After enjoying a good run in the last few years, players in Malaysia’s banking industry are bracing themselves for a tougher operating environment ahead, amid growing headwinds in the external environment and intensifying competition.
Additionally, a tighter regulatory regime with the introduction of the Financial Services Act (FSA) and Islamic Financial Services Act (IFSA) in July is expected to bring about a change for the industry.
China’s growth has slowed to 7% – 8% this year, from around 9% to 10% two years ago. Price bubbles are building up while bad loans and excessive lending are plaguing the banking sector. India, which has been growing above 7% in now projected to grow by just 4% in 2014.
In ASEAN, Indonesia is facing the same problems of deteriorating current account deficits which causing the rupee to depreciate by 20% since the beginning of the year. Thailand is already on technical recession while Malaysia faces high household and government debts as well as depreciating currency. Loans growth was below expectations and interest income was lacklustre, with net interest margin compressed by lower asset yields as higher yielding loans were replaced by lower yielding ones.
Going forward, the non-interest income will continue to underpin earnings growth, against the backdrop of more stringent capital requirements that have been in place. In this regards, key areas would be bancassurance, wealth management, and transactional banking fees.
Besides that, anticipation that the QE programme in US may be tapered off sooner. Due to that, Malaysia saw a huge outflow of funds from June onwards. Coupled with the new Acts, the compliance will have an impact in the form of higher costs, management distraction and reduced capacity to lend.