This article first appeared in The Edge Financial Daily on December 5, 2019

KUALA LUMPUR: Strong trading income, underpinned by the domestic bond market’s rally, has cushioned the impact of tepid loan growth and pressured net interest margins on Malaysian banks’ earnings in the first nine months of this year (9M19).

The demand for Malaysian bonds, according to RAM Rating Services Bhd in a statement yesterday, has been fuelled by foreign investors’ hunt for yields amid the prospects of low global interest rates.

“Inflow of foreign funds amounted to RM4.3 billion in 9M19, compared to an outflow of RM22.2 billion 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,” RAM’s co-head of financial institution ratings Wong Yin Ching said.

“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 return on assets and return on equity weakened to a respective 1.32% and 12.9% in 9M19 relative to 1.38% and 13.7% in 9M18,” Wong added.

Though most bank’s net interest margin (NIM) broadened quarter-on-quarter in the third quarter of 2019, the rating agency said the average NIM for the eight anchor banks locally remained weak at 2.18% in 9M19, as opposed to 9M18’s 2.25%.

“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 basis points (9M18: 27 basis points) as a result of a few lumpy impairments from the domestic agriculture and manufacturing sectors as well as some overseas exposures,” it said.

And while the central bank has cut the statutory reserves requirement ratio to 3% from 3.5%, effective from Nov 16 this year, the easier liquidity arising from this is only expected to have a marginally positive impact on NIMs, said RAM.

Still, the banking system’s gross impaired loan (GIL) ratio remained sturdy at 1.62% as at end-October 2019, the rating agency noted, despite having inched 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%,” it added.