Layoffs in Malaysian banks a symptom of slowing regional economy

BY BOO SU-LYN

Jayant Menon, a lead economist at the Asian Development Bank said banks would need to undertake cost-cutting measures due to slowing economic growth in the region. — Picture by Saw Siow Feng
KUALA LUMPUR, Nov 1 — The recent string of restructuring by several banks in Malaysia is due to an unexpectedly bigger impact from slowing economic growth in the region amid falling government revenues, analysts have said.

Asian Development Bank lead economist (trade and regional cooperation) Jayant Menon said the sluggish economy in the region, chiefly in China but with a larger than expected effect on its trading partners such as Malaysia, would affect many sectors of the economy, including services like banking.

“With dwindling government revenues following the oil and commodity price decline, the government-linked banks can no longer expect large subsidies to weather the slowdown, and will need to undertake cost-cutting measures, such as retrenchments, to remain competitive,” Jayant told Malay Mail Online.

Bloomberg TV Malaysia reported on Tuesday that Hong Leong Bank Bhd announced its mutual separation scheme on October 21, following other banks like CIMB Group Holdings Bhd, RHB Capital Bhd and Affin Bank Bhd that had laid off workers.

Government-linked CIMB Group Holdings reportedly cut 11.1 per cent of its total workforce earlier this year, or 3,599 employees, while RHB Banking Group reportedly said last September that there was no specific target on the number of staff that RHB Capital would retrench.

RAM’s co-head of financial institution ratings Wong Yin Ching noted that some Malaysian banks have embarked on merger and acquisition exercises over the last few years that have resulted in a bigger workforce, besides relying more on technology.

“Hence, as banks pursue greater cost efficiency in this increasingly competitive environment, we have seen various measures being implemented to reduce their workforce.

“These have been undertaken with greater urgency now given the softer earnings outlook in this more challenging economic environment with slower loan growth and continued margin compression,” Wong said.

Maybank Investment Bank group chief economist Suhaimi Ilias also pointed to the mergers and acquisitions in the banking sector that have led to excess staff, like at CIMB Investment Bank following the Royal Bank of Scotland (RBS) Asia Pacific acquisition, as well as the RHB-OSK and Affin-Hwang mergers.

“Amid pressure on interest income and intense competition for fee-based income, banks have to manage their costs-income ratio (CIR) and boost revenue per worker as well as overall productivity.

“The future of banking is also changing as information and communication technology play increasing role in the provision of services,” Suhaimi said.

- See more at: http://www.themalaymailonline.com/malaysia/article/layoffs-in-malaysian-banks-a-symptom-of-slowing-regional-economy-analy#sthash.51WHcbVH.dpuf

Banking sector: Valuations are undemanding

Banking sector: Valuations are undemanding

Written by Financial Daily
Tuesday, 08 March 2011 11:28


Banking sector
Maintain overweight:

The sector’s value proposition lies in (i) stable economic growth which lends support to our aggregate net profit growth forecast of 11.6% for 2011 and 11.8% for 2012; (ii) benign inflation and bottoming margins; (iii) steady loan growth momentum; (iv) potential Economic Transformation Programme upside surprises; (v) cross-synergies and burgeoning contribution from regional operations to group earnings; (vi) healthy capital ratios; and (vii) decent valuations and dividend yields. RHB Capital and CIMB continue to be our top picks.

Results were broadly within expectations, with recurring net profit up 24% year-on-year (y-o-y). While cumulative loan growth was a commendable 12.9% y-o-y, net interest margin (NIM) compression during the period contributed to a more moderate 10.3% y-o-y expansion in net interest income, while fee income and other non-interest income growth rates were a modest 6.8% y-o-y respectively. Operating expenses, meanwhile, rose 10.1% y-o-y. Consequently, operating profit rose by a slower 11% y-o-y, while the jump in net profit was driven primarily by lower loan loss provisions, which fell a sizeable 34.5% y-o-y in 2010.

Our industry loan growth estimate is raised to 11.5% for 2011 from 10%-11% previously and we forecast 2012 loan growth at 10.5%. We expect household loan demand to moderate from 13.2% for 2010 to about 10.5% for 2011 and 8% for 2012, but expect non-household (business/government) lending to pick up the slack with growth rates of 12.7% and 13.5% for 2011 and 2012 respectively, from 12.3% for 2010.

We project recurring net profit growth of 11.6% and 11.8% for 2011 and 2012 respectively for the top 5 banks, on operating profit growth of 8.6% for 2011 and 12.4% for 2012. We expect cumulative loans (domestic and regional) for the top 5 banks to expand by 12% for 2011, 10.9% for 2012. While we have imputed a 6-11 basis points NIM contraction this year, we expect NIMs to bottom out and recover in 2012, aided in part by likely rate hikes in 2H10. Amid volatility in the external environment, we are factoring in moderately higher non-performing loans.

