Banks’ earnings pressure cushioned by bond rally: RAM

PETALING JAYA: Despite tepid loan growth and pressure on net interest margin (NIM), RAM Ratings said strong trading income underpinned by the domestic bond market’s rally cushioned the impact on Malaysian banks’ earnings in the first nine months of the year (9M’19).

“Foreign investors’ hunt for yields amid the prospects of low global interest rates has been fuelling demand for Malaysian bonds. Inflows of foreign funds amounted to RM4.3 billion in 9M’19 compared to an outflow of RM22.2 billion in the previous corresponding period. The yield on 10-year Malaysian government securities had declined to 3.3% as at endSeptember 2019, from 4.1% as at endDecember 2018,” said RAM co-head of Financial Institution Ratings Wong Yin Ching.

The rating agency noted that while most banks’ NIM broadened quarter-on-quarter in Q3’19, the average NIM for the eight anchor banks remained weak at 2.18% in 9M’19 versus 2.25% in 9M’18.

“The easier liquidity arising from the recent cut in the statutory reserve requirement is only expected to have a marginally positive impact on NIM.”

Meanwhile, RAM said loan growth decelerated to a new low of 3.7% in October 2019, as the external environment remains challenging against a more subdued global growth outlook.

The eight anchor banks’ average credit cost ratio rose to 31 bps as a result of a few lumpy impairments from the domestic agriculture and manufacturing sectors as well as some overseas exposures.

“The surge in trading income moderated the earnings impact from poorer net interest income and an uptick in impairment charges. On the whole, the eight anchor banks’ average pre-tax ROA (return on assets) and ROE (return on equity) weakened to a respective 1.32% and 12.9% in 9M’19 relative to 1.38% and 13.7% in 9M’18,” Wong added.

RAM said the banking system’s gross impaired loan ratio remained sturdy at 1.62% as at end-October 2019 despite having nudged up from 1.48% as at end-December 2018.