Banks see tough 2020


  • Banking
  • Monday, 18 Nov 2019

PETALING JAYA: With the prolonged US-China trade war and global growth moderating across developed and emerging economies, coupled with geopolitical tensions, the banking sector as a bellwether of the Malaysian economy is not being spared from a tough 2020.

Bankers are bracing for challenges in the sector from these headwinds, which may translate into slower or flattish loan growth, net interest margin (NIM) compression and the risk of deteriorating asset quality.

MALAYAN BANKING BHD (Maybank) group president and CEO Datuk Abdul Farid Alias told StarBiz that the outlook for 2020 would be very much dependant on whether the various global geopolitical uncertainties would stabilise, or if they would continue to be volatile as in 2019.

An amicable resolution to some of these major issues, such as the US-China trade war, would help provide much-needed confidence to global markets and support overall trade growth, he added.Datuk Abdul Farid Alias, Group President & CEO of MaybankDatuk Abdul Farid Alias, Group President & CEO of Maybank

“Our expectation for Malaysia’s gross domestic product (GDP) growth for 2020 is 4.4%, which is similar to our projected growth for 2019. In this regard, we expect the operating environment for 2020 to be similar to that of 2019.

“Given this outlook, the bank will continue to prioritise liquidity and capital strength to ensure we can navigate through the continued challenging landscape, while at the same time leveraging on the opportunities that are present or will arise, particularly in this region.

“As always, we will also remain disciplined in pricing and focus on growing responsibly in targeted segments we identify with continued emphasis on good risk management and ensuring operational efficiency, ” Abdul Farid said.

Bank Negara is maintaining its GDP growth projection of between 4.3% and 4.8% for 2019. The central bank did not at this juncture made an official forecast for 2020.

CIMB GROUP HOLDINGS BHD CEO Tengku Datuk Seri Zafrul Aziz anticipates the challenging environment for the banking sector to continue into 2020 due to the impact of the sustained trade war on the domestic economy, the possibility of an overnight policy rate (OPR) cut and the risk of asset quality deterioration in the face of a potentially weaker economic environment.

The OPR was maintained at 3% at Bank Negara’s recent meet on Nov 5.

To ride out and compete in the tough banking environment next year, Tengku Zafrul added that the bank would continue its operational recalibration and future-proof initiatives under its Forward23 growth strategy.

This includes focusing on cautious loan growth in selected segments like SMEs, residential mortgage and hire-purchase.

“As per 2019, CIMB will remain in investment mode in 2020 to strengthen its digital capabilities, resilience and competitiveness to achieve its Forward23 objectives by 2023, ” he noted.CIMB Group Holdings Bhd group CEO Tengku Datuk Seri Zafrul AzizCIMB Group Holdings Bhd group CEO Tengku Datuk Seri Zafrul Aziz

Expressing his views and concerns on the broader picture, RHB Banking Group managing director Datuk Khairussaleh Ramli said global growth is moderating, with the slowdown becoming more synchronised across both the advanced and emerging economies.

Geopolitical tensions, policy uncertainty and unresolved trade disputes remain headwinds that would weigh on the global growth outlook, he said.

“The weak global trade is beginning to affect domestic demand, particularly investment activity. Prolonged global policy uncertainty would suppress recovery in investor sentiment. Overall, these headwinds suggest that the banking sector may see another year of subdued slow topline growth in 2020.

“On the flip side, positive progress in US-China trade talks would help improve global economic activity, and in turn would spur demand for banking and capital market activity, ” Khairussaleh added.

To face the upcoming challenges and hurdles in 2020, he said RHB’s five-year strategic roadmap, FIT22, which was launched in 2017, has shown good progress.

Towards this end, he stressed that the banking group would continue to stay focused on three key areas. Elaborating on these key areas, he said firstly, it would be by strengthening the group’s Malaysian franchise by focusing on targeted segments.

Secondly, it would involve building an overseas business that is positioned around the strengths of the group, and lastly, building a future-ready operating model that prioritises customer experience, agility, analytics and digital enablement.

“Our business investments for 2020 will to a large scale dovetail with our FIT22 strategic roadmap, ” Khairussaleh emphasised.Datuk Khairussaleh Ramli RHB Group managing directorDatuk Khairussaleh Ramli RHB Group managing director

Meanwhile, analysts are projecting a loan growth of between 4% and 5% for this year, and some expect it could trend slightly lower or remain flattish for 2020, depending on how the external headwinds impact the domestic economy.

Loan growth for September 2019 moderated to 3.8% year-on-year (y-o-y) from 3.9% y-o-y in August this year. On the whole, the pace of growth in loans has slowed by more than half in the nine months of this year alone.

As for the sector’s loan growth, Tengku Zafrul said that at the current juncture, he expects loan growth next year to be close to 2019 levels, in line with the relatively robust domestic economic expansion, which would be partially offset by the continued global trade uncertainty.

