This article first appeared in The Edge Malaysia Weekly on September 5, 2022 - September 11, 2022

FOREIGN banks in Malaysia have been losing market share to domestic banks over the years amid a highly competitive environment, a trend some say is likely to continue.

“In the last 10 years, a noticeable trend is that local banks have been gaining market share at the [expense] of foreign banks, especially in consumer banking — in all areas, including cards, mortgages and personal loans,” says the CEO of a foreign lender, speaking to The Edge on condition of anonymity.

It is a very competitive environment and local banks are increasingly more aggressive, the CEO explains. “There are banks that can do 95% [margin of] financing for a home loan [whereas the normal rate is up to 90%]. It’s not easy to keep up with them. The domestic banks are getting stronger and even more well-capitalised, so it’s not easy to compete.”

Foreign banks’ share of assets in the banking system fell from 22% as at end-2013 to 19% as at end-July 2022, while their share of loans fell from 21% to 17%, according to Bank Negara Malaysia data.

Over the same period, domestic banks saw their share of assets in the banking system increase from 78% to 81%, and share of loans grow from 79% to 83%.

“I expect this trend to continue. Foreign banks will slowly but surely [continue to] lose market share,” the CEO remarks.

This raises the question of whether it may reach a point where some of the foreign banks, especially the smaller ones that do not have the scale to compete as effectively, may eventually choose to exit.

“You never know, it is possible, especially for some of the smaller banks. It’s been tough even for the global banks here … the revenue base is lower but cost is higher and you have to keep investing in technology to compete,” says a senior banker.

In January, US-based banking group Citi agreed to sell its consumer banking business in Malaysia, along with those in Indonesia, Thailand and Vietnam, to Singapore’s United Overseas Bank Ltd. This was part of Citi CEO Jane Fraser’s plan to exit consumer banking in 13 markets in total.

“While the … 13 markets have excellent businesses, we don’t have the scale we need to compete,” Fraser said, in explaining her decision to exit.

Consumer or retail banking is indeed a tough business that requires scale for one to be a competitive player, says Shankar Kanabiran, a financial services advisory partner at EY Malaysia. Domestic banks have an advantage in that they have a wider breadth of products and a wider reach compared with the foreign banks.

“The scale gives them the ability to price the products more competitively,” he tells The Edge.

A senior banking analyst concurs. “Margins on home loans, for example, are very thin. Some of the foreign banks have been very selective in their lending, focusing largely on the affluent segment where they are able to cross-sell other services such as wealth management products. These foreign banks are very return-on-equity-focused and are cautious when it comes to lending, given that loans are capital intensive. Hence, growing for the sake of loan market share is not a priority. There is a strong emphasis on fee income, as opposed to net interest income from lending,” she explains.

“On the other hand, the business strategy for local banks could be different. Loan growth is still a KPI [key performance indicator]. Some local banks are willing to compete aggressively on price to gain market share and business position in a targeted segment,” she points out.

“On the whole, while there is still space for foreign banks to play in the Malaysian market, competition will continue to intensify as local banks also up their game in fee-based products,” she concludes.

Even in the corporate and investment banking space, the big domestic banks, such as Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and RHB Bank Bhd, have been “upping their game” and making their mark, Kanabiran notes.

In January this year, The Edge, citing sources familiar with the matter, reported that the Bank of Nova Scotia Bhd was winding down its operations and would exit Malaysia before year-end, putting an end to its 49-year stint in the country.

The low-key bank, which mainly does corporate banking, had seen its assets dwindle over the years to only RM1.28 billion as at July 31 last year.

National Bank of Abu Dhabi Malaysia Bhd, which set up operations in the country in July 2012, closed six years later in 2018. And The Royal Bank of Scotland Bhd, a profitable entity, wound up its operations in 2016, ending its more than 120-year presence in the country.

In Malaysia, there are currently 26 commercial banks, of which 18 are foreign; and 17 Islamic banks, of which six are foreign (see table).

The notable foreign commercial lenders in the consumer lending space are United Overseas Bank (Malaysia) Bhd with 45 branches in the country, OCBC Bank (Malaysia) Bhd with 31, HSBC Bank Malaysia Bhd with 41 and Standard Chartered Bank Malaysia Bhd (StanChart) with 24.

For perspective, the country’s smallest domestic lender, Alliance Bank Malaysia Bhd, has 79 branches while the largest, Maybank, has 344. (All the number of branches cited are as at end-2021, as per the Association of Banks in Malaysia’s 2021 annual report.)

Meanwhile, the foreign Islamic lenders are Al Rajhi Banking & Investment Corp (Malaysia) Bhd, HSBC Amanah Malaysia Bhd, Kuwait Finance House (M) Bhd, OCBC Al-Amin Bank Bhd, Standard Chartered Saadiq Bhd and PT Bank Muamalat Indonesia, Tbk.

Despite the heat of competition and falling market shares, Kanabiran believes most of the global banks, including the ones from Japan and China, will stay on in Malaysia and operate within their niche. Many are here to support corporates from their home markets in a “follow-the-client” strategy.

“I would say the consumer banking market will probably be dominated largely by the local players; but, in the space of corporate and investment banking, there will still be a role for the foreign banks to play,” he says.

Another banking analyst is of the opinion that as long as the banks are able to make profits, there is no reason for them to leave the market.

Industry observers have often wondered if the two small banks from the Middle East — KFH Malaysia and Al Rajhi Malaysia — will be able to make it over the long term as they have long struggled to make strides in Islamic banking.

Nevertheless, both have owners with deep pockets and have recently shown improvement in numbers. KFH Malaysia posted a net profit of RM73.69 million in 2021 after making losses in the previous two years, while Al Rajhi Malaysia reported a net profit of RM12.1 million last year, reversing a loss in the previous year.

Generally, foreign banks in Malaysia have seen their profits gradually decline over the years.

HSBC Bank Malaysia’s net profit fell from RM1.12 billion in 2013 to RM402.8 million in 2021, while its total assets grew 12.3% over the period to RM89.6 billion in 2021.

StanChart’s net profit declined from RM561.53 million in 2013 to RM135.17 million in 2021, while assets fell by a marginal 0.2% to RM54.26 billion.

OCBC Bank saw earnings fall from RM946 million in 2013 to RM664.29 million in 2021, while assets grew 14.4% to RM93.6 billion in 2021.

UOB Malaysia seems to be the exception, as its net profit grew from RM1.04 billion in 2013 to RM1.14 billion in 2021, even as assets expanded 43.3% to RM128.99 billion.

Of Malaysia’s eight domestic banks, five (Maybank, Public Bank Bhd, Hong Leong Bank Bhd, RHB Bank Bhd and Alliance Bank) saw their net profit increase from 2013 to 2021 (or the equivalent financial years), while all saw an expansion in assets. Only CIMB Group, AMMB Holdings Bhd and Affin Bank Bhd saw their net profit falling over that period.

A point to note, however, is that almost all of the domestic banking groups underwent major transformations over those years — involving acquisitions, disposals and restructuring — which may have had an impact on profit.

Maybank’s net profit rose from RM6.55 billion in 2013 to RM8.1 billion in 2021, even as assets expanded 58.5% to RM888.17 billion. Public Bank, the third largest lender by assets, saw net profit increase from RM4.06 billion to RM5.66 billion over the same period, as assets grew 51.4% to RM462.74 billion.

Alliance Bank, the smallest domestic bank, saw profit increase from RM563.55 million in the year to March 31, 2014, to RM572.82 million in the year ended March 31, 2022, and an asset expansion of 28.7% to RM61.85 billion.

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