Foreign banks lose out to local rivals on earnings but they still hold advantage

After the doldrums, the sector is expected to pick up momentum in the second half of next year with a recovery in, among others, oil prices as well as a clear direction on US policies especially on its interest rates

PETALING JAYA: While locally incorporated foreign banks did not see as high earnings growth as their local counterparts in the first quarter of this year, they have some competitive advantage over most of the local boys in the areas of cross-border banking, private banking and wealth management.

TA Securities said this in a recent report prepared for clients stating that collectively, net profit reported by Standard Chartered, HSBC, OCBC Malaysia and UOB Malaysia (UOBM) contracted by 12.4% on a year-on-year basis in the first quarter of 2017 while local listed banks registered earnings growth of 14.1% over the same period.

However, the research outfit noted that rising demand for capital market activities should strengthen opportunities to grow fee income.

“Here, we foresee foreign banks having some competitive advantage over most local banks in the areas of cross-border banking, private banking and wealth management due to their global and regional network and ability to offer a wider suite of products and solutions to their customers,” it said.

The weaker earnings of locally incorporated foreign banks nevertheless were caused by decreases in total income, which contracted for four straight quarters, TA said.

“Non-interest income declined by a further 11.9% year-on-year, after falling by some 20%,” it said.

Average net interest margins (NIM) weakened slightly for Standard Chartered, HSBC, OCBC and UOBM, it added.

In contrast, local banks upheld margins by registering an 11 basis point year-on-year expansion in NIM.

“We believe the stronger margin was also underpinned by the intense efforts by banks to manage assets and liabilities more efficiently.”

Local banks had undergone massive kitchen-sinking exercises in the past few years to counter ballooning costs amid a softer economic environment, resulting in cleaner balance sheets starting some time last year.

CIMB Group Holdings Bhd posted the highest growth in the first quarter of financial year 2017 (1Q17) among local banks with a 45% rise in profitability year-on-year to RM1.18bil. Malayan Banking Bhd’s net profit, meanwhile, grew 19% to RM1.7bil.

The improvement in core earnings of local banks came in mainly due to higher operating income and lower provisions for loan losses.

TA noted that local banks registered their third consecutive quarter of year-on-year increase.

Among locally incorporated foreign banks, UOBM is the largest by asset size with total assets of RM103bil. The bank made a profit of RM291mil for the quarter ended March 31, 2017.

According to TA, UOBM remained upbeat on its outlook for the small and medium enterprises, business and credit card segments, growing each by 8.1%, 9.9% and 7% year-on-year during the quarter.

However, UOBM’s residential loans rose at a less robust pace of some 7% compared to the local players’ 10.9% increase.

Given that the foreign banks’ more customer-centric portfolio, accounting for 55% to 60% of total loans, TA foresees an increase in appetite for foreign banks to shift more resources into the consumer segment in the near future.

Going by recent headlines, there appears to be an increase in commitment by foreign banks in Malaysia and within the region as a whole.

HSBC recently announced that it would be investing RM1.06bil to build its future headquarters in the Tun Razak Exchange (TRX) under its commitment to develop Malaysia as a financial hub in Asean.

Standard Chartered, meanwhile, has also expressed its commitment to help support Asean companies to expand regionally and internationally as trade links and investments expand across the region.