Happy New Year to all! We kick off the new year with a report released by Macquarie Equities Research (MQ Research), summarizing the November 2019 banking system data released by Bank Negara (BNM). In this report, MQ Research reiterates its non-consensus base case that there will be no FY20 overnight policy rate (OPR) cuts. Coupled with recovery in corporate credit demand, MQ Research is constructive on banks.

BNM Stats and Policy Updates

• November systems loans growth continued to be soft at +3.7% year on year (y/y), but with a sharp rebound in applications (+26% y/y, -2% month on month (m/m)). Corporate loans growth decelerated to near-record lows (+2.4% y/y) whereas retail loans enjoyed a marginal recovery (+4.7% y/y). Average lending rates (ALR) continued to slip following the May OPR cuts, but at a slower pace. On a positive note, deposit rates have begun to ease on tempered competition, resulting in marginally improved current account and savings account (CASA) ratios; fixed deposit (FD) to CASA growth: +4.0%/+5.5% y/y. Banking system liquidity remains ample with loan-to-deposit ratios at 88.8% and liquidity coverage ratio at 143%. Gross impaired loans (GIL) showed some signs of topping out (1.6%).
• BNM has unveiled the exposure draft for Digital Banks’ licensing framework and the Electronic Know-Your-Customer (e-KYC) guidelines, as well as an updated Interoperable Credit Transfer Framework (ICTF).
• Digital Banks: Similar to Singapore’s Monetary Authority of Singapore (MAS), BNM’s licensing for Digital Banks requires a clear business plan (how/when will it be profitable?) with an emphasis on targeting underserved/unserved segments (add value to the financial sector). Digital Banks will be given a 3-5 year “foundation period” that will entail an asset limit of RM2bn but also with relaxed and simplified capital and liquidity requirements. Preference will also be given to Malaysian-controlled entities. MQ Research anticipates major e-wallet players will lead the first wave of digital banks (up to 5 licenses available). And while the threat of competition for conventional banks’ assets is small, MQ Research anticipates evolution of e-wallets to digital banks will allow these digital challengers to further entrench themselves with consumers’ daily financial services – low value, but high frequency.
• The e-KYC exposure draft will be a key enabler for Digital Banks to operate completely branchless while leaning on national ID as well as conventional banks’ to help on-board customers; potentially positive for smaller banks as well.
• Key ICTF update takeaway is BNM emphasises interoperability. All players must offer interoperable QR code, even though proprietary QR codes are allowed (e.g. Maybank’s QRpay). BNM continues to require all players to participate (directly or indirectly) in the share payment infrastructure (onshore), but noted other payment systems (incl. offshore) may be permissible subject to stringent BNM approval. Overall, BNM wants to avoid market fragmentation.

Outlook

• MQ Research remains constructive on Malaysian banks in FY20, on recovering margins, stable asset quality and recovering corporate credit demand. CIMB remains MQ Research’s top pick among the big 3 banks, recommend switching to Maybank from Public.

Source: Macquarie Research - 6 Jan 2020