Five things to watch in banking this year

AFTER two difficult years of dealing with Covid-19 issues, Malaysian banks are expected to do better this year thanks to a recovering economy, potential interest rate hikes and lower provisions.

However, analysts expect the sector’s net profit to improve only slightly compared to last year, mainly due to Cukai Makmur, the one-time prosperity tax that the federal government introduced last November. under the 2022 budget.

Maybank Investment Bank (Maybank IB) Research sees the sector’s net profit rise 2.5% this year – it would have been 10% without Cukai Makmur – before rebounding 18% in 2023.

Most economists expect Bank Negara Malaysia to raise the overnight rate by at least 25 basis points this year, which will help boost lenders’ net interest margins (NIMs).

But the timing of such a hike will be just as important, according to a banking analyst.

“Yes [Malaysian government] bond yields continue to rise before interest rates move, then you will find that banks will have to mark their investment portfolios to market, which will lead to investments [marked-to-market] losses,” said the analyst.

As things stand, most research houses, including Maybank IB Research, CGS-CIMB Research, RHB Research and AmInvestment Bank Research, continue to have a positive investment recommendation on the banking sector. “Banks remain the best indicator of an economic recovery and a key beneficiary of rising interest rates,” RHB Research analysts Eddy Do and Fiona Leong said in a report last week.

Here are five things to watch that could impact or challenge banks this year.

1. Ongoing support for borrowers

Banks will likely continue to offer repayment assistance to borrowers who need it, on a case-by-case basis, after existing relief measures expire.

“I think the banks will certainly continue to extend their support – that’s not the problem. But if they allow you to freeze your credit status – like those in the Pemulih program – or if they only give you a reduced down payment rather than a moratorium on payment, it really depends on the bank. The reality is that if economic conditions do not improve, there is a risk that financial assistance will have to continue,” remarks a banking analyst.

Since July 7 last year, banks have extended a six-month moratorium to individuals and small businesses on a voluntary basis. The aid was part of the government’s Pemulih recovery plan to help those affected by the pandemic.

Since then, the banks have also developed a program known as Urus which extends help to distressed borrowers in the lower 50% (B50) income group. The deadline for applications for assistance, which began on November 15, is the end of this month.

“I think banks will be willing to continue to extend repayment assistance on a case-by-case basis. It could be a win-win situation in the long run. From a bank’s perspective, repayment assistance could hurt NIMs in the short term and lead to a modification loss, but if in the long term it prevents the formation of a non-performing loan (NPL), then that’s a good thing. a bank would be more important if an NPL occurs,” Tushar Mohata, head of equity research and banking analyst at Nomura Malaysia, told The Edge.

Analysts’ main concern for banks is whether there is another prolonged lockdown in the country. If this happens – even if it is not the scenario currently envisaged – then large-scale repayment assistance programs could be imposed on banks, which would be detrimental to banks’ profits.

In the meantime, banks should have a clearer picture of their impaired loan position in 1Q2022, as that is when the repayment trends of the Pemulih program can be assessed. “It will be interesting to see what is the extent of loans that fall under stage 2 or 3 [of their provisioning model]remarks Mohata.

2. Issuance of digital banking licenses

Bank Negara, which received 29 applications for digital banking licenses last year, is expected to announce up to five winners this quarter. The emergence of these new banks, meant to focus only on underserved and unserved segments, could potentially shake up the industry.

From a stock price and news flow perspective, this is something to watch closely, analysts say.

“If one of the incumbents wins, it will be interesting to see what their strategy might be, and it could also be positive for their share price. If some of the non-incumbents – for example, well-known global tech players – win, this will of course raise concerns about the competitive dynamics in the industry once their digital banks launch,” says Mohata.

RHB Bank Bhd, AEON Credit Service (M) Bhd, MIDF Bhd and RCE Capital Bhd are among the financial institutions that have applied for a digital banking license, each as part of a consortium.

3. Digital acceleration and investments

Meanwhile, with the imminent issuance of digital banking licenses, competition is likely to intensify and traditional banks are expected to step up their own digital game. This includes making digital investments to improve customer experience, turnaround times and productivity, says Elaine Ng, Head of Financial Services at PwC Malaysia.

This is seen as necessary as the entire banking industry shifts from a product-centric mindset to a more customer-experience-centric mindset.

Ng notes that banks plan to increase their spending on cybersecurity and data privacy by introducing new technologies or strengthening their cybersecurity strategy.

“The cyber threat landscape is becoming more complex as cybercrime tactics become more advanced,” she told The Edge. According to PwC’s Global Digital Trust Insights 2022 survey, which surveyed the C-suite of various industries including financial services, 25% of Malaysian C-suite people expected their cyber budget to increase by 6% to 10% in 2022.

4. Make ESG a priority

Given the pressure from investors and regulators, it is inevitable that banks will have to pay more attention to ESG (Environmental, Social and Corporate Governance) factors and issues related to sustainability. Most big banks already have ESG strategies and commitments in place, including phasing out lending to controversial sectors like coal, but more needs to be done.

PwC’s 2021 Malaysian Bank ESG Readiness Survey indicates that banks are stepping up their ESG journey, but there is still room for improvement as the level of ESG integration across the business varies from bank to bank. to the other. Fifty percent of respondents (local banks) have adopted Bank Negara’s Climate Change and Principles Based Taxonomy (CCPT), while the remaining 50% plan to adopt CCPT within the next two years. Sixty-four percent of banks plan to adopt the Task Force on Climate-related Financial Disclosures within the next two years.

Ng notes that navigating Bank Negara’s CCPT in particular has its complexities, ranging from the absence of customer data or information and difficulties in translating principle-based guidelines into practice, to the difficulty of measuring indirect environmental impact and lack of ESG expertise.

“Based on our study, there are a few options worth considering for Malaysian banks. These include defining a scientific objective or net zero strategy in alignment with their business strategy, and establishing an ESG risk management framework comparable to established financial risk frameworks. Banks can consider integrating ESG factors into risk rating models and frameworks for credit assessment decisions, and filling data gaps to accurately reflect their exposure to climate risk,” says -she.

5. Build Trust

Finally, banks will need to redouble their efforts to gain customer trust while scaling through digitalization and striving to focus more on non-financial performance indicators such as ESG metrics.

Trust will continue to be paramount, notes PwC’s Ng.

“The challenge for banks is to ensure that their growth strategy is closely aligned with their purpose and broader role in promoting financial inclusion in the community. Defending trust goes a long way when consumers can see visible way how banks are responding to pressing societal issues, including financing the green economy and supporting causes that protect marginalized groups in society,” she says.

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