This article first appeared in The Edge Malaysia Weekly on October 31, 2022 - November 6, 2022

BANK Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), the country’s largest development financial institution (DFI), looks to be putting the brakes on the growth of its personal financing (PF) business, which has for years been its mainstay.

The Islamic lender, which only recently released its financial results for the second quarter of the year ending Dec 31, 2022 (2QFY2022), saw the PF business — which makes up 74.3% of its overall financing — come in at RM59.01 billion.

This represents a year-to-date (YTD) decline of 1.5%, even as personal loans/financing in the banking system grew 1.6% over the same period. In FY2020, Bank Rakyat’s PF business saw sizzling year-on-year growth of 6.9% — the strongest in six years — before a more tepid 0.9% in FY2021.

Bank Rakyat is by far the biggest player among banks in the personal loans/financing space. For perspective, the Malaysian banking system’s personal loans/financing stood at RM107.23 billion as at end-August, which suggests that Bank Rakyat’s market share — with its portfolio of RM59.01 billion — is a sizeable 55%.

It is understood that the bank wants to slow down its PF segment, while growing other segments like home financing, vehicle financing and the small and medium enterprise (SME) business, in a bid to diversify its income base.

This is necessary for Bank Rakyat’s long-term growth, industry observers say, pointing out that the lender has for too long been reliant on providing PF to civil servants, many of whom are already highly leveraged. The bulk of its lending is to civil servants.

In its latest annual report, Bank Rakyat made mention of its effort to control PF growth at “under 1% a year” as it is taking steps to diversify into other areas. It also said that it wants to broaden its customer base by diversifying into other segments, namely the private sector and non-fixed income earners.

Chairman Datuk Abd Rani Lebai Jaafar highlighted that the bank’s completion of 10 new SME and cooperative business centres (SMEC) nationwide in 2021 was part of the bank’s “diversification strategy away from being over-dependent on retail financing”.

“This ensures Bank Rakyat is on track with the target of an outstanding balance of over RM7 billion for total SMEC financing by 2025, with about RM3 billion achieved as [at] 2021,” he said in the annual report.

Analysts that The Edge spoke to said it was good for the bank to diversify into other areas for growth, noting also that the slow move away from PF comes amid growing economic headwinds that could lead to more problematic loans in that space.

As it is, of consumer loans in the banking system, the gross impaired loan (GIL) ratio is highest for personal loans, at 2.72% as at end-August, compared with residential property (1.35%), credit card (0.89%) and vehicle financing (0.58%).

“On the flip side, though, Bank Rakyat’s unsecured PF business is a relatively safe one [given the automatic monthly salary deductions for civil servant customers], so pivoting to secured loans like mortgages would mean lower returns for the bank,” says one analysts, pointing out that personal loans tend to have the highest yields in the retail banking space.

Given the automatic salary deductions for civil servants, the GIL ratio for Bank Rakyat is relatively low at 2.01% as at end-June — but it has moved up from 1.7% as at the end of last year. It is only in the rare event that a civil servant loses or changes his/her job, or dies, that problems may crop up.

It is not known to what extent the bank’s financing is currently under repayment assistance. As at 1HFY2022, the group had grown its home financing segment by 5.4% YTD to RM8.84 billion and its hire purchase segment by 4.7% to RM2.01 billion. In fact, all its lending segments were higher except for PF, pawnbroking and revolving credit.

To be sure, Bank Rakyat is no small bank. With assets of RM116.41 billion, it is the second-largest Islamic lender after Maybank Islamic Bank (RM272.56 billion) and is nearly twice the size of the country’s smallest banking group Alliance Bank Malaysia Bhd (RM63.13 billion). YTD, its assets have grown by a marginal 1%.

Bank Rakyat’s net profit grew 34.3% y-o-y to RM557.49 million in 2QFY2022 on the back of lower allowance for impairments, which dropped 20.7% to RM178 million. Net income fell slightly by 1.9% to RM865.69 million as expenditure grew 3.5% to RM559.14 million. Quarter on quarter, net profit grew a substantial 49.8% from RM372.19 million.

Its cumulative net profit for the six months to date grew 6% to RM929.68 million as allowance for impairments fell 15.2% to RM358.13 million and operating expenditure fell 7.4% to RM678.79 million. Net income declined 3.4% to RM1.73 billion. Its gross financing grew 2% y-o-y to RM79.36 billion.

In FY2021, Bank Rakyat achieved a 35% increase in net profit to RM1.86 billion, its highest since FY2017 (RM1.91 billion). Almost 70% of its portfolio is made up of floating-rate financing, which indicates that the group should benefit from a rising interest rate environment.

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