Heightened economic uncertainties drag banks’ 1Q earnings

by S BIRRUNTHA / Pic by TMR

THE Malaysian banking sector has seen weaker earnings for the first quarter ended March 31, 2022 (1Q22), due to an increased global economic uncertainty, exacerbated by the wider impact of the Covid-19 pandemic and the Russia-Ukraine crisis.

Centre for Market Education fellow and UCSI University Malaysia assistant professor of finance Dr Liew Chee Yoong said those factors have fuelled inflation, caused depreciation of the ringgit against other foreign currencies, as well as sent supply shocks that are currently occurring in this country and impacting commodities such as wheat.

“When interest rates increase, companies and individuals have fewer incentives to borrow from banks as the cost of financing increases.  

“They rather put more money in their bank accounts to earn interest income.  

“As a result, the interest income of retail banks is affected as their loan businesses went down. This reduces their net interest margins which ultimately affects their net profits,” he told The Malaysian Reserve (TMR) recently.

Meanwhile, Liew said for the bank’s non-interest income which mainly comes from investment banks, it is lower as these investment banks experience lower underwriting businesses as well as lower corporate advisory services business.  

He noted that in times of inflation and global economic uncertainty coupled with the depreciation of the ringgit, companies tend to spend less on capital investment and advisory services and have fewer incentives to sell securities to public investors for the first time.  

He said this reduces the underwriting revenue of investment banks as well as their advisory services revenue.

“Hence, both the retail and investment banks are negatively affected by all the factors mentioned which explain their poorer financial performance in the 1Q22 compared to 4Q21,” he added.

Liew highlighted that another factor which contributes to weaker banks’ earnings is the one-off Cukai Makmur, which also affected the net profits of the retail and investment banks.

Introduced this year, it is a government tax on the profits of medium and large companies with income above RM100 million.  

“With this tax, medium-sized and large companies tend to borrow less and spend less on capital investment, advisory services and also have fewer incentives to undertake underwriting services from investment banks because they have to pay more taxes.  

“All these reduce the banking sector’s net profits for the 1Q,” Liew said.

Echoing similar views, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid agreed that the extent of economic uncertainties have heightened, which resulted in a weaker performance by most Malaysian banks.

He said this is very much being contributed by external events such as the rise in global interest rates by the major central banks, rising commodity prices following the conflict in Ukraine and the “zero-Covid” strategy in China which overall affects the global supply chain.

“The economic outlook appears to have tilted on the low side and therefore, banks would be more vigilant in their credit underwriting standard.  

“Already, we are seeing the gross impaired ratio gradually rising to 1.57% as of April this year from 1.5% at the end of 2021.  

“Naturally, banks should be mindful in their lending practices,” he told TMR.

Mohd Afzanizam noted that the competitive landscape has also become more intense with barriers to entry from the non-traditional segment becoming lower.  

That would mean the banks must grow their financing assets despite the emergence of new entrants such as the digital banks and fintech.  

However, he said the rise in bond yields would negatively affect their holdings of marketable securities, especially the fixed income instrument as bonds yields and bond prices are inversely related. 

“When the bond yield rises, the bond prices would go down and this will result in mark-to-market losses in the marketable securities holdings by the bank.  

“Perhaps, the equities market is pricing in such dynamics,” he said.

The Malaysian banking sector reported weaker earnings for 1Q22, after being hit by a series of lockdowns and slow economic activity for almost two years.

Malayan Banking Bhd saw its net profit for 1Q22 decline 15% to RM2.04 billion compared to RM2.39 billion recorded a year ago, as geopolitical tensions and market volatility impacted the operating environment.

CIMB Group Holdings Bhd’s net profit for 1Q22 fell 41.93% to RM1.43 billion from RM2.46 billion a year ago, mainly due to one-off non-recurring items booked a year ago and the recognition of Cukai Makmur.

Similarly, RHB Bank Bhd saw its 1Q22 net profit drop 7.69% to RM600.27 million from RM650.29 million due to higher taxes and lower net income.

Public Bank Bhd’s net profit for 1Q22 was down by 8.59% to RM1.4 billion from RM1.53 billion a year ago, dragged by the recognition of the prosperity tax.

Bank Islam’s net profit tumbled 33.3% in 1Q22 to RM105.92 million from RM158.71 million last year on higher net allowance for impairment on financing and advances.

On the other hand, Affin Bank Bhd’s net profit for 1Q22 doubled to RM142.69 million from RM68.94 million a year ago, underpinned by improved net interest income and Islamic banking income. However, the bank’s profit fell 31.02% in terms of quarter-on-quarter.

In a research note on June 7, RHB Investment Bank Bhd maintained its ‘Overweight’ rating on the banking sector, driven by its stable performance in 1Q22.

The research house said while underlying momentum was healthy going into 2Q22, banks struck a cautious tone on business growth and asset quality, reflecting the sector’s relatively defensive attributes and the country’s gradual economic recovery.

“We forecast sector earnings improving by 5.4% year-on-year in 2022, relatively unchanged post-1Q22 results, with return on equity stable at 9.4%,” it noted.