S&P Global Ratings said that the first-quarter 2019 financial results of major Malaysian banks point to a weakening trend in profitability amid escalating trade tensions. We believe banks operating in the local Malaysian market will see visible margin compression, accompanied by slower loan growth and higher non-interest income volatility for the rest of 2019. Asset quality will likely hold, despite downward pressure.
All five Malaysian banking groups that are covered by S&P Global Ratings reported a year-on-year margin decline in their first-quarter 2019 results: -9 basis points (bps) for both Malayan Banking Bhd. (Maybank; A-/Stable/A-2) and CIMB Group Holdings Bhd. (we rate CIMB Bank Bhd. [A-/Stable/A-2], a key subsidiary for CIMB Group); -12 bps for RHB Bank Bhd.(BBB+/Stable/A-2); -14 bps for Public Bank Bhd. (A-/Stable/A-2); and -26 bps for AMMB Holdings Bhd., whose key commercial banking subsidiary is AmBank (M) Bhd. (BBB+/Stable/A-2).
Even on a sequential basis, three out of the five banks have shown quarterly margin deterioration: -8 bps for Maybank; -4 bps for RHB; and -10 bps for AMMB. Meanwhile, two recorded moderate improvements: 1 bp for Public Bank and 3 bps for CIMB. However, these improvements are either unsustainable or masked by their overseas operations’ net interest margin recovery (in the case of Indonesia for CIMB).
More importantly, the margin compression was before Bank Negara Malaysia’s 25-bps overnight policy rate cut in May, which means there will be further downside ahead until end-2019 of which we typically assume a six- to nine-month lag for the repricing of these banks’ assets and liabilities. Continuous tight liquidity in the market–amid persistent deposit competition–clearly does not help and is increasing the cost of funding. Heightened capital market volatility amid escalating trade tensions between the U.S. and China–while not a risk factor unique to Malaysia–is dampening the outlook on local banks’ non-interest revenues.
“All these factors contribute to our negative view on Malaysian banks’ profitability trend this year–especially when we believe there is limited room for further cost cutting,” said S&P Global Ratings credit analyst Nancy Duan. We believe a lot investments made by banks nowadays are more structural and strategic (e.g. technological investments), which should not be called off easily.
“All in all, we are likely to see a disappointing 2019 in terms of bottom-line earnings”.
The good news is that we continue to see resilience in Malaysian banks’ asset quality profile at this uncertain time, despite downward pressure. We are of the opinion that the banks’ domestic portfolio will remain sound in general, supported by healthy private consumption and the revival of previously suspended infrastructure projects. Small and midsize enterprises as well as low-income households are more vulnerable in a slowing economy, but the lower interest rates could help cushion the impact.
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
