THERE was a time when a high-flying banker in Malaysia could receive a handsome sum of RM10 million in annual bonuses. But, this may no longer be the case today.

“The RM10 million payout was for exceptional cases. For the rest of us bankers, getting a double-digit months’ bonus such as three to five years’ worth of was the norm in the good years … but those days are long gone,” says an associate director at a local investment bank.

“Of course, bonuses are subjective as they depend on many variables like base pay and so on, but one thing is for sure — bonuses today are no longer as fat as what they used to be for bankers.”

Indeed, the tables have turned for bankers and banks.

Never mind the bonus payments. There was a time when banking was the “it” job, but in recent years, more bankers have been getting increasingly worried for their jobs.

Likewise, shareholders of banks who used to get good return on equity (ROE) are starting to see shrinking yield.

While banks’ net profits are still growing, the ROEs — the returns on shareholders’ investments — are falling (see charts). In the past 10 years, banks saw their ROEs hit a high of 30% in 2008 before falling to a low of 4.55% in 2015.

The state of play in the banking industry has certainly shifted. It was boom time back in the 1990s — the sector was liberalised, the stock market was flying high, the economy was expanding rapidly and the margins were plump.

Today, in spite of growing revenue, banks have to grapple with stricter capital requirements, thinning margins and mounting costs. Competition is intense, with some banks undercutting each other and even opting not to charge advisory fees just to secure a deal to earn placement fees.

Profits are rising, but not as fast as costs

“The golden era of banking is over,” CIMB Group Holdings Bhd chairman Datuk Seri Nazir Razak tells The Edge.

“All banks need to recalibrate to navigate the ‘perfect storm’ — a combination of rapid technological advances, slower global growth and banking re-regulation. There are massive challenges and opportunities, and standing still is not an option. Those who don’t recalibrate will not survive in the long run, but then, those that do, but do it badly, may also face ruin.

“The perfect storm is a useful analogy, but where it breaks down is that storms will pass and calm will return, whereas banks face severe structural challenges, and after the storm, it will not be business as usual for any of them. Banks that see this reality and are radically changing stand the best chance of thriving in the long run,” says Nazir.

“Banking was simple then. Today, the landscape has evolved to become competitive, comprehensive and innovative,” says Public Bank Bhd chairman Tan Sri Teh Hong Piow, comparing the industry now and 51 years ago when he founded the group (see “Teh reflects on nearly 70 years of banking” on Page 67).

Malayan Banking Bhd group president and CEO Datuk Abdul Farid Alias acknowledges that the operating environment has changed even more rapidly in recent years and there have been disruptions on many fronts.

“This has caused intense competition — not just among banks but also with new entrants into the traditional banking space,” he says.

“Yes, the regulatory environment has also become more stringent as a result of the many changes and challenges that have emerged over the years. The challenge is to have an adequate regulatory framework that balances maximisation of industry growth with stable macroeconomic market environments.”

CIMB group CEO Tengku Datuk Seri Zafrul Tengku Abdul Aziz points out that many banks are now more selective in their investments as they prioritise resources and optimise capital utilisation.

“Efficiency, capital and optimisation are the focus for many banks at the moment in the face of regulatory requirements, margin compression, higher operating costs and a challenging macro environment,” he says.

Asean banks in general have seen their profitability impacted by higher loan loss provisions in the last two to three years, mainly caused by the collapse in commodity prices and slower global economic growth. As a result, many banks have taken measures to strengthen their credit underwriting standards and rebalance their portfolios to manage and diversify risks.”

The margins were a lot higher in the local banking sector 10 to 15 years ago, says Alliance Financial Group Bhd (AFG) CEO Joel Kornreich.

“Particularly for mortgages, margins were very much higher compared with those of other countries in the region. That has normalised since. The margins used to be 2% and 2.5% 10 to 15 years ago. Today, it’s less than 1%,” he says.

To maintain profitability, many banks are fighting for cheaper funding through their CASA (current account and savings account) products, observes Ong Ching Chuan, assurance partner and financial services leader of PwC Malaysia.

“In addition, it is important for banks to enhance the resilience of their liquidity risks in preparation for the new Basel 3 requirements ... for example, the net stable funding ratio will be effective next year. This is clearly observed from the various deposit campaigns taking place now,” he says.

Ong cautions against banks waging a price war to grow market share in the current volatile environment.

