articles Ratings /ratings/en/research/articles/190902-malaysian-banking-outlook-incumbents-feel-the-squeeze-11117490 content esgSubNav
Log in to other products

Login to Market Intelligence Platform


Looking for more?

In This List

Malaysian Banking Outlook: Incumbents Feel The Squeeze


Securities Firms Should Benefit From Global Economic Recovery In 2021 As Risks Abound


French Bank Outlook 2021: All About Efficiency And Asset Quality


Bulletin: U.K. Bank Rating Actions Won’t Wait For The Bank of England’s 2021 Stress Test Results


Banks In Emerging Markets: 15 Countries, Three Main Risks (January 2021 Update)

Malaysian Banking Outlook: Incumbents Feel The Squeeze

The Malaysian banking industry is drifting. The country's banking incumbents are well capitalized, enjoying historically low ratios of nonperforming loans (NPLs) and credit costs for its domestic loan book, and stable market share. However, S&P Global Ratings projects the banks' loan growth in 2019 to be half the level it was four years ago, and that profit will disappoint yet again amid a declining net interest margin.

Malaysian banks' loan growth has stayed in single digits (4%-6%) for the past three-and-a-half years, amid domestic policy uncertainties and slow external growth. The banks are battling on multiple fronts: trade war, a China-led regional economic slowdown, dampened domestic business sentiment, and continuously soft commodities prices. Moreover, the lenders need to contend with the possibility that financial technology (fintech) may radically disrupt their industry, just as they are shaving costs.

While such factors don't yet affect our ratings--we maintain a stable outlook on all the Malaysian banks we rate--we believe it's critical to flag the issues. Malaysia's incumbent lenders are facing cyclical and secular pressures that may slowly erode their financial standing if not addressed.

The Global Trends Buffeting Malaysia

We project Malaysian bank loans will grow 3%-5% in 2019, about half the growth achieved in 2015. We also expect the industry's net interest margin will contract 5-10 basis points in the year, following cuts to the policy rate and heated domestic competition for deposits.

Chart 1


Bank Negara Malaysia trimmed the policy interest rate by 25 basis points in May, and we expect one more interest rate reduction this year. The U.S. Federal Reserve's more accommodative monetary policy has given room for regional central banks to ease policy, weighing on margins.

Chart 2


Malaysia's small, trade-dependent economy is exposed to global stresses. China is Malaysia's main trading partner and the Southeast Asian economy is affected by China's economic deceleration. The Sino-U.S. trade war hurts the Chinese economy and, therefore, Chinese consumption of Malaysian imports.

We see particular weakness in Malaysia's tech-oriented exports to China. An ongoing slowdown in the regional electronics and trade cycle is already affecting Malaysia's tech sector.

Chart 3


Malaysian banks' direct exposure to exports and electronics manufacturing sectors tends to be small. However, we expect the trade war will have meaningful spillover effects to the domestic economy, where Malaysian banks have a significant stake.

Chart 4


Chart 5


While current bad loans in Malaysia are low by regional standards, we expect NPL rates to edge up to 1.6%-1.7% over the next 12-18 months, from 1.5%, taking into account deteriorating conditions.

Chart 6


High Private Sector Debt And Property Overhang Drag On Growth

Malaysian households have been deleveraging for the past three years. Most recently, the trade war and volatile capital markets have weighed on consumer sentiment and discouraged business investment. A slipping Malaysian economic growth is translating into slowing credit demand, and we project the ratio of household debt to GDP to stabilize at the current 81%-82% over the next two years.

The large financial assets buffer of Malaysian households, at 2x household financial liabilities, protects against bad debt. Unemployment remains low--we project a jobless rate of 3.3%-3.4%, and suggests credit risk in the household sector remains well contained.

However, given that Malaysian banks do over half (58%) of all lending to households, any indicator suggesting softness in household borrowing bodes poorly for lenders.

Chart 7


Even as the Malaysian corporate sector's debt-paying capabilities remain solid, the earnings trend is weak. We expect the strain on corporate income to persist amid tough macroeconomic conditions.

Chart 8


Malaysian commercial property market is wading through excess supply. We see signs on the ground in the form of empty shopping malls and vacant office buildings being built in peripheral locations.

The supply overhang has been in place for a few years. While we haven't seen this mismatch translating to banks' NPL book yet--the commercial-property related NPL ratio is low at 1.4%--we expect this will depress demand for loans from the developers.

There is anecdotal evidence suggesting that many Malaysian developers are cash rich and revenue-diversified, and should be able to ride out the downturn. Small developers are more vulnerable.

The Pros And Cons Of Diversification

The return to margin compression worsens banks' profit outlook. Competition for cheap, sticky retail deposits flares up repeatedly as banks vie for high-quality, liquid assets.