Without elaborating further, he noted that he expected CIMB’s 2020 loan growth to be close to 2019 levels, in line with the banking industry’s growth.

RHB’s Khairussaleh said on the whole, he anticipated system loans to grow 4% y-o-y in 2019, and remain stable at 4% y-o-y in 2020.

“Growth in 2020 would be supported mainly by the household sector, particularly lending for the purchase of residential property. Loan demand from businesses is expected to remain subdued but stable, ” he added.

On NIM and return on equity (ROE), he said the NIM prospect for 2020 is largely dependent on the interest rate outlook. There is a possibility that Bank Negara would lower the OPR by another 25 basis points (bps) in the first half of next year. This would exert downward pressure on banks’ margins, Khairussaleh said.

“Given the challenging environment, banks would thrive hard to sustain ROE. Efforts would be made to improve fee income, boost productivity and efficiency, and strengthen asset quality, apart from capital management activities, ” he noted.

ROE is a ratio that provides investors with insight into how efficiently a company is handling the money that shareholders have contributed to it. In other words, it measures the profitability of a corporation in relation to stockholders’ equity.

Tengku Zafrul said he expected ROE to be relatively flat or slightly improved in 2020 for the industry, premised on continued economic growth and the central bank’s supportive policies.

NIM is expected to stay relatively flat or marginally lower, depending on the impact of any further potential OPR movements in 2020, he added.

As for the risk of a deterioration in asset quality or the gross impaired loan (GIL) ratio next year, Tengku Zafrul said: “There are expectations that the Malaysian sector GIL may rise in 2020 in view of the continued negative impact from the global trade tensions.

“However, it has remained well under control thus far, which suggests that any deterioration may be minimal, in view of the high consumer savings levels and low corporate leverage.”

Elaborating on the GIL prospect, Khairussaleh said with no systemic risks in sight and the domestic economy expected to be relatively stable in 2020, he believed asset quality would remain resilient.

The key thing is to be able to assist businesses and borrowers to see through any challenging period if required until such time that the macro environment and their business fundamentals improve, he said.

For the first nine months of 2019, the banking system GIL ratio was up 11.6%, with the increase coming mainly from the manufacturing, agriculture and household sectors. System GIL ratio remained benign at 1.61% as at end-September, albeit higher than the 1.48% of December 2018. Loan loss coverage was still at a comfortable level of 89% in September 2019.

Both Tengku Zafrul and Khairussaleh do not foresee mergers and acquisitions in the sector in 2020. Khairussaleh said, “We believe that banks would focus on organic growth and build resilience in their business operations next year.”

RHB’s Khairussaleh said on the whole, he anticipated system loans to grow 4% y-o-y in 2019, and remain stable at 4% y-o-y in 2020.

“Growth in 2020 would be supported mainly by the household sector, particularly lending for the purchase of residential property. Loan demand from businesses is expected to remain subdued but stable, ” he added.

On NIM and return on equity (ROE), he said the NIM prospect for 2020 is largely dependent on the interest rate outlook. There is a possibility that Bank Negara would lower the OPR by another 25 basis points (bps) in the first half of next year. This would exert downward pressure on banks’ margins, Khairussaleh said.

“Given the challenging environment, banks would thrive hard to sustain ROE. Efforts would be made to improve fee income, boost productivity and efficiency, and strengthen asset quality, apart from capital management activities, ” he noted.

ROE is a ratio that provides investors with insight into how efficiently a company is handling the money that shareholders have contributed to it. In other words, it measures the profitability of a corporation in relation to stockholders’ equity.

Tengku Zafrul said he expected ROE to be relatively flat or slightly improved in 2020 for the industry, premised on continued economic growth and the central bank’s supportive policies.

NIM is expected to stay relatively flat or marginally lower, depending on the impact of any further potential OPR movements in 2020, he added.

As for the risk of a deterioration in asset quality or the gross impaired loan (GIL) ratio next year, Tengku Zafrul said: “There are expectations that the Malaysian sector GIL may rise in 2020 in view of the continued negative impact from the global trade tensions.

“However, it has remained well under control thus far, which suggests that any deterioration may be minimal, in view of the high consumer savings levels and low corporate leverage.”

Elaborating on the GIL prospect, Khairussaleh said with no systemic risks in sight and the domestic economy expected to be relatively stable in 2020, he believed asset quality would remain resilient.

The key thing is to be able to assist businesses and borrowers to see through any challenging period if required until such time that the macro environment and their business fundamentals improve, he said.

For the first nine months of 2019, the banking system GIL ratio was up 11.6%, with the increase coming mainly from the manufacturing, agriculture and household sectors. System GIL ratio remained benign at 1.61% as at end-September, albeit higher than the 1.48% of December 2018. Loan loss coverage was still at a comfortable level of 89% in September 2019.

Both Tengku Zafrul and Khairussaleh do not foresee mergers and acquisitions in the sector in 2020. Khairussaleh said, “We believe that banks would focus on organic growth and build resilience in their business operations next year.”

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