PETALING JAYA: While it will remain challenging for banks amid the global economic uncertainty, bankers are optimistic that the sector will see improved profitability next year after experiencing flat growth this year.
They expected the improvement in performance to be largely driven by stronger domestic economic growth coupled with continued cost-saving initiatives launched by financial institutions last year.
AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir expected the banking sector to chart an overall loan growth of around 5% to 6% in 2017 on the back of continued domestic economic performance.
“Core earnings are likely to grow by 6.8% year-on-year in 2017 following flat growth in 2016, largely driven by lower provisions while being supported by top-line growth. Additionally, operating expenses are envisaged to be well-controlled next year and to some extent, supported by savings from cost initiatives,” he told StarBiz via email.
While loan growth could remain soft and limit the opportunities for revenue and earnings growth in 2017, CIMB Group Holdings Bhd group chief executive, Tengku Datuk Seri Zafrul Aziz said banking groups with stable or improving underwriting standards, strong buffer in the form of restructured loans and diversification of business would be able to withstand the subdued economic and credit environment.
Zafrul said the sector may see improved net profit in 2017, driven by normalised growth in loan loss provision.
CIMB has seen its cost-to-income ratio reduce from 59.1% in 2014 to 54.6% as at Q316 helped by various cost-cutting initiates while its Common Equity Tier 1 ratio, a measure of a bank’s strength, has also strengthened from 10.1% in 2014 to 10.9% during the same period.
“It is still too early to get clarity on the real and full impact of Brexit, the US presidential transition, and various geopolitical events across Asean and how these will impact the economic growth and banking sector in this region,” Zafrul said in his email to StarBiz.
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He cautioned that a stronger US dollar, higher US interest rates, the possibility of increased US protectionism and the continued slowdown in China’s economy were considered as downside risks heading into 2017.
Malayan Banking Bhd (Maybank) group president and CEO Datuk Abdul Farid Alias believed that the outlook for the banking sector in 2017 will remain challenging, mainly due to the risks from external political developments and policies.
“In particular, we will have to wait and see whether US president-elect Donald Trump will carry out his election promises.
“The main issue that will directly impact us is the US trade policy. Trump has stated that he intends to pull the United States out of Trans Pacific Partnership agreement and is also seeking to review existing free trade deals like Nafta.
“His trade policy also risks causing a deterioration in US-China trade relations given his claims that a major factor behind the large trade deficit of the United States is China’s unfair trade advantages and practices,” Farid told StarBiz in an email.
The United States and China make up 40% of global gross domestic product (GDP) and a quarter of world trade, and account for between 20% and 60% of East Asian economies’ exports, Farid pointed out adding that Maybank estimated that a 10% drop in US-China trade would cut global GDP growth by 0.7 percentage points.
“In addition, Trump’s aim to raise the US growth rate to 3%-4% via fiscal stimulus is seen as inflationary. This, in turn, will put the US Federal Reserve’s interest rate policy under the spotlight, bringing with it the risk of more aggressive hikes instead of the current guidance of gradual hikes.”
There are also several key political events in Europe that pose a risk to its growth outlook and financial market conditions, especially given the rising tide of inward-looking nationalism and populism, de-globalisation and protectionism and these include the start of the UK-Eueopean Union talk on Brexit, he pointed out.
There is the fear of a financial crisis triggered by China which had resulted in sustained capital outflows from China that in turn have caused the yuan to fall, Farid added.
Maybank expected domestic growth to pick up mildly to 4.4% in 2017 from the estimated 4.2% in 2016.
The wild card is external trade, especially in view of the risk on US-China trade relations, Farid said but the recent surge in crude oil prices, in particular following the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec output cut deal, and the firming of commodity prices in general, would provide some buffer, he added.
Meanwhile, persistent worries for banks next year include continued contraction in net interest margins mainly due to pressures of funding cost and competition for deposits, AMMB’s Sulaiman pointed out.
“The Malaysian banking sector’s loan-to-deposit ratio is still high and banks may have to compete for deposits or raise funds from longer funding sources, which may consequently attract higher interest expense.
“For instance, we recently saw the resurgence of heightened competition for deposits after the overnight policy rate (OPR) cut of 25 basis-point,” he said.
He said asset yield was poised to remain stable on the back of a stable interest rate environment, as we expect the OPR to be maintained at 3% until the third quarter of next year.
“Another concern is that the persistent slow growth in deposits may contribute to funding cost pressure.
“At the same time, the recent outflow of funds has resulted in the weaker domestic currency against the US dollar, leading to tighter liquidity in the system.”
While the pressure on asset quality is expected to remain, Sulaiman felt that it could be muted next year.
Maybank IB Research, in its recent outlook for 2017 report, said that the biggest challenge for banks would still be in managing asset quality in an environment of ongoing economic uncertainty, particularly on the external front.
“Domestically, the weaker ringgit and spike in bond yields pose short-term earnings risks in the form of potential mark-to-market losses on investments and borrowings. With sector core earnings growth trending at 3%-4% in 2016/2017, we expect pressure on return on equity to persist.”