Seeing few growth areas, Malaysian banks have responded by trimming operational costs, closing branches, and retrenching staff. The cost-to-income ratio in the sector has stayed at around 47%-48% over the past two years. While banks have been striving to improve this ratio, we believe that is unlikely without better support from earnings.

Malaysian banks have responded to slow growth at home by diversifying offshore, to countries such as Singapore and Indonesia. The overseas diversification has added more-broad-based revenue streams for some of the largest Malaysian banks over the years, boosting their margins.

For example, Indonesia is a highly profitable market for the Malaysian lenders--they achieve about twice the net interest margin in Indonesia compared to what they get at home. But when times are bad, Malaysian banks' overseas operations tend to drag down the group profit, as seen in recent years' losses in the Singapore offshore oil and gas sector, and the Indonesian mining and commodities sectors.

We think the leading banks' overseas operations should recover from their recent troubles as the issues in those segments have largely played out.

However, Singapore, being a highly open economy, is likely to feel the full effect of macro-headwinds over the next 12-18 months, limiting the profit upside for banks. Notably, the Singapore economy grew by just 0.1% year on year in the second quarter, a marked slowdown from the 1.1% growth logged in the previous quarter.

Behold, The Fintech Revolution

In this climate of cost-cutting and strained profit arrives digital banking. Malaysian regulators are expected to hand out the country's first digital banking licenses in the next 12-24 months. This will allow local tech and telecom groups such as Grab Holdings Inc. and Axiata Group Bhd., to compete directly with banks in lending and deposits-taking, without the encumbrance of an expensive branch network.

International leading technology giants such as Alibaba Group and Tencent Holdings, which already have a meaningful share of Malaysia's digital payments market, could challenge the Malaysian lenders. Both have proved highly competitive in digitalized financial services in China.

Chart 9


International experiences in China and Singapore show that a fintech-powered lending business is generally able to keep their cost-to-income ratio low, at slightly above 30%, compared with the current 47% cost-to-income ratio for the Malaysian banking sector. We expect the arrival of digital banking will result in service fee cuts and yet more compression to the net interest margin on deposit competition.

Tech groups have the potential to compete with traditional lenders on almost all fronts in retail banking. To manage this threat, incumbent banks will need to invest heavily in technology.

The risk is that they may not have the money to support this spending given their earning constraints. This will be especially challenging for small Malaysian lenders, and fintech competition may trigger overdue sector consolidation.

The fintech threat is more long term, and we don't expect the competitive landscape to change dramatically for the next three to five years. Banks still have advantages, such as their market dominance, and regulatory and compliance knowledge. They also have consumers' trust, which the fintech newcomers have yet to earn. In addition, this three-to-five year window will give banks time to re-invent themselves, and design coping strategies.

In our view, some banks may cooperate with fintech firms on product design and risk underwriting, some may invest in digital startups, and some may even partner with the fintech arrivistes to run digital banks. It's a plan for next-stage incumbency, but it's certainly not a guarantee of it.


