Malaysia's banking sector has solid fundamentals in place to meet challenges

Although funding conditions in Malaysia are tightening due to heightened macroeconomic risks, both domestically and abroad, the banking system as a whole remains profitable, liquid and well capitalised. The country’s 27 domestic and foreign banking institutions are amongst the most dynamic in the region, serving clients at home, as well as the wider South-east Asia region. As the IMF stated in a 2014 report, “strong regulatory oversight, coupled with efforts to restructure the banking sector in the aftermath of the Asian financial crisis in 1997–98, has supported rapid growth in Malaysia’s financial sector over the last decade.”

With banking assets estimated at RM2.4trn ($594.1bn) as of March 2016, according to figures from central bank Bank Negara Malaysia (BNM), banking penetration has already surpassed 200% of GDP and is approaching advanced economy levels. However, the sector remains highly consolidated, with eight domestic players competing in a relatively mature market, compared to 77 players that existed before the 1997-98 Asian financial crisis.

Total loans in the banking system reached RM1.45trn ($358.9bn) by March 2016, compared to RM1.36trn ($336.6bn) a year earlier, according to BNM. As in advanced markets, the trend is for banks not just to compete for clients, but more importantly against a liquid and well-functioning capital market. One of the main risks of disintermediation in the Malaysian banking sector has been companies raising debt through bond markets or opting for initial public offerings. As a result, the focus in the last decade has been on retail clients who offer higher risk and higher reward.

Marching On

Despite external challenges such as low commodity prices and currency volatility, local lending activity in Malaysia remains supportive of local businesses and consumers. Total financing extended to the economy by the banks expanded by 7.5% in 2015, reaching a total volume of RM1.44trn ($356.5bn), up from RM1.34trn ($331.7bn) in 2014. Islamic banks recorded higher growth in terms of loans during this period, expanding by around 16%. The highest credit growth was recorded in the corporate sector, which grew by 8%.

At the same time, households are under pressure to slow down their borrowing rate and continue to feature prominently in bank portfolios. Retail credit expanded by 7.7% year-on-year in 2015, according to BNM data. The fastest-growing consumer group in 2015 was small and medium-sized enterprises, which according to BNM recorded double-digit credit expansion of 15%. In terms of the largest loanbook, Maybank is leading the way, with an estimated RM453.5bn ($112.3bn) portfolio, according to its 2015 annual report, followed by CIMB with RM297.8bn ($73.7bn) and Public Bank with RM271.8bn ($67.3bn). RHB Capital and Hong Leong Bank ranked fourth and fifth in terms of credit portfolio in 2015 at RM149.6bn ($37.03bn) and RM113.4bn ($28.1bn), respectively.

Liquidity Support

When capital outflows first accelerated there was much concern that Malaysian banks could suffer liquidity shortages. The monetary policy was stepped up to support the financial system. Throughout 2015 and into 2016 BNM played an active role in both managing liquidity and protecting balance sheets against risk concentration. In January 2016 BNM reduced the statutory reserve requirement from 4% to 3.5% in order to inject more liquidity in the banking system. Until that point the rise in competition for deposits was pushing up lending rates as capital outflows caused a temporary dislocation of funding.

Meanwhile, the Basel III regulatory liquidity coverage ratio that requires banks to hold enough liquid assets to cover outflows in a stressed environment has encouraged competition for long-term retail deposits. Since early 2015 BNM has relied largely on monetary operations, especially reverse repo facility, to ensure that sufficient funding is available to banks in an environment of rising net external outflows, which have reduced overall liquidity in the banking system. According to a March 2016 BNM statement, “While funding conditions were occasionally tighter amid the large volume of portfolio outflows, aggregate surplus liquidity in the domestic financial system placed with the bank remained high at RM205.1bn [$50.8bn] as at end-2015.”