“We have seen price wars on mortgages in a neighbouring country. The question is, is this a sustainable strategy in the long run? Should Malaysian banks adopt this strategy? Alternatively, some banks are focusing on product innovation and better customer experience as a competitive differentiator. This is where the use of innovative technologies that can complement the banks’ business models will be key,” he says.

Recalibrate and rethink

Banks will have to rethink their business models and respond to meet their customers’ needs specifically, says RHB Banking Group Bhd group managing director Datuk Khairussaleh Ramli.

“Regulatory requirements have definitely shaped the way financial institutions conduct their business and these are all with good intentions of protecting the depositor, enhancing client confidentiality and ensuring that banking services are not used for illegitimate and undesirable purposes. The upside is, the strength of the banking sector as a custodian of public funds has been enhanced and trust boosted. On the other hand, it has also put pressure on banks’ earnings and returns to shareholders, with the combined effect of higher capital and liquidity requirements,” he notes.

“MFRS 9 requirements, for which reporting will commence on Jan 1 next year, is based largely on a forward-looking expected credit loss (ECL) impairment model and a substantially reformed approach to hedge accounting. ECL is expected to increase the provision amount required and hence will potentially affect the profitability of banks,” he says.

“Banks will then have to adjust internally their business model and risk appetite.”

Nazir admits that building a regional platform is “more challenging” today than he first anticipated.

“Banks have to recalibrate their business models based on a new understanding of the end-state to survive and thrive again. Before, we said that you can be one regional bank across Asean, but the rules do not facilitate that,” he says.

“Regional banking will continue, but the dream of having one entity across Asean will not materialise. There will be multiple banks. We have to be multi-local across Asean. Banks have to work a little bit harder to get cross-border synergies compared with being one entity across Asean.

“As the region integrates, there will be growing demand for banks operating in multiple markets. Customers will still be attracted to having just one account or banking relationship that gives them access to banking services across the region.

“Ironically, if regulators make cross-border banking more difficult, it will be the banks that are already established as domestic entities in multiple countries that can do this.”

AFG’s Kornreich says banks will have to look at how they are going to transform themselves because “the only way to make money is to evolve and be more efficient”.

“The world is moving towards greater efficiency, and banks have to do that,” he says.

Maybank’s Farid believes the changing landscape will offer banks an opportunity to “redefine” how they can remain relevant to their customers.

“This may require operating models to be recalibrated or even changed completely, depending on the banks’ business approach and the markets they operate in. The political and economic uncertainties experienced did have an impact on our growth, though. This may be part of the cyclical forces, thus we had anticipated it and prepared ourselves well for the slowdown. Nevertheless, we do expect a moderate pick-up in global economic growth this year on the back of firmer commodity prices and trade growth across the region,” he says.

CIMB’s Zafrul points out that some foreign banks are continuing to recalibrate their presence in this region, the most recent being last year when ANZ sold its retail and wealth management businesses in five Asian markets. Barclays also sold its private wealth business in Singapore and Hong Kong, and RBS wound down its business in Malaysia.

“This trend has provided an opportunity for Asean-domiciled banks to step up their game and fill the void left by the foreign banks,” he says.

“Banking strategies at a more granular level are becoming less homogenous as each bank aims to play to their strengths through its own unique strategy. We have seen and will continue to see banks (both domestic and global) take different pathways to hone their competitive edge and build scale in their own game.

“Having said that, digital will be a common theme across these pathways as the technology world and tech-savvy consumers continue to evolve and become mainstream.”

Another C-level banker points out that the current banking landscape is a lot more challenging compared with the 1990s, thus giving rise to merger and acquisition possibilities.

Game on

Against a tough operating backdrop, there is also the emergence of a business that could replace the role of banks.

Globally, there are platforms, such as AliPay, that provide payment services without having to go through a bank.

“While this is not happening in Malaysia, the fact that such a model exists— where banks are bypassed for payments and lending — must be a wake-up call to all banks.” says the head of business development at a local listed conglomerate.

“It also proves that banks no longer have an impenetrable fortress and they need to evolve fast or risk being left behind.”

Farid does not discount the possibility of banks being disrupted like many other industries. However, he says the need for banks will remain as long as the need to create, build, store and transfer wealth is there. “The form may change, but the substance should remain the same,” he adds.

AFG’s Kornreich believes that banks and finance technology have to coexist (see “Fintech startups yet to gobble up bankers’ lunch” on Page 65).

Indeed, even the conservatively managed Public Bank says it is exploring opportunities in fintech.

That is good news because it shows that banks are embracing change and moving with the times. As the bankers The Edge spoke to say, those who do not, risk being left behind.

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