Wednesday 31 May 2023
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This article first appeared in The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022

AFTER two difficult years of dealing with Covid-19-related issues, Malaysian banks are likely to do better this year on the back of a recovering economy, a potential hike in interest rates and lower provisions.

However, analysts expect the sector’s net profit to improve only slightly from last year owing mainly to Cukai Makmur, the one-off prosperity tax that the federal government introduced last November under Budget 2022.

Maybank Investment Bank (Maybank IB) Research sees the sector’s net profit growing 2.5% this year — it would have been 10% without Cukai Makmur — before rebounding by a stronger 18% in 2023.

Most economists expect Bank Negara Malaysia to raise the overnight policy rate by at least 25 basis points this year, which will help boost lenders’ net interest margins (NIMs).

But the timing of any such hike will be equally important, says a banking analyst.

“If [Malaysian government] bond yields continue to move up before there is any move in interest rates, then you’re going to find that banks will have to mark-to-market their investment portfolios and that will give rise to investment [marked-to-market] losses,” the analyst points out.

As it stands, most research houses, including Maybank IB Research, CGS-CIMB Research, RHB Research and AmInvestment Bank Research, continue to have a positive investment recommendation on the banking sector. “Banks remain the best proxy for an economic recovery and a key beneficiary of higher interest rates,” RHB Research analysts Eddy Do and Fiona Leong said in a report last week.

Here are five things to look out for that may have an impact on or pose a challenge to banks this year.

1. Continued support for borrowers

Banks will likely continue to offer repayment assistance to borrowers who need it, on a case-by-case basis, once existing relief measures expire.

“I think banks will definitely continue to extend support — that’s not the issue. But whether they let you have your credit status frozen — like for those under the Pemulih programme — or whether they only give you a reduced instalment rather than a moratorium on payment, that’s really up to the bank. The reality is that, if economic conditions don’t improve, there is a risk that financial aid will have to continue,” a banking analyst remarks.

From July 7 last year, banks extended a six-month moratorium to individuals and small businesses on an opt-in basis. This relief came under the government’s Pemulih stimulus package aimed at helping those affected by the pandemic.

Since then, banks have also come up with a programme known as Urus that extends help to troubled borrowers in the bottom 50% income group (B50). The deadline for applications for this assistance, which started Nov 15, is the end of this month.

“I think banks will be willing to continue extending repayment assistance on a case-by-case basis. It could be a win-win situation in the long run. From a bank’s perspective, repayment assistance could hurt NIMs over the short term and there is also a modification loss incurred. But if over the long run it prevents the formation of a non-performing loan (NPL), then it is a good thing. The impact on a bank’s earnings would be larger if an NPL occurs,” Tushar Mohata, Nomura Malaysia’s head of equities research and banking analyst, tells The Edge.

The main concern that analysts have for banks is if there is another prolonged lockdown in the country. If this happens — although it is not the scenario currently anticipated — then large-scale repayment assistance programmes may be imposed on banks, which would be detrimental for banks’ earnings.

Meanwhile, banks are expected to have a clearer picture of their impaired loans position in 1Q2022, as that is when repayment trends from the Pemulih programme can be assessed. “It will be interesting to see what is the extent of loans that fall into Stage 2 or 3 [of their provisioning model],” Mohata remarks.

2. Issuance of digital bank licences

Bank Negara, which received 29 applications for digital banking licences last year, is expected to announce up to five successful recipients sometime this quarter. The emergence of such new banks, which are supposed to focus only on the underserved and unserved segments, could potentially jolt the industry.

From a share price and news-flow perspective, this is something to closely monitor, say analysts.

“If any of the incumbents win, it will be interesting to see what their strategy might be, and it may be positive for their share price as well. If some of the non-incumbents — say, well-known global technology players — win, then of course it will raise concerns about what the competition dynamics in the sector will be like once their digital banks are launched,” says Mohata.

RHB Bank Bhd, AEON Credit Service (M) Bhd, MIDF Bhd and RCE Capital Bhd are among the financial institutions that have applied for a digital bank licence, each as part of a consortium.

3. Digital acceleration and investments

Meanwhile, with the impending issuance of the digital banking licences, competition will likely  intensify and traditional banks are expected to ramp up their own digital game. This includes making digital investments to improve customer experience, turnaround time and productivity, says Elaine Ng, PwC Malaysia’s financial services leader.

This is seen as necessary as the entire banking industry is experiencing a shift from a product-centric mindset to one that is more focused on customer experience.

Ng notes that banks are planning to boost their spending on cybersecurity and data privacy by introducing new technologies, or making their cybersecurity strategy work harder for them.

“The cyber threat landscape is increasing in complexity as cybercrime tactics are getting more advanced,” she tells The Edge. According to PwC’s 2022 Global Digital Trust Insights survey, which polled the C-suite of various industries, including financial services, 25% of those in the Malaysian C-suite expected an increase in their cyber budget by 6% to 10% in 2022.

4. Moving ESG up the agenda

Given pressure from investors and regulators, it is inevitable that banks will have to pay more attention to ESG (environmental, social and corporate governance) factors and sustainability-related issues. Most of the big banks already have in place ESG strategies and commitments, including phasing out lending to controversial sectors like coal, but there is still much more to be done.

PwC’s 2021 survey on ESG readiness among Malaysian banks indicates that banks are stepping up in their ESG journey but there is still room for improvement as the level of ESG integration into the business varies across banks. Fifty per cent of the respondents (local banks) have adopted Bank Negara’s Climate Change and Principle-based Taxonomy (CCPT), while the remaining 50% plan to adopt the CCPT in the next two years. Sixty-four per cent of banks plan to adopt the Task Force on Climate-related Financial Disclosures in the next two years.

Ng notes that navigating Bank Negara’s CCPT in particular has its complexities, ranging from absence of client data or information and challenges in translating principles-based guidelines into practice, to difficulty in measuring indirect environmental impact and a lack of ESG expertise.

“Based on our study, a few options are worth considering for Malaysian banks. These include setting a science-based target or net zero strategy in alignment with their corporate strategy, and establishing an ESG risk management framework comparable to established frameworks for financial risks. Banks can consider incorporating ESG factors into risk rating models and frameworks for credit assessment decisions, and addressing data gaps to accurately reflect their exposure to climate risk,” she says.

5. Building trust

Finally, banks will have to try harder to gain customers’ trust while evolving through digitalisation and striving for a greater focus on non-financial performance indicators such as ESG metrics.

Trust will continue to be at a premium, notes PwC’s Ng.

“The challenge for banks is to ensure that their growth strategy is closely aligned with their purpose and their wider role in promoting financial inclusion in the community. Championing trust goes a long way when consumers can visibly see how banks respond to pressing societal issues, including financing the green economy and supporting causes that protect the marginalised groups in society,” she says.


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