Lending Rates

Throughout 2015 competition for deposits in the banking sector meant that banks were willing to pay higher interest rates on deposits. Average fixed deposit rates ranged between 3.08% and 3.31%, according to BNM. In turn, this created pressure to charge more for loans to protect net interest rate margins. However, intervention from the central bank helped to prevent a climb in interest rates charged by banks on loans. Retail lending rates remained broadly stable, according to BNM. The base rate, which has replaced the base lending rate, averaged 3.9% in 2015.

Competition for deposits and higher funding costs led to some net interest margin compression. Profit made from lending is also impacted by flight to quality. As banks shift their portfolio to less risky projects and clients, their returns are diminished. At the same time, a number of banks, notably CIMB and RHB Bank, embarked on staff rationalisation programmes in order to improve their cost-to-income ratios, which are now below 50%.

Further investment in technology and automation may not have the desired impact on cost savings. The issue is that once banks introduce something like online banking they still have to maintain their branches, i.e., doubling the processes of managing both branches and online services.

Spotting Bubbles

At the same time, the authorities were watchful of banks’ exposure to real estate and construction. The IMF warned that Malaysian banks have regained exposure to those segments, reviving concerns of building another bubble in the market.

Since 2010 BNM has been gradually tightening the screws on mortgage lending while trying to stamp out property speculation, especially in Kuala Lumpur’s overheating luxury condo market, which benefits from inflows of foreign capital.

Chung Chee Leong, CEO of mortgage firm Cagamas, told OBG, “As a consequence of effective cooling measures introduced by the government and BNM to curb over-speculation in property, growth in aggregate house prices stabilised from an annual growth of 8% in the fourth quarter of 2014 to 5.8% in the fourth quarter of 2015, due to the effect of the continued adjustment to the macro-prudential and fiscal measures.”

According to BNM, Malaysian financial institutions’ exposure to the property market stood at RM733.4bn ($181.5bn), which is above 70% of GDP and equivalent to 25.7% of all financial assets. This compares to 24.1% in 2014. Some 90% of this exposure is accounted for by the purchase of residential and non-residential properties. The value of loan applications for property has been trending downwards, while more stringent eligibility requirements introduced by BNM helped to reduce the increase of banks’ sensitivity to any potential falls in property prices. According to BNM, growth in aggregate house prices stabilised at 8% following the introduction of measures to curb speculative behaviour.

Meanwhile, the share of borrowings by highly leveraged lower-income households, according to BNM, continued to decline, reflecting improvements in affordability assessment and reducing risk to the domestic banking system. Household borrowings from banks and non-banks expanded by 7.3% by the end of 2015, extending the slower pace of growth since 2010. This was mainly due to a sustained slower expansion in financing for personal use of 4.6%, while financing for house purchases remained robust at 11%. The expansion in loans for the purchase of securities and non-residential property also moderated.

Asset Quality

Ever since the 1997-98 Asia financial crisis Malaysian banks have enjoyed a benign asset quality cycle, with gross impaired loans hovering just above 2%, even as aggregate household debt continued to climb. In 2015 the gross impaired loans rate stood at 2.5%, some 30 basis points lower than in 2013. At the same time, gross delinquent loans ratio, which measures non-performing loans (NPLs), stood at 0.3% of the total banking system. This historically low NPL environment is not expected to last indefinitely and at some point the quality of banking assets will start to deteriorate, forcing banks to absorb higher levels of delinquent loans. During 2015, when the ringgit was falling against other currencies and external demand was weak, there were also at least five capital segments with potential NPL stress: fixed assets, working capital, construction, credit card and personal loans. For Malaysia’s top banks, CIMB and Maybank, the most potential for a fast change in NPL formation was identified in the working capital and construction segments. Over the next three years NPLs are expected to rise, reaching 4% of total assets. Stress tests conducted by BNM indicated that in the unlikely event of a simultaneous default taking place across all types of household borrowings losses would be limited to RM65.4bn ($16.2bn).

Capitalised System

Fortunately, Malaysian banks are well capitalised and able to withstand economic shocks. According to BNM, common equity tier (CET) capital stood at 10% and is strong enough to withstand severe economic shocks. The Malaysian banking system is also well capitalised enough to sustain any potential increase in NPLs. According to BNM’s March 2016 report, banks’ capital in excess of the minimum regulatory requirement increased by 9.5% in 2015, reaching a total of RM117.3bn ($29.04bn).

