KUALA LUMPUR (May 31): S&P Global Ratings is expecting a "disappointing" 2019 for Malaysian banks in terms of bottom-line earnings, after their first quarter results pointed to a weakening trend in profitability, amid escalating trade tensions between the two largest economies in the world.

This will come amid visible margin compression, slower loan growth and higher non-interest income for these banks for the rest of 2019, though asset quality will likely hold, despite downward pressures.
 
"All five Malaysian banking groups that are covered by S&P Global Ratings reported a year-on-year margin decline in their first-quarter 2019 results: 9 basis points (bps) for both Malayan Banking Bhd and CIMB Group Holdings Bhd; 12 bps for RHB Bank Bhd; -14 bps for Public Bank Bhd; and -26 bps for AMMB Holdings Bhd, whose key commercial banking subsidiary is AmBank (M) Bhd.

"Even on a sequential basis, three out of the five banks have shown quarterly margin deterioration: 8 bps for Maybank; 4 bps for RHB; and 10 bps for AMMB. Meanwhile, two recorded moderate improvements: 1 bp for Public Bank and 3 bps for CIMB. However, these improvements are either unsustainable or masked by their overseas operations' net interest margin recovery (in the case of Indonesia for CIMB)," the rating agency said in a statement today.

Notably, it said the margin compression seen took place before Bank Negara Malaysia announced a 25 bps overnight policy rate cut in May, which means there is further downside ahead until year end. S&P assumes a six to nine-month lag for the repricing of these banks' assets and liabilities.

"Continuous tight liquidity in the market — amid persistent deposit competition — clearly does not help and is increasing the cost of funding. Heightened capital market volatility amid escalating trade tensions between the US and China — while not a risk factor unique to Malaysia — is dampening the outlook on local banks' non-interest revenues.

"All these factors contribute to our negative view on Malaysian banks' profitability trend this year — especially when we believe there is limited room for further cost cutting," said S&P Global Ratings credit analyst Nancy Duan. 

This is because many of the bank's investments are now more structural and strategic, Duan said, like technological investments, which should not be called off easily. "All in all, we are likely to see a disappointing 2019 in terms of bottom-line earnings," Duan said.

Still, the rating agency sees "continued resilience" in domestic banks asset quality profile, despite downard pressures at such uncertain times.

"We are of the opinion that the banks' domestic portfolio will remain sound in general, supported by healthy private consumption and the revival of previously-suspended infrastructure projects. Small and midsize enterprises, as well as low-income households, are more vulnerable in a slowing economy, but the lower interest rates could help cushion the impact," the statement added.