What’s in store for banks

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.

“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.