BNM stated that currently Malaysian banks’ excess capital buffers are six times greater than any estimated losses under potential stress, simulating a 40% decline in house prices. This provides enough cushion to withstand a substantial recession of more than six quarters of negative growth.

There was a fresh drive by the BNM to raise capital in 2015 partly because of looming Basel III capital requirements, which will be applied starting in 2019. In accordance with new regulations banks will have to maintain a minimum total capital ratio of 8% and a 2.5% counter-cyclical capital buffer. Malaysian banks are getting quite close to the target. Following a number of rights issues, the CET 1 capital level is estimated at 11%. Meanwhile, average return on equity for the sector as a whole is also estimated at 11%. The highest CET 1 capital level of 11.5% was posted by Affin Bank, followed by Alliance Financial Group with 11.4%. In third place was Hong Leong Bank with a CET 1 level of 11.3%. Malaysia’s largest bank, Maybank, posted a CET 1 level of 10.7%, while CIMB’s ratio was 9.1%, according to a December 2015 analysis by DBS Bank.

ASEAN Expansion

Within South-east Asia Malaysian banks are recognised for their leadership in integrating financial services across the region. CIMB Bank, for instance, was one of the first to adopt a slogan using ASEAN, appealing to both consumers and businesses operating across different jurisdictions. With a large population of foreign workers, which some estimates put as high as 5m, and billions of ringgit in remittances flowing outside of the country, Malaysian banks already have a ready-to-go regional business. In addition, foreign business interests of leading Malaysian companies such as Petronas, Sime Darby and Telekom Malaysia are another major factor in why top Malaysian banks are determined to expand their regional operations. Maybank was one of the first to receive a foreign banking licence as soon as Myanmar was opened up to outside investors. Meanwhile, both Maybank and CIMB have prominent bank subsidiaries in Indonesia and Singapore.

However, efforts to create a fully integrated ASEAN financial community continue to face a number of hurdles. The legacy of protectionism and technical issues are hampering ASEAN coverage and regional integration.

Proponents for the creation of an ASEAN bank licence point to the fact that the region will have high savings and even higher funding needs over the next two decades. For instance, the Asian Development Bank estimates a financing gap of $8trn for infrastructure alone. Yet most of ASEAN’s savings are currently invested in US government Treasuries. Malaysian banks have been campaigning for at least a decade to allow them to get more involved in setting up asset-backed structured products to support infrastructure projects. Despite a few successes in Indonesia, Myanmar and Thailand, many governments remain wary of allowing banks from the region access to their markets.


The next 18 months are likely to mark a period of consolidation and slight risk aversion as banks prepare for new Basel III rules on capital and liquidity coverage. More detail is expected on regulatory implementation guidelines. At the same time, banks are likely to try to minimise risk in terms of their portfolios by opting for steady cash flow projects, reducing their exposures to real estate and construction.

Nonetheless, a wide range of new infrastructure projects launched under the 11th Malaysia Plan is likely to fuel an increase in project finance with large projects expected in Sabah and Sarawak. Overall credit expansion in 2016 and 2017 is expected to be slower than in 2015 as portfolios mature and NPLs begin to show up in more stressed sectors. Yet the Malaysian banking sector is likely to remain liquid and profitable, able to withstand economic shocks thanks to its large capital buffers.

You have reached the limit of premium articles you can view for free. 

Choose from the options below to purchase print or digital editions of our Reports. You can also purchase a website subscription giving you unlimited access to all of our Reports online for 12 months.

If you have already purchased this Report or have a website subscription, please login to continue.

The Report: Malaysia 2016

Banking & IFS chapter from The Report: Malaysia 2016

Cover of The Report: Malaysia 2016

The Report

This article is from the Banking & IFS chapter of The Report: Malaysia 2016. Explore other chapters from this report.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart