Banks on steady footing
Stephanie Jacob 

Banks play a crucial role in a country’s economy and financial system. They do not only have to deliver value to their owners and shareholders, but must also have the ability to withstand downturns or they could pose a threat to the whole financial system.

For this reason, it is important to continuously monitor banking risks even during times of recovery or optimism, to ensure that the better outlook is driven by optimism over financial performance and improving resilience.

In this month’s Focus List we evaluate all nine out of the 10 listed banks by testing them across five categories (see How we evaluated them) to assess their strength and resilience.

Public Bank rose one rung from last year to take the top spot on our list with an overall score of 2.55. It was ranked first in two of five categories, having the best score in terms of non-performing assets to total assets and efficiency ratio. It is perhaps unsurprising that the bank scored well in these two categories given its reputation for stringent lending rules.

Taking second spot is Alliance Bank which did well to outpace its larger-cap peers and get an overall score of 3.05. The SME-focused banking group has the second smallest market cap among the country’s listed banks.

Rounding up the top three is BIMB Holdings Bhd which rose two spots from fifth placing last year. The Islamic bank notched up an overall score of 3.25.

It also came out tops in two of the five categories measured. It was best in terms of loan-loss reserves to non-performing assets and in deposits to funding categories.

Fifth-placed Maybank was the only other entity to come out tops in a particular category. Malaysia’s largest bank by market capitalisation had the best score in the tier 1 capital to risk weighted assets category.

Newly-minted MBSB Bank Bhd (wholly owned by Malaysia Building Society Bhd) was not added to this year’s list as it became a fully-fledged bank only in April.

MBSB Bank is the result of the acquisition of Asian Finance Bank Bhd by Malaysia Building Society, and is now the country’s second-largest full-fledged Islamic bank.


A barometer

The banking sector is often seen as a barometer of the economy at large. If the economy is functioning well and people are optimistic, they are more likely to take out loans and be able to meet their debt commitments.

In turn, the banks do well because people are using their services and not defaulting.

Based on this, the latest available banking statistics for the month of June will make positive reading as the upward trajectory of loan growth since April continued. Loan growth in June stood at 5%, up from 4.9% in May.

Sunway University (Business School) professor of economics Dr Yeah Kim Leng says he views the sector as stable.

“Malaysia's banking sector remains well capitalised with strong asset quality reflected in part by its low and stable non-performing loans (NPLs),” he tells FocusM. “It is also profitable with return on equity among the highest in the region.”

AmInvestment Bank analyst Kevin Ong reports that loan growth was driven by an improvement in both household and non-household loans. He said household loans were driven by personal loans, credit cards and loans for the purchase of securities.

An MIDF Research report opines that the increase in loans for personal use was likely due to the federal government zero-rating the Goods and Services Tax (GST) on June 1, a move which spurred private consumption.

Loans for passenger cars were subdued in the June numbers but are expected to pick up in subsequent months as consumers take advantage of the tax holiday between the zero-rated GST and the re-introduction of the Sales and Service Tax on Sept 1, AmInvestment’s Ong said in his report.

Growth in business loans was also recorded for June, up 0.7% on a monthly basis and 3% year-on-year. This was driven by a pick-up in the manufacturing, wholesale and retail, construction, utilities and agriculture sectors, said an Affin Hwang Capital report.

Looking ahead, the research house argues that the underlying economic trends point to a healthier outlook for the banking sector.

“We note that an improving global economic outlook and relatively stronger commodity prices are favouring a further rebound in banking sector earnings,” the report adds.

MIDF Research also offers a similarly positive outlook on the sector.

Aside from receiving a boost from the tax holiday, it sees the stable employment environment as supporting the demand for loans.

The brokerage also believes that as the government’s economic policies become clearer, businesses are likely to start expanding and growing which could be a further impetus to loan growth.


Sufficient liquidity

Bank Negara Malaysia says the liquidity levels in the banking system remains sufficient at both the institutional and system- wide levels.

It notes that the levels of liquidity placed with the central bank were lower in the second quarter given the overall foreign portfolio outflows during the period. But it adds the issue is not too much of a concern.

Yeah concurs and says despite the tightening due to foreign capital outflow, liquidity remains ample.

“Interbank lending and borrowing activities remained orderly. At the institutional level, most banks continued to maintain surplus liquidity positions,” BNM details in its Quarterly Bulletin for the second quarter of 2018.

It adds that the level of risks is “contained and unchanged”.

“Domestic financial institutions remain resilient with banks continuing to be well-capitalised, and having sufficient liquidity to support the financing needs of the real economy,” the central bank reports.

It highlights that impairments from household debt continue to be at record lows, and this is driven by a sustained capacity for debt servicing from this segment.

On the business front, the overall risk outlook remains stable, the regulator says. It notes that one area of concern is the non-residential property sector where certain segments are seen to be facing an oversupply situation.

However, the central bank sees the impact to banks as being mild currently. “Direct risks … remain low as banks maintain sound underwriting standards”, says the report.

Asset quality of the banking system (both listed and non-listed) also remains sound as of June, it adds. The level of net impairment loans ratio and total provisions to total loans ratio remain unchanged for the year at 1% and 1.5%, respectively.

Yeah believes that in the current scenario, the banking system is capable of withstanding a “moderately large (economic) shock, including a mild recession” should one occur.


Valuations attractive

Several banking stocks fell in the immediate aftermath of the surprise outcome of the 14th General Election on May 9 and analysts suggest this presents a buying opportunity in some of these counters.

“The recent uncertainties, both domestically and externally, mean the banking stocks in our universe have seen a sharp depreciation in their prices recently,” notes a Kenanga Research report. adding this has created some “attractive (investment) propositions”.

MIDF Research opines that the previous selldown in banking stocks was sentiment driven and believes the pressure has now subsided.

“While banking valuations are catching up, we believe there is still value in some of the banking stocks,” it says.

Meanwhile, Yeah believes that any fallout for banks resulting from the government delaying or cancelling large projects, will be fairly minimal.

“There is relatively small impact focused on a few institutions that could have been involved in arranging government funding and private financing for developers and contractors.

“These banks will be looking at other opportunities since they have a wide scope of activities relating to financing, investment and non-interest income from intermediation services,” he opines. FocusM

This article first appeared in Focus Malaysia Issue 296.