIN NAHARUL

THE performance of banks is a good barometer of the economy. Two of the country’s major lenders have recently indicated that things may not be as rosy in the economy as they’re often made out to be.

Public Bank Bhd, the country’s second-largest banking group by market capitalisation, on Wednesday warned of “increasing challenges” ahead stemming from “moderating growth of the domestic banking sector and continued interest margin compression”.

“The economic and banking environment has been increasingly challenging (for the first half of 2019 [1H19]),” Public Bank chairman emeritus Tan Sri Dr Teh Hong Piow said in a statement accompanying the bank’s results for the second quarter ended June 30, 2019 (2Q19).

The bank’s net profit fell 4.5% to RM1.33 billion in 2Q19 from RM1.396 billion last year due to the 25 basis point reduction in the Overnight Policy Rate (OPR) in May 2019, which caused overall net interest income to slide 1.5% to RM1.85 billion from RM1.88 billion previously.

Loan growth was positive at 4%, while domestic loans — which comprise over 90% of the group’s total lending portfolio — grew 4.3%.

Teh warned of downside pressure from moderating global economic growth and external headwinds, which will continue to “negatively impact business and financial market sentiment”.

Against this backdrop, the bank will “remain on a cautious stance in growing its business”.

Two weeks earlier, AMMB Holdings Bhd (AmBank) said the cautious stance taken by analysts on banks was “certainly the right one” as external developments — particularly Brexit and US-China trade tensions — have brought “a holdback in terms of investment”.

“Because of that, we see a tapering down in small businesses. Of course, it is better than industry growth, but sentiments are still kind of cautious in terms of the outlook, because we don’t see massive new investments coming in,” AmBank group CEO Datuk Sulaiman Mohd Tahir (picture) said at the group’s post-AGM press conference in Kuala Lumpur.

On the flip side, the country’s sixth-largest bank by assets said it had a positive start to 2019 after loan growth for the financial year ended March 31, 2019, came in at 6% driven by mortgages and loans to small and medium enterprises.

Amid constant reassurances that the domestic economy stands on strong fundamentals, there are worrying signs.

Malaysia’s exports slipped 3.1% to RM76.2 billion in June 2019 from a year earlier on declines in sales of electrical and electronic products and timber products.

Exports climbed 2.5% year-on-year in May on a surge in palm oil shipments. For April, exports rose 1.1%. Coming off last year’s high base effect, these numbers naturally seem small, but one cannot discount the fact that the ongoing US-China trade spat is likely to have played a part in trade declines.

Some economists are also guiding for economic growth to ease going forward, owing mostly to trade disputes. RHB Investment Bank Bhd in a note last month said Malaysia’s real exports are estimated to moderate to a 0.5% growth in 2019 from 2.2% in 2018, therefore the domestic sector must sustain the country’s economic growth in 2H19 as private investment slows on soft business sentiment.

“The trade war is highly uncertain,” said Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid, adding that things are “not good” for the economy and, by extension, banks. He believes fiscal policy has to be expansionary next year in order to support economic growth.

“Monetary authorities have cut their policy rates and they would continue to do so in the near future to support the economy. The impact from monetary policy action would take some time to be felt and, therefore, fiscal policy needs to come forward and do a bit more heavy lifting,” he told The Malaysian Reserve (TMR).

Hong Leong Investment Bank Bhd (HLIB) last stated the outlook on banks remains challenging over the rest of the year, after the sector “got off to a rousing start but quickly lost steam in 1H19”.

HLIB projects sector earnings growth in 2019 to moderate to 2.6% from 7% in 2018, while return on equity will drop to 10% thanks to a faster uptick in net credit cost.

Kenanga Investment Bank Bhd, in a note last month, upgraded the banking sector to ‘Outperform’, citing attractive and undemanding valuations with expectations for topline growth to be hit mildly by the OPR cut, but bottomlines to be enhanced as impairment allowances fall.

The concern now is whether Bank Negara Malaysia (BNM) will cut interest rates again this year in light of trade concerns and global growth slowing.

“The chances of a second rate cut this year are looking higher at this moment based on what’s happening,” AmInvestment Bank Bhd analyst and senior VP of domestic equity Kelvin Ong told TMR recently, pointing out that several Asian central banks have cut rates in the past week or so.

“Before the escalation of trade tensions, we didn’t even think there would be any rate cuts. (Now) the probability for another cut has increased,” MIDF Amanah Investment Bank Bhd analyst Imran Yassin Mohd Yusof told TMR.

“We think if there’s another cut, it would potentially happen next year, (but) now, it all depends on how bad the trade war becomes and whether it spills over into our domestic economy,” he added.

Mohd Afzanizam believes BNM will likely wait for the outcome of FTSE Russell’s review of Malaysian government bonds next month, before deciding on whether or not to reduce the OPR again.

“Otherwise, the coast is quite clear for a cut. We have a low inflation rate and the economy is operating below potential,” he added.