Banks’ earnings show real economy

A drop in earnings calls for a cautious approach in tackling the pandemic

karinn@thestar.com.my

WITH THE banking sector being said to be the lifeline of any modern economy, the results of major banks are a key indicator on the state of the real economy.

Just this week, a number of large banks announced their results, generally showing a drop in earnings, and coupled with warnings of the uncertain economic times.

Banks are also taking a cautious approach in tackling the pandemic, being prudent by increasing their provisions.

In Malaysia, the largest bank Malayan Banking Bhd (Maybank) said on Thursday that it needs to review its target for return on equity (ROE) in light of the Covid-19 pandemic.

The targeted ROE was previously guided at 10% to 11% for the financial year ending December 31, 2020.

The bank, which ranks fourth by assets in the region, posted better results though.

Its net profit for the first quarter ended March 31, 2020 rose 13.3% to Rm2.05bil as compared to the corresponding quarter last year.

This was on the back of better earnings from the bank’s corporate banking and global markets, investment banking and asset management segments.

Apart from that, Maybank increased its provisions for impairments on loans and other debts during the quarter, by 59% to Rm961.7mil.

However, the provisions were made during the early stages of the Covid-19 pandemic.

As such, this has yet to include the cost of accrued interest from the six-month moratorium period on hire purchase and personal loans that Maybank is absorbing.

Going forward, with the challenges of the external environment, Maybank will prioritise its capital and liquidity strength, maintain selective balance sheet expansion in tandem with the group’s risk appetite and remain focused on its ongoing cost discipline.

The group will also seek to minimise the impact of the low interest rate environment, by growing current and savings deposits, which carry a lower cost.

Maybank president and group CEO Datuk Abdul Farid Alias notes that the first-quarter results do not represent how the bank will perform for the rest of the year.

“While we still hold a large level of liquid assets, we need to strike a balance when selling them to ensure that it will not contract our net interest income, particularly in the current declining interest rate regime globally.

“We expect the operating environment for the rest of 2020 to remain uncertain, and sensitive to the kinetics of the pandemic as well as the outlook for treatment and vaccines, which will have implications to public health and economic policies,” he says in his commentary on the bank’s financial performance for the quarter.

The nation’s second-largest lender CIMB Group Holdings Bhd saw its net profit for the first quarter of financial year 2020 being halved to Rm507.9mil, as compared to the Rm1.19bil registered during the corresponding period last year.

CIMB was hit by lower non-interest income during the quarter while accounting for higher provisions, as it braces itself for the continued challenges for the rest of the year.

“Profitability was impacted by volatile trading conditions, lower foreign exchange income and isolated credits, which gave rise to increased provisioning in selected markets.

“Loan growth stayed healthy across all markets, growing 3.8% year-on-year, and our current and savings account (CASA) ratio improved significantly to 36.5%,” says CIMB Group.

The bank’s provisions at Rm968mil during the first quarter, which was mainly contributed by its Singapore operations, are almost double its net profit.

On a year-on-year comparison, CIMB’S provisions were triple the amount during the corresponding quarter last year at Rm300mil.

Public Bank Bhd, which commands the highest valuations among its peers, typically posts a good set of numbers in its financial results.

However, Public Bank was not spared from the challenges brought forth by the Covid-19 pandemic.

The bank registered a 5.7% year-on-year decline in net profit to Rm1.33bil for the first quarter ended March 31, 2020.

This was mainly attributed to declining interest rates.

Despite the compressed interest margins, Public Bank continues to record an efficient cost-to-income ratio.

The bank’s cost-to-income ratio for the first quarter stood at 35.7%, as compared to the domestic banking industry’s 44.7%.

Public Bank founder chairman emeritus

Tan Sri Teh Hong Piow highlights that rising costs are increasingly putting pressure on profitability.

Hence, the group has placed greater emphasis on broad-based cost efficiency to protect its profitability.

Public Bank’s gross impaired loan ratio was at 0.5% as at end-march 2020, reflecting its stable asset quality despite the significant challenges in the operating environment.

As for provisions for impaired loans, Public Bank has set aside a higher amount by Rm64.6mil, as compared to the same quarter in 2019, as the bank prepares for the impact of the Covid-19 pandemic.

Across the causeway, Singapore’s banks are also facing similar challenges.

OCBC Bank’s operating profit from its banking operations grew year-on-year for the first quarter of 2020, but its net profit was impacted by higher allowances.

OCBC Bank registered a 43% year-on-year decrease in net profit to S$698mil, due to lower insurance income and increase in allowances amounting to S$657mil.

The bank’s allowances in the first quarter of 2019 was S$249mil.

The allowances were allocated for general allowances buffers including macro-economic variable adjustments as well as specific allowances mainly for one downgraded large Singapore corporate account in oil trading.

On the other hand, UOB Group saw its earnings for the first quarter of 2020 impacted by declining interest rates and higher credit costs, coupled with slowing business momentum due to the effects of the global pandemic.

UOB Group posted a net profit of S$855mil for the quarter, which declined 19% year-onyear.

The bank accounted for S$546mil in allowance during the quarter, taken through IFRS 9 impairment charge and regulatory loss allowance reserve (RLAR) to strengthen gross profit coverage.

“We expect the operating environment for the rest of 2020 to remain uncertain, and sensitive to the kinetics of the pandemic.” Datuk Abdul Farid Alias