Published on 04 Dec 2019.
Despite tepid loan growth and pressure on net interest margins (NIMs), strong trading income underpinned by the domestic bond market’s rally cushioned the impact on Malaysian banks’ earnings in 9M 2019.
“Foreign investors’ hunt for yields amid the prospects of low global interest rates has been fuelling demand for Malaysian bonds. Inflows of foreign funds amounted to RM4.3 bil in 9M 2019 compared to an outflow of RM22.2 bil in the previous corresponding period. The yield on 10-year Malaysian government securities had declined to 3.3% as at end-September 2019, from 4.1% as at end-December 2018,” observes Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the release of the rating agency’s Banking Quarterly Roundup 3Q 2019.
While most banks’ NIM broadened q-o-q in 3Q 2019, the average NIM for the eight anchor banks remained weak at 2.18% in 9M 2019 (9M 2018: 2.25%). The easier liquidity arising from the recent cut in the statutory reserve requirement is only expected to have a marginally positive impact on NIMs. Loan growth decelerated to a new low of 3.7% in October 2019, as the external environment remains challenging against a more subdued global growth outlook. The eight anchor banks’ average credit cost ratio had also risen to 31 bps (9M 2018: 27 bps) as a result of a few lumpy impairments from the domestic agriculture and manufacturing sectors as well as some overseas exposures.
“The surge in trading income had moderated the earnings impact from poorer net interest income and an uptick in impairment charges. On the whole, the eight anchor banks’ average pre-tax ROA and ROE weakened to a respective 1.32% and 12.9% in 9M 2019 relative to 1.38% and 13.7% in 9M 2018,” observes Wong.
On the other hand, the banking system’s gross impaired loan (GIL) ratio remained sturdy at 1.62% as at end-October 2019 despite having nudged up from 1.48% as at end-December 2018. Banks also maintained their healthy loss-absorption buffers, with an average GIL coverage ratio (including regulatory reserves) of well above 100% and a common equity tier-1 capital ratio of 13.7%.
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2019 by RAM Rating Services Berhad