What’s in store for banks – Business News


WITH predictions of slower economic growth this year, banks, which are often seen as proxies to the economy, will all have to deal with similar issues of lethargic loan growth, rising credit costs and compressed profit margins.

That said, what will distinguish the more interesting ones from the business-as-usual outfits this year are those premised on possible merger and acquisition (M&A) exercises.

In that vein, industry observers point out that the larger banks such as Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and RHB Bank Bhd generally fit the bill of being the predator mostly due to their size, while the country’s three smallest banks – Affin Bank, Alliance Bank and AmBank – are seen as likely prey, for the same reason.

The other two of the eight main commercial banking groups – Public Bank Bhd and Hong Leong Bank Bhd – are the ones that have yet to court or be courted in recent times.

In the case of Public Bank, its high valuations make it difficult to be swallowed up.

Based on its last traded price of RM20.78 per share, Public Bank is trading at a massive 2.3 times price-to-book, making it the most expensive bank in the country.

Consolidation within the banking industry is nothing new and it’s no secret that the central bank supports further mergers within the industry.

Recall, following the effects of the Asian financial crisis in the late 1990s, Bank Negara had called for a consolidation of the country’s then almost 60 financial institutions, of which over 20 were local commercial banks.

In the current scenario, there is a possibility of Alliance Bank merging with Affin Bank, as they are very small banks, observers say.

Farid: To protect our margins, we will seek to gain larger shares of low-cost funding.

Farid: To protect our margins, we will seek to gain larger shares of low-cost funding.

“They will eventually feel the pressure to merge, given the market forces,” says an observer.

Additionally, Affin Bank is controlled by the Armed Forces Fund Board, which is known to want to cast its net wider in the banking field.

Bankers, meanwhile, agree with the notion that there could be some form of consolidation this year between the smaller banks.

CIMB group CEO Tengku Datuk Seri Zafrul Aziz Abdul Aziz says CIMB, the country’s second-largest lender by asset size after Maybank, is not looking at buying or merging with other banks in Malaysia.

“I don’t see any good opportunities, given our position in Malaysia today. Consolidation between smaller banks, perhaps,” he tells StarBizWeek.

Last year, merger talks between RHB Bank and AmBank dominated the banking circuit, but in the end, discussions fell through after the parties could not agree on some terms.

That was RHB’s second failed attempt at a merger, following its proposed three-way mega merger with CIMB and Malaysia Building Society Bhd back in 2015, which also did not materialise.

More recently, Islamic banks like Bank Islam Malaysia Bhd were also reportedly in talks to merge with smaller rival outfits like Bank Simpanan Nasional and Bank Muamalat Malaysia Bhd.

“An M&A will definitely be a good catalyst for banking stocks, especially those which have started to look a bit dull after enjoying a good run-up for the past year,” an analyst says.

Hong Leong Investment Bank (HLIB) has an alternative view.

In its report to clients, it says it believes “the slew of (recent) M&A news will not encourage a next round of M&As in the near term”.

“Banks will have their hands full with various regulations to be met this year and next year, namely, the MFRS9 and NSFR that will likely impact bank earnings.

“In the current environment of prioritising cost efficiencies, we believe banks are looking for a leaner operating cost structure,” it says.

Competition to offset higher NIMs

This year, predictions are for industry loans to grow by some 4% to 5%, slightly above 3.9%, which was the total loan growth as of November 2017.

In 2016, total industry loan growth was at 4%.

With a minimal loan growth expected alongside other factors, fund managers are not particularly enthusiastic about banking stocks.

Thomas Yong, fund manager at Fortress Capital, is neutral on Malaysian banks for now.

“Net interest margins (NIMs) will expand due to an expected hike in the overnight policy rate (OPR), as loans are repriced faster than deposits, but will partially be offset by continued competition for deposits and negative impact on loan demand.”

Loan growth is likely to stay muted at 4% to 5%, he adds, due to a still-elevated level of domestic indebtedness at the corporate and household level. 

Additionally, there is a potential rise in credit cost upon the adoption of new accounting standard MFRS 9 this year, which requires banks to set aside higher provision amounts for expected bad loans.

Sulaiman: This promising development is primarily due to our focus to drive growth in the SME segment.

Sulaiman: This promising development is primarily due to our focus to drive growth in the SME segment.

Banks, Yong adds, currently form a “low single-digit percentage” of his entire investment portfolio.

Danny Wong, fund manager at Areca Capital, is a little more positive, saying that from a macro point of view, he is positive on the banking sector, which is riding on an economy which is still growing.

Wong, who also counts a lethargic loan growth and the MFRS 9 which kicked in this year as challenges for banks, says he has Maybank shares now “for a defensive portfolio”.

“I will add more banks, but only if the valuations are right.”

Strategies for the year

Meanwhile, it’s business as usual for the lenders.

Maybank group president and CEO Datuk Abdul Farid Alias says the bank intends to remain focused on driving income growth via selective asset growth in both consumer and business/corporate lending this year,

“We see key loan growth drivers to be in infrastructure-led projects, the affordable housing segment and the SME business. To protect our margins, we will seek to gain larger shares of low-cost funding,” he tells StarBizWeek.

Specifically for Maybank Malaysia, Farid says the lender will focus on pockets of opportunities within the consumer, retail SME and corporate lending segments.

