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In a break with tradition, Malaysia’s banks take diverging routes

Daniel Tabbush is a veteran Asia analyst, covering banks in the region for more than 20 years. The following does not constitute investment advice, and the views expressed are those of the author and do not necessarily represent the views of S&P Global Market Intelligence.

There once was a time when Malaysia's biggest lenders used to perform equally well, or equally badly. No longer. As they adapt to their fast-changing markets, these banks are delivering with each and every recent earnings period a very mixed snapshot. While this might make analyzing these banks less straightforward than previously, it does shed light on which strategies and product mixes are proving to be more robust than others in not only Malaysia, but also other parts of Southeast Asia.

Consider nonperforming loans reported for the third quarter. At Malaysia's six largest banks by assets, NPL developments for the quarter ended Sept. 30 were far from homogeneous. While AMMB Holdings Bhd. reported a contraction of NPLs of 16%, Malayan Banking Bhd. had the highest NPL increase, at 43%, with RHB Bank Berhad a distant second at 24%.

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Maybank's U.S. dollar-denominated loans, at 13% of its total loans at year-end 2015, could help in part explain its NPL growth, given the weakening Malaysian ringgit against the greenback. Another possible driver of NPLs at Maybank and RHB is that both have high concentrations of corporate loans, at 75% and 65% respectively of their total loan books.

In general, much of the NPL formation at Malaysia's big corporate lenders is the result of what we are seeing across the region. Companies involved in beleaguered sectors such as oil, gas and shipping are struggling, or will soon struggle, to pay down their loans. Maybank reported in its most recent results that 9% of its commodities exposure is impaired, but a hefty 40% is on a watch list.

AMMB's relatively low exposure to corporate lending, at 48%, is a big reason for its NPL contraction in the third quarter. Public Bank Bhd., meanwhile, had a reasonably low NPL growth rate of 5%. Retail lending comprises 63% of its loan book. Hong Leong Bank Bhd.'s NPLs also grew 5%, with 50% of its loan book comprising retail lending.

Net profit growth trends are also moving in different directions. RHB Bank's net profit, growing at 151% in the third quarter year over year, was bolstered by its strengthening fee income and net trading income. This in turn helped it shrug off sharply higher customer loan impairment expenses.

CIMB Group Holdings Bhd. net profit, which grew 28%, benefited from relatively high growth of 9.3% over the period. Peer banks' customer loan growth ranged from between 1.2% and 8.9%, so clearly CIMB has been more aggressive than other lenders and that is reflected in stronger profit growth.

Yet CIMB kept its loan loss provision expenses-to-average loan levels at amortized cost constant in the quarter, at 0.82% – this was still higher than peer banks' average of 0.26%. With a contraction of NPL growth of 4% – one of the best in the country – perhaps CIMB has some scope to ease off credit costs and see an improved return on average assets in coming quarters.

Hong Leong Bank and AMMB recorded the weakest customer loan growth at 1.3% and 1.2%, respectively. At AMMB, this could be due to pending changes in its ownership structure, as Australia & New Zealand Bank (ANZ), which owns 23.8%, looks to divest its stake. Such pending change can lead to less aggressive loan sales and targets in general. But for both banks, low loan growth is in line with worsening house price growth.

A key factor here are local house prices. The Malaysian House Price Index has been seeing muted increases since 2013, which is likely the result of a high supply of housing.

During the second quarter of 2016, the country saw the supply of residential housing contract by 0.1% year over year, marking the first decrease in a number of years. With a worsening secondary housing market and oversupply, banks will surely be more restrictive with their home-loan applications, thereby limiting growth.

Meanwhile, Malaysia's household debt-to-GDP levels, which is the highest in Southeast Asia at 89% as at year-end 2015, is likely to add a degree of saturation and caution among banks.

Of Malaysia's big banks, Public Bank remains impressive, despite 2.9% net profit growth in the third quarter. The lender has more retail loans than other mainstream Malaysia banks, at 63% of its total, and these are focused mostly on not only mortgage loans, but also auto loans. As a result, the value of the loans are generally low and there is pooling for taking credit costs, factors helping Public Bank's consistently low NPL ratio – at 0.52% in the third quarter -- and its loan loss provision expenses-to-average loans at amortized cost ratio of 0.13%. Even if net profit growth is less than spectacular, the critical nuances in the character of Public Bank have enabled it to have the best return on average equity in the country at 1.31%.Prod Tip

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