Shutting up shop: High costs and shrinkage hitting Malaysian banks

Malaysia’s banking sector is shrinking despite a vibrant potential market of 30 million people. With less money in the economy, customers are more cautious.


Malaysia’s banking industry continues to shrink in every measure. From total assets to total deposits or total equity to net profit; figures have fallen from the consistent figures seen pre-2014.

This is because non-bank financial institutions are giving people more choice about where people put their money. Capital that used to sit in Malaysian banks is also being moved overseas. These both contribute to shrinking corporate profit.

Lending is increasingly competitive. The high cost of living and moderate economic growth is making finding business more difficult for providers. Today’s customers are more prudent in their consumer and commercial spending due to uncertainty in the economy. More than two dozen local and foreign banks are fighting for a share of the market of over 30 million people.

Big banks rarely exceed expectations on profitability and risk management

NPL and ROE of the top ten banks in Malaysia (%)

NPL: non-performing loans ROE: return on equity Size is net profit. Source: Google Finance

Malaysia’s ten largest banks reported a ROE of between 8% and 17.0% and most managed to outperform the average level of profitability. Only CIMB Group Holdings and RHB Bank Bhd failed.

Public Bank Bhd. had the highest ROE at 16.1%. “The industry outlook is expected to be challenging moving forward,” Chief Executive Tey Ah Lek said. “The decline in ROE was attributable to the gradual capital commitment build up.” This year, Public Bank Bhd. will adjust their target ROE to 15.0% compared to 16.5% last year. Tey explained that his company will need to “strengthen fee-based income as well as increase productivity”.

Only three out of the largest ten banks in Malaysia performed better than the average on non-performing loans (NPL). This shows that holding larger assets does not necessarily lead to a more effective management of risk.

Three of the top four banks have a big problem with problem loans; CIMB Group Holdings had a NPL ratio of (3.3%), RHB Bank Bhd. (2.4%) and Malayan Banking (2.3%). This compares to an average for Malaysia of 2.0%. Public Bank had the lowest 0.5%.

Banks continue to work on reducing costs through technology

The banking industry cost-to-income ratio (CIR) improved from 49.3% in 2015 to 46.3% in 2016. This is the first decline after year-on-year rises since pre-2012.

The CIR of the top four banks in Malaysia (%)

CIR: cost-to-income ratio Source: Google Finance

CIMB’s group holdings have the highest CIR in the industry thanks to pressure from unreasonably high operating costs. From 2015 to August 2016, the group closed 22 physical branches to “reduce operational costs and focus on digital banking”, said Tengku Zafrul Aziz, the CIMB Group CEO.

CIMB will not look to new branches as “digital optimisation is the way to go”, he said. Staff have also been laid off amid cuts in their microfinance and wealth management sector across Southeast Asia.

Public Bank Bhd. turned in a better performance with the lowest CIR of the top four at 32.3%. This is still a two-point increase compared to 2015. RHB Bank Bhd. is struggling more with a CIR of a 50.0%. Technology improvement has helped a little, and the bank has made savings in human resources thanks to investments in technology capabilities and infrastructure.

The physical presence of banks is shrinking but loan growth is expected

This is part of a wider shift in consumer preferences. Malayan Banking is one of the outlets still heavily committed to physical channels. Even they have closed 400 branches nationwide and 2,500 automated teller machines because of “lower-than-expected” demand.

Malaysia’s local banks will achieve 6.0% to 7.0% growth in their loan business during 2017, predicts the investor service of credit risk agency, Moody’s. “Our projections are more optimistic this year as we do think that the business conditions here are fairly robust,” said Simon Chen, Moody’s vice-president.

He added, “Malaysian banks have strong incentives to promote the growth of investment accounts because they provide capital benefits and an additional source of funding to grow assets.”

Banks need to adapt to a changing environment

RAM Rating Services Bhd., a Malaysia local credit rating agency, is less optimistic. Loan growth will remain flat in 2017, at about 5.0% to 6.0%, they estimate. Growth in 2016 was 5.3%. Liquidity of local banks remained “sound.” The inflation rate reached an eight-year high in March of 5.1% and the central bank predicted inflation will remain “relatively high” in the first half of this year.

The Malaysian banking sector is facing moderate growth in the economy, low demand for loans and increasing competition. Operators can face up to this changing and challenging environment by embracing the industry’s turn towards technology and digitalisation. It is not just knowing your customer, but reaching out to them and moving forward together.