This article first appeared in The Edge Malaysia Weekly on February 17, 2020 - February 23, 2020

THE next five years will be crucial for Bank Rakyat as it looks to keep itself relevant amid a fast-changing landscape that will also see rival development financial institutions (DFI) merging in order to compete better.

In a bid to grow more sustainably, the country’s largest DFI — and the second largest Islamic lender after Maybank Islamic Bhd — plans to further reduce its reliance on personal financing (PF) while accelerating its financing to cooperatives and small to medium enterprises (SMEs).

And, as banks everywhere delve deeper into digitisation, Bank Rakyat hopes to catch up. It has invested in a core banking system that will go “live” in June, after which it can roll out a host of digital initiatives, including a mobile banking app that it hopes to launch early next year.

These are some of the bank’s key plans, as encapsulated in its five-year strategic road map, BR25, which kicked off last August, says its new CEO Datuk Rosman Mohamed, who took the helm on Feb 1.

PF currently accounts for 78% of the bank’s total financing.

“Today, people know us for PF. By end-2025, we want to be known as a sustainable bank that also focuses on cooperatives and entrepreneurship. We have to look back at our mandate. In 1954, when we were formed, the whole idea was to make the cooperatives segment grow within the country. Today, there are about 14,000 cooperatives in Malaysia, of which some 10,000 are active. We want to help them grow, not just by extending financing but also relevant advice,” Rosman tells The Edge in an interview.

Rosman, who came on board as a director in April last year before becoming acting managing director in August, spearheaded the development of BR25. He is currently reviewing the financial targets set under the plan but expects the bank to achieve a profit before tax and zakat (PBTZ) of “more than RM2 billion” by end-2025. Its PBTZ stood at RM1.86 billion in 2018.

Bank Rakyat’s financing to cooperatives and SMEs is currently small and it aims to grow each at a double-digit pace annually over the next five years, from single-digit now. The bank’s approved financing to cooperatives and SMEs each stood at around RM203 million last year. Rosman hopes this will increase to at least a RM5 billion portfolio for each by end-2025.

Bank Rakyat’s renewed focus on cooperatives and SMEs comes following the government’s launch of the National Entrepreneurship Policy 2030 in July last year. The policy — set out by the Ministry of Entrepreneur Development and Cooperatives, under which Bank Rakyat falls — aims for the turnover of cooperatives to grow to RM60 billion by 2030 from RM40.3 in 2018, and for SME contribution to the economy to increase to 50% from 37.4% during the same period.

“So, Bank Rakyat will certainly have to play a role there. Having said that, we are a bank — we’ve got to be mindful about risks. The risk assessment for PF is different than that for SMEs, so there are things we are putting in place in terms of upgrading our talent and skill sets ... we may have to import some talent from outside to really beef up our SME segment,” Rosman says.

This stronger focus on cooperatives and SMEs will help drive Bank Rakyat’s overall loan growth to 3% to 4% this year, which is not too far off from last year’s growth, he adds.

Curbing PF growth

Governed by the Cooperative Societies Act 1993, Bank Rakyat is essentially a cooperative bank that does mainly retail banking — almost 90% of its assets are retail assets — and the bulk of its customers are civil servants. It had 2,237 cooperatives and 852,618 individuals as members as at 2018.

The bank’s growth has for a long time been fuelled by PF. As at the first nine months of FY2019, PF accounted for 77% of its total gross financing of RM71.72 billion. It is by far the biggest PF player in town.

“Under BR25, we want to bring it down to about 70% by 2025. This does not mean we won’t grow PF — it’s just that we want smaller, single-digit growth of 3% to 4% each year. We also want to grow automotive, housing and credit card financing as we look to reduce our concentration risk in PF,” Rosman says.

PF has nevertheless been a relatively safe business from an asset quality standpoint, thanks to a system of automatic salary deductions for the civil servant segment. This has kept the bank’s gross impaired financing (GIF) ratio in PF impressively low at under 1%. Its overall GIF ratio as at 9MFY2019 was 2%.

Going forward, there may be a slight uptick in the GIF ratio given the economic turbulence this year, with the COVID-19 virus outbreak. Bank Rakyat was among the first banks to announce that it would offer customers temporary relief on their financial commitments if they are affected financially by the virus outbreak.

“In the corporate sector, for companies that closed, such as Utusan Melayu (Malaysia) Bhd, we give their staff who had taken our PF a six-month grace period from making payments. So, we try to manage these things,” Rosman says.

Bank Rakyat saw profit after tax and zakat of RM1.21 billion in 9MFY2019, an increase of 33% from the previous corresponding period, even as income grew 0.9% to RM4.9 billion. PBTZ grew 4.1% y-o-y to RM1.29 billion. Allowance for impairment fell 30.5% to RM123.91 million. Its cost-to-income ratio of 35.9% is among the best in the industry.

Rosman says the bank is likely to have achieved its internal target of a PBTZ of RM1.7 billion for FY2019. Its GIF ratio should come in below 2% as forecast, he adds.

The 25-basis-point cut in the overnight policy rate in January is expected to weigh on the bank’s net interest margin (NIM). Rosman does not discount the possibility of another OPR cut of the same quantum in the middle of the year.

“At this point in time, our NIM is at about 3%, but if you look at banks [in general] , they are probably at 2% to 2.5%. So, even if we have some impact, it may go down to 2.8%, 2.7% ... but we’re still competitive,” he says.

Consolidation

Last December, Bank Pembangunan Malaysia Bhd (BPMB) and Danajamin Nasional Bhd obtained the central bank’s approval to begin merger negotiations. The government ultimately wants to merge BPMB, Danajamin, Export-Import Bank of Malaysia Bhd and SME Bank to strengthen the DFI ecosystem.

Will the merged entity pose a major threat to Bank Rakyat? “Our asset base is about RM109 billion ... I’m not sure the four banks combined will beat that. And there are not many [business] overlaps. The only area that can perhaps be a challenge is SME, as we are also trying to expand there. So, while we don’t see [them] as a major threat, there could be some competition that we need to look at ...  but there could also be opportunities, in terms of there being more talent available in the market.”

Meanwhile, Rosman says Bank Rakyat itself may consider mergers and acquisitions. The lender may be keen on acquiring businesses within banking, such as takaful. “We don’t have a licence for takaful. But if there’s an opportunity, one that makes sense to us, then it’s something that we can explore.” He adds that the bank is not currently in M&A talks with any party.

The bank has no plan for now to apply for a separate digital bank licence. Bank Negara Malaysia is expected to open applications for up to five licences later this year. “We are in the midst of hiring a chief digital officer to look into it. So, if you ask me, we may not [apply] this year ... but 2021, 2022, maybe that’s something we could look at.”

Meanwhile, Bank Rakyat is focusing on its internal digital initiatives. It currently has 147 branches nationwide and it plans to convert 30 of these into digital branches over the next five years.

All eyes will be on Rosman to see if he can take the bank to the next level. Apart from a stint with Maybank, he spent most of his career overseas working in multinational companies such as Cabot Corp and British American Tobacco.

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