Valuations are undemanding, in our opinion, with the large banks trading at a prospective 2011 calendarised PER of 13.1 times, 11.7 times for 2012. Separately, the sector trades at a prospective 2012 P/BV of 1.9 times supported by an average ROE of 16.9%. Dividend yields, meanwhile, average a decent 4.2% and 4.7% for 2011 and 2012 respectively. — Maybank IB Research, March 7


This article appeared in The Edge Financial Daily, March 8, 2011.

Laggards Maybank, RHBCap more attractive after rate hike

Laggards Maybank, RHBCap more attractive after rate hike

Written by Loong Tse Min & Daniel Khoo
Monday, 17 May 2010 10:54

KUALA LUMPUR: Banks have started to raise interest rates after Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25 basis points (bps) and big capitalised laggards could be the unexpected beneficiaries, analysts said.

Banks which were considered fully valued and less exciting due to their smaller share of the investment banking market, will now look attractive with an expected growth in net interest margins (NIM) of 10bps.

HwangDBS Vickers Research said other banks, which were laggards, would also benefit include Malayan Banking Bhd and RHB Capital Bhd. It said these banks would also benefit as proxies to economic growth after the first-quarter gross domestic product (GDP) grew at a sizzling 10.1%.



Last Thursday, BNM raised the OPR by 25bps to 2.5%, the second rate increase since March 4 and this has prompted several banks to hike their rates, effective this week.

Last Friday, Malayan Banking Bhd said it would revise upwards its deposit and base lending rate (BLR) from tomorrow with 25bps each. Maybank Islamic Bhd’s base financing rate (BFR) will similarly be increased by 25bps to 6.05%.

Other banks which are raising their rates are CIMB Bank, CIMB Islamic Bank and Bank Islam Malaysia Bhd.

HwangDBS said the OPR hike was positive for most banks as BLR-based loans tend to be re-priced within a week of a rate hike, while deposit rates take longer to adjust due to the various time buckets.

“Our sensitivity analysis shows that every 25bps hike in OPR would raise lending yields by 17bps and increase cost of funds by 7bps, thus widening NIM by 10bps and boosting earnings by 6.5%, on average,” it said.

HwangDBS said Maybank was a good proxy to the higher GDP and OPR hike expectations. It expects Maybank’s loan portfolio to expand 12%-15% from 2010 to 2012 compared with the industry average of 8% to 9%.

“Maybank and RHBCap are high conviction picks and we have buy call and target prices of RM9.10 and RM7.30, respectively,” it said.

The research house said the Alliance Financial Group, with 84% variable rate loans in its portfolio, would be the biggest winner while AMMB Holdings Bhd would be least affected due to its high proportion of fixed rate loans (57%).

AmBank Group’s chief financial officer and deputy group managing director Ashok Ramamurthy said there may be potential for RM15 million to RM20 million of revenue in the next 12 months which would be lost through “margin compression” due to the rising interest rate environment — which would make borrowing costs more expensive.

“Most banks around the world try to borrow short and lend long. And when they do that in a rising interest rate environment, there will be margin compressions. Margin compressions will be capped at RM50 million, 1.5% of our current revenues; but our actual exposure is much smaller, about one third of that,” Ashok said.

“So when you talk about our earnings guidance with profit growth of 16%-20% next year, that is after taking into account any potential impact from rising interest rates — that’s the net growth,” he added.

Maybank’s president and CEO Datuk Seri Abdul Wahid Omar said with inflation expected to rise to 2.3%, and with OPR increasing to 2.5%, the country was now experiencing positive real interest rates (after deducting inflation from interest rate figures).

He said interest rates were currently “not too high nor too low” and that it was accommodative and conducive for business and growth in the economy.

On the possibility of more OPR hikes, HwangDBS expects the rate to rise by another 50bps to 3% by the fourth quarter.

However, CIMB head of economics research Lee Heng Guie said BNM was neutral on the next rate move.

“Based on BNM’s policy statement, it is quite neutral, given the continued uncertainty of external factrors such as Greece’s sovereign debt crisis. We do expect rate change to move at a measured pace,” said Lee.

AmResearch senior economist Manokaran Mottian said the 25bps hike was a preemptive move by BNM. The central bank’s 25bps hike in March had been vindicated by the strong first-quarter GDP data.

Meanwhile, RHB Banking Group will raise the BLR for RHB Bank Bhd and the BFR for RHB Islamic from 5.8% to 6.05% from Wednesday. The new fixed deposit rates will be 

• 2.5% (for one to five months, previously 2.25% for one to 11 months), 
• 2.7% (six to 11 months), 
• 3% for 12 months (from 2.6%) and 
• 3.1% (13 to 35 months).

This article appeared in The Edge Financial Daily, May 17, 2010.