Teh: The bank will remain focused on its organic growth strategy in the retail banking business.

Teh: The bank will remain focused on its organic growth strategy in the retail banking business.

“In Singapore, we will seek to build on our wealth-management services, expand on Islamic offerings by providing alternative financing solutions to customers, deepen cross-sell and expand digital banking solutions to enhance customer experience.”

As for its Indonesian market, Farid says Maybank intends to expand fee income streams through structured products and e-channel transactions, improve cross-sell, sharpen margins for higher-yielding NIM products and target corporate lending growth among top-tier clients.

Public Bank’s founder and chairman Tan Sri Teh Hong Piow says: “The bank will remain focused on its business model, which is driven by an organic growth strategy in the retail banking business.”

On the financing business, it is looking to further grow its core business in the consumer and SME lending segments while growing fee-based income, particularly the unit trust and bancassurance business which will also remain a key focus in charting the group’s business strategy, Teh tells StarBizWeek.

That said, the veteran banker adds that Public Bank will remain agile to the evolving operating environment and will tap on technology as an enabler to expand its banking business.

For AmBank, group CEO Datuk Sulaiman Mohd Tahir says the bank, currently the third smallest of the eight banks, is focusing on growing its current account, savings account or CASA for short, to 27% from the current 21% through various initiatives, including focusing on transaction banking.

According to him, the bank has seen some “green shoots” from its Top 4 strategy introduced last year and is “on track to deliver tangible results as it moves forward with its initiatives”.

“In the first half of financial year 2018, our priority banking customer base grew by 44%, while our mass affluent customer base increased by 28%.

“We made significant inroads in terms of driving CASA penetration across key segments and merchants. Our CASA composition in 2017 stood at 21% and we were able to do this despite the fact that deposit growth was trending downward in Malaysia,” he tells StarBizWeek.

The priority segment recorded over a 100% growth, mass affluent 23% and retail SME 29%, while business banking grew 14%.

“This promising development is primarily due to our focus to drive growth in the SME segment in line with our Top 4 strategy,” Sulaiman adds.

“We also recorded an encouraging 9.9% growth year-on-year in net interest income supported largely by customer lending from our core target segments, namely, mortgages and SME.”

Moving forward over the next two financial years, it targets a return on equity (ROE) of approximately 10% and for its cost-to-income ratio to come in at 55% and below. As for loans, it expects growth to be on par with industry expectations.

In the case of CIMB, Tengku Zafrul told a press conference earlier this week that the group would focus on growing its new markets of Vietnam and the Philippines this year.

The initiatives would include going digital in Vietnam and establishing a bank in the Philippines by the third quarter of 2018.

CIMB also aims to complete its China Galaxy stockbroking joint venture by the third quarter of this year.

The group, Tengku Zafrul said, would finalise a new target plan by the fourth quarter of this year, following the conclusion of T18 – its medium-term business strategy which started out in 2015 and ends at the end of this year.

Tengku Zafrul expressed confidence that with 2018 being the final year for the lender’s T18 initiatives, he is optimistic that the group would be able to achieve all of its targets by the end of this year.

This includes an ROE of 10.5% to 11%, which was notably revised from an initial 15% in April last year.

A good run

Banking stocks have had a good run in the past one year, helped generally by improved financial performances and effective cost-cutting measures. Over the period, the KL Finance Index which tracks banking shares, rose by 16.5% compared with the benchmark FBM KLCI which gained less than 9%.

Some analysts reckon that certain stocks are ripe for profit-taking at this stage.

In its note to clients yesterday, Affin Hwang Investment said although it does not currently have any sell ideas within the banking sector, it thinks investors should take money off the table for CIMB and RHB, as both are trading near its price targets.

“Our concerns on CIMB centre on a potentially weaker NIM and elevated provisions (lack of credit recoveries), while for RHB, its weaker asset quality and the need to raise its loan loss cover to 100% (93.6% as at September 2017) could indicate a potential downside risk on credit cost,” the research house noted.

Click image for a better view.

Meanwhile, HLIB reckons a potential 25-basis-point (bps) hike in the OPR could come as early as this month.

“On an OPR hike of 25 bps, we estimate the potential uplift to be about 2%-3% to net profit, depending on the banks’ composition of loan sensitivity,” it said in the report released yesterday, where it revised its sector rating from “neutral” to “overweight”.

Some economists are looking at potentially two hikes in the OPR this year, which theoretically would mean a boost to banks’ earnings.

But this can also lead to a deterioration in banks’ asset quality, as customers face difficulty in servicing loans which now come with higher interest rates.

Kenanga Research, meanwhile, says that with all things remaining equal and as expected going forward, its valuations for the banking stocks which it covers remain virtually unchanged.

“Although 2018 might see a better economic environment, the spectre of MFRS 9 coupled with moderate loans due to interest rate hikes will be challenging for the sector… we see no concrete catalyst and game changer on the horizon. Hence, no change to our neutral call,” it wrote in its banking report released on Thursday.

The banking sector is currently trading at an estimated 2018 price-to-book value multiple of 1.3 times versus the past-10-year average of 1.62 times, indicating that the sector is cheaper now than it was before.

Time will tell if the industry will be up for an exciting year.


Related story:

What bankers say about 2018 outlook

Read more : thestar

Leave a Reply

Your email address will not be published. Required fields are marked *