Euromoney: Malaysian banking benefits from previous years of pain

Euromoney, September 2013

Malaysia’s banking sector went through many years of painful restructuring after the Asian financial crisis and consequently sailed through the global financial crisis a decade later largely unscathed. They are well capitalised, diversified and largely well-run – the only headwind being a flagging domestic economy.

Still, it’s interesting to see that Malaysian banks have held up in the face of the sell-off of emerging market stocks, and as of August were trading at a modest premium to the average for Asean banks. Nomura expects loan growth to moderate to 9% in the 2013 fiscal year from 10% in 2012, and return on equity to trend lower by about one percentage point (it’s around 15% today) over the next few years as banks build their core equity ratios in light of Basel 3. Gross Non-performing loans look reasonable, at 1.96% of total loans in June, while deposits are growing at 8% a year.

That said, Credit Suisse downgraded Malaysia (and Thailand)’s banking sectors from overweight to market weight in August, blaming the surge in household debt. “The biggest positive about Malaysia is that it is a defensive market,” says Credit Suisse in an August report. “However, with GDP and corporate sales slowing and real interest rates rising sharply when the country has been piling up debt, [it] is not an ideal operating backdrop, especially for banks.” Malaysia’s household debt to GDP ratio, at 80%, is the second highest in Asia, the bank says. Macquarie’s not enamoured either. “Our cautious view on the banks is predicated on both cyclical macro headwinds for Malaysia and our sense that the rapid growth in household borrowing in recent years must now slow down, leaving the ETP [Economic Transformation Programme, a huge government-led infrastructure boom] and related projects as the main growth driver going forward,” said analyst Matthew Smith in August.

Perhaps the most admired bank in Malaysia is CIMB, which, through a number of mergers and acquisitions over the last 10 years, has grown from a smart investment bank into a full-service player, after consuming Bumiputra-Commerce Bank in 2005. Other partnerships and acquisitions – Principal on the asset management side, GK Goh in Singapore, Niaga in Indonesia – have made it a force across Asean and in all financial disciplines, further cemented by its purchases of many RBS businesses in 2012.

“Our top pick is CIMB,” says Nomura analyst Julian Chua. “We believe its loan growth should be superior to the sector average as it is well positioned to finance the government infrastructure spending under the Economic Transformation Programme and high teens growth in Indonesia.” CIMB is also Morgan Stanley’s top pick, and Credit Suisse’s (with Public Bank its least preferred, in contrast to Morgan Stanley which rates Public for the quality of its franchise, and Macquarie, which ranks it the only overweight in the sector).

Euromoney’s best bank award in Malaysia has shifted several times over the last 10 years. For a long time, it was the exclusive property of Public Bank, which remains well run and healthy, with 12% loan growth year on year and strong exposure to the domestic economy, though it is big in some cutthroat sectors like mortgage and auto loans. Then, the award shifted to CIMB, which was never the biggest bank in the country but consistently impressed with its vision, innovation and drive.

But this year we opted for Maybank, the biggest, which is showing the fruits of a programme called LEAP 30, a transformational agenda it set about developing in 2008. Maybank is already the largest commercial bank in Malaysia by assets, loans, deposits and market capitalisation, but is now also impressive on other metrics: the most profitable bank in Malaysia (RM5.74 billion in 2012, up 17.6% year on year), with revenue growth across the board as coverage increased and bad loans fell. Like CIMB, it has staked a lot on regional development, most visibly through the acquisition of Singapore’s Kim Eng; it is now a top five player in various investment banking businesses in Thailand, the Philippines Vietnam and Singapore. Regional strength will be increasingly important as a diversifier away from sluggish domestic income.

Other important major banks in Malaysia include Hong Leong Bank, which has now integrated its merger with Eon Bank but has, partly as a consequence of that acquisition, seen a decline in return on risk weighted assets; AMMB Holdings, which is one of Morgan Stanley’s top picks following a five year period within which it has raised returns, diversified into commercial banking and improved its current and savings account franchise; and RHB Capital. Both AMMB and RHB have mergers either mooted or underway, AMMB with Kurnia (though it may well sell a business too, its AmLife life insurance business) and RHB with OSK Investment Bank, which RHB declared complete in April. Morgan Stanley argues that mid-caps like AMMB and RHB are the best value in the market.

An important element is Islamic banking, with all the major banks having a separate Islamic banking arm. Malaysia has the most sophisticated Islamic finance industry in the world, which today represents over 20% of overall banking assets, and it also attracts some of the most innovative minds in banking: this is another area where CIMB has built a strong leadership position.

Investment banking leaders are CIMB and Maybank, both of which are at or near the top across domestic DCM, M&A and equity capital markets.

Among foreign institutions, all three Singaporeans – DBS, OCBC and UOB – are historically strong in Malaysia, with close to full-service operations including asset management. Of the multinationals, Deutsche has a strong track record in equities, and was alongside Maybank and CIMB on all three major IPOs last year (Felda Global Ventures, IHH Healthcare and Astro Malaysia);