This article first appeared in Corporate, The Edge Malaysia Weekly, on June 6 - 12, 2016.
MALAYSIA is still an attractive banking market despite margins having come down over the last five years, says Standard Chartered Bank Malaysia Bhd (StanChart) managing director and CEO Mahendra Gursahani.
“They [margins] are dropping and they are dropping for the industry as a whole. For StanChart, it’s difficult to say how much it has dropped because it depends on the product. Our wholesale and retail [products] have very different margins. But overall, the trend over the last five years would be that margins are compressing, and for the industry [as well], so I don’t think this is a unique challenge for StanChart in Malaysia,” he tells The Edge in an interview on the sidelines of the World Economic Forum on Asean held in Kuala Lumpur last Wednesday.
“But that would not be reason for us to look at our strategy and wonder whether we have a future here or not ... because, within that space, there is still good business to be done. We will look for returns and where we see businesses that are not returning the minimum threshold that we would require to be in that business, then we will make those decisions as we come across them. But at the moment, we don’t see a reason for us to stop doing business here. We’re certainly very active,” he adds.
StanChart has the distinction of being Malaysia’s first and oldest bank, having set up its first branch in 1875 on Beach Street, Penang.
Malaysian banks have seen their net interest margin (NIM), an indicator of the difference between what they make on lending and what they pay for funding, tumble from 2.6% in 2010 to around 2% last year. Analysts point out that NIM and asset quality preservation stand out as two of the key challenges banks here face today.
NIMs are trending down for various reasons, Mahendra says.
“One reason is obviously that the cost of funds has increased and that puts upward pressure on margins. And the other is that there is more liquidity chasing fewer customers, in a sense, and therefore there’s competitive pressure at the top line. So you’re being squeezed on both sides — lending rates are coming down and your cost of funds is going up, and margins are compressing.”
Other key Asean markets too are seeing a squeeze on NIMs but their rates have stayed higher than in Malaysia. NIMs are the highest in Indonesia, averaging 5.39%, compared with Thailand’s 2.6% and the Philippines’ 3.35%.
That does not necessarily imply that these are more profitable markets, Mahendra, who assumed the CEO’s role in Malaysia in February last year after his previous posting in the Philippines, points out. “I would give you the example of the Philippines, where the NIMs are high but then so is the impairment. So, your net margins, after impairment, are not that much better than in most other places.”
He goes on to say that in margin terms, Malaysia is showing signs of being a mature banking market, much like Singapore. “A mature market is where there is a high degree of competition, where the demand for financial services is starting to plateau. I think Malaysia is going through this transition where margins have narrowed because it is showing signs of a mature economy.”
Still, he notes that impairments and non-performing loans (NPLs) in Malaysia are relatively low and manageable. “NPLs may be on the way up but very marginally. An NPL ratio of below 2% for the industry is still very good ... no cause for concern there. I don’t think that it will dramatically change in the near term,” he says.
Last year was a particularly tough one for StanChart. It saw a sharp 93.4% decline in net profit to RM25.85 million compared with RM394.03 million a year earlier, due to impairment provisions that it made on a few large accounts. Provisions on loans, advances and financing came in at RM569.71 million compared with RM384.16 million a year ago.
Early last year, Bloomberg reported that StanChart’s ultimate parent company, Standard Chartered Plc — which generates most of its earnings in Asia — was reducing the headcount in Malaysia by 11% in the first quarter, with the cuts stretching across areas like marketing and consumer operations. There were also job cuts in other Asian markets as the UK-based group looked to exit some businesses and trim costs.
Malaysia remains among Asean’s top three profit contributors to the banking group, says Mahendra.
“We had to take some impairment on very specific commodity-related accounts,” he says, explaining the drop in StanChart’s profit. “I don’t think that’s going to repeat itself [this year]. We’ve taken very strong management actions to make sure that our [loan] book becomes more balanced as we look into the future, so that our reliance on either industry-specific concentration or NIM-specific concentration is reduced all the time.”
StanChart is in the midst of rebalancing its loan portfolio, he says. “A well-balanced portfolio is what we want to achieve. So, we want to do, on the retail banking side, sensible unsecured lending — credit cards, personal financing. And we definitely want to play an active role in mortgages, even though the whole market has slowed.”
Housing loans made up about 40% of StanChart’s total gross financing last year.
Wealth management is also a key focus for the group. Malaysia is the second largest wealth management market for StanChart in Asean.
“Where we’re really putting all our effort into is serving our affluent and emerging-affluent customer base. And so, we’re really beefing up our priority banking and our wealth propositions, so that we participate more heavily in that segment,” Mahendra says.
He expects StanChart’s loan growth to be muted as it seeks to rebalance its portfolio.
Last year, gross loans shrunk to RM30.7 billion from RM34.56 billion in the year earlier. “We’re rebalancing our portfolios, and in that period of rebalancing, we will continue to see our balance sheet shrink rather than grow. We are going to build it back over time but I think we are on a three to five-year journey. This is not about saying, ‘My balance sheet has shrunk, so do I explode it out again next year?’ I think we will do that slowly and gradually but our ambition is to grow.”
Mahendra says the group will count on corporate and institutional banking, commercial banking and retail banking to drive the group forward. “We want to fire up all [three] engines and we’re well on our way to doing that.”