Table 1

Malaysian Banking Peer Comparison
Maybank CIMB Group Public Bank RHB Bank
Rating A-/Stable/A-2 Not rated (CIMB Bank: A-/Stable/A-2) A-/Stable/A-2 BBB+/Stable/A-2
Mil. MYR 2016a 2017a 2018a 2016a 2017a 2018a 2016a 2017a 2018a 2016a 2017a 2018a
Total assets 736.0 765.3 807.0 485.8 506.5 534.1 380.1 395.3 419.7 236.7 230.2 243.2
Customer loans (net) 477.8 483.6 505.5 315.4 316.6 337.1 292.4 303.0 315.3 152.4 158.3 165.6
Customer deposits 517.1 526.6 556.3 333.8 351.3 373.3 310.0 319.3 339.2 165.6 166.9 178.9
Net customer loan/deposit (%) 92.40 91.83 90.87 94.49 90.10 90.31 94.34 94.92 92.95 91.98 94.87 92.60
Net profit 7.0 7.8 8.4 3.6 4.6 5.7 5.3 5.5 5.7 1.7 2.0 2.3
Net profit to parent 6.7 7.5 8.1 3.6 4.5 5.6 5.2 5.5 5.6 1.7 2.0 2.3
Return on average equity (%) 10.56 10.65 11.09 8.26 9.41 11.30 15.80 15.20 14.12 8.43 8.65 10.08
Return on average assets (%) 0.97 1.03 1.06 0.77 0.92 1.09 1.40 1.42 1.39 0.75 0.84 0.98
Net interest margin (%) 2.27 2.36 2.34 2.62 2.67 2.50 2.13 2.20 2.16 2.04 2.05 2.23
Cost-to-income (%) 44.87 45.93 44.86 54.14 51.80 52.96 32.23 31.90 32.93 49.82 49.86 49.32
Impaired ratio (%) 2.28 2.35 2.42 3.29 3.39 2.91 0.51 0.48 0.51 2.43 2.23 2.06
Impairment coverage ratio (%) 72.01 71.40 82.01 79.81 70.47 91.03 102.73 95.49 126.02 56.86 51.18 93.34
Credit cost (%) 0.63 0.41 0.32 0.82 0.71 0.44 0.07 0.07 0.05 0.39 0.27 0.20
Common equity tier 1 ratio (%) 13.99 14.77 15.03 11.30 12.20 12.60 11.86 12.76 13.63 13.33 14.23 15.92
Tier 1 ratio (%) 15.66 16.46 15.98 12.90 13.60 N.A. 12.72 13.54 14.27 13.61 14.49 16.13
Total capital adequacy (%) 19.29 19.38 19.02 16.30 16.50 17.30 15.98 16.49 16.84 17.41 17.50 19.21
Liquidity coverage ratio (%) 151.90 133.10 132.40 N.A. 156 164 N.A. N.A. N.A. 107.50 117.50 143.00
Hong Leong AMMB Affin Bank Alliance Bank
Rating Not rated Not rated (AmBank: BBB+/Stable/A-2) Not rated Not rated
Mil. MYR 2016a 2017a 2018a 2016a 2017a 2018a 2016a 2017a 2018a 2016a 2017a 2018a
Total assets 210.5 219.0 229.3 133.8 134.8 137.9 60.2 70.0 76.0 55.6 54.1 53.9
Customer loans (net) 120.4 124.8 128.9 86.5 89.9 95.4 42.7 45.7 48.4 38.4 39.0 40.0
Customer deposits 149.5 154.5 156.9 90.4 94.0 95.9 47.6 50.9 57.3 46.1 44.4 42.7
Net customer loan/deposit (%) 80.57 80.81 82.13 95.72 95.64 99.41 89.58 89.79 84.39 83.28 87.73 93.56
Net profit 2.1 2.3 2.9 1.4 1.4 1.3 0.6 0.4 0.5 0.5 0.5 0.5
Net profit to parent 1.4 1.5 1.9 1.3 1.3 1.1 0.5 0.4 0.5 0.5 0.5 0.5
Return on average equity (%) 9.48 9.55 11.16 8.86 8.49 7.21 0.00 0.00 0.00 11.52 10.48 9.44
Return on average assets (%) 1.00 1.08 1.29 1.05 1.09 0.91 0.96 0.61 0.69 0.97 0.94 0.92
Net interest margin (%) 1.58 1.66 1.65 2.08 2.07 2.13 1.84 2.02 1.83 2.06 2.13 2.35
Cost-to-income (%) 42.12 40.09 37.80 56.88 57.09 61.20 56.10 59.87 63.39 48.42 47.05 50.51
Impaired ratio (%) 0.79 0.96 0.87 1.94 1.86 1.70 1.67 2.53 3.25 1.26 1.00 1.43
Impairment coverage ratio (%) 119.82 95.14 88.99 81.08 66.35 57.58 96.60 98.47 97.08 76.93 96.59 64.49
Credit cost (%) 0.04 0.13 0.06 (0.19) (0.21) (0.00) 0.17 0.25 0.18 0.12 0.23 0.23
Common equity tier 1 ratio (%) 13.18 13.79 13.11 10.60 11.10 11.90 12.59 12.21 11.92 12.07 13.33 13.69
Tier 1 ratio (%) 13.58 14.19 13.80 12.50 11.10 11.90 12.59 12.23 13.60 12.07 13.33 14.12
Total capital adequacy (%) 15.10 16.28 16.75 16.30 13.60 15.40 16.20 17.23 19.00 17.66 18.00 18.64
Liquidity coverage ratio (%) 114 137 126 N.A. N.A. 193 N.A. 108.5 169.3 155.20 159.90 154.30
a--Actual. N.A.--Not applicable. Affin Bank--Affin Bank Bhd. Alliance Bank--Alliance Bank Malaysia Bhd. AmBank--AmBank (M) Bhd. CIMB Bank--CIMB Bank Bhd. Hong Leong--Hong Leong Bank Bhd. Maybank--Malayan Banking Bhd. Public Bank--Public Bank Bhd. RHB--RHB Bank Bhd. Source: S&P Global Ratings, SNL, banks' presentation and reports.

Related Research

  • Asia Pacific Quarterly: Weaker Outlook As Trade Tensions Bite, July 9, 2019
  • Malaysia: Summary Analysis, July 3, 2019
  • Trade Tensions Weigh On Malaysian Banks' Profitability, May 30, 2019
  • Banking Industry Country Risk Assessment: Malaysia, Oct. 4, 2018

This report does not constitute a rating action.

Primary Credit Analyst:Rujun Duan, Singapore + 65 6216 1152;
Secondary Contacts:Vishrut Rana, Singapore (65) 6216-1008;
Ivan Tan, Singapore (65) 6239-6335;
Geeta Chugh, Mumbai (91) 22-3342-1910;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back