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Send to friendOverall, the Maybank Group’s home market countries – Malaysia, Singapore and Indonesia – sustained their growth momentum in FY2011 as global economic recovery gathered momentum.
Global economic growth accelerated to 4.1% in FY2011 after rebounding by 1.9% in FY2010 from the 1.9% contraction in FY2009 as recovery from the 2008-2009 global financial crisis and world recession gathered momentum.
The Malaysian economy grew by 4.7% (FY2010: 5.4%) on growth in private consumption and sustained robust expansion in gross fixed capital formation amid the consolidation in Government outlays and moderate external trade growth.
Singapore’s real GDP growth was 7.9% in the financial year under review compared with 10.5% in the preceding financial year, thanks to the sustained growth in external trade and consumer spending, while growth in Government spending and gross fixed capital formation continued at slower pace.
Indonesia registered 6.4% economic expansion in FY2011 after the 5.3% increase in FY2010, spearheaded by domestic demand as growth in consumer, business and Government spending picked up, which in turn boosted import growth, while exports were buoyed by firm commodity prices.
Despite the stronger FY2011 growth performance noted above, global real GDP growth decelerated to 3.6% in the second half from 4.7% in the first half, reflecting the dampening impact of rising commodity prices and inflation that prompted interest rate hikes especially in the emerging and developing economies, plus the diminishing effect of the earlier fiscal stimuli, as well as the output and trade shock from Japan’s earthquake and tsunami on 11 March 2011 which disrupted the global supply chain. These were followed by several developments at end-FY2011 and early-FY2012 that further elevate the risks to global economic outlook.
Global: Quarterly Real GDP Growth (% YoY)
The Eurozone sovereign debt crisis – triggered by concerns over the sustainability of budget deficits and government debts – intensified towards the end of FY2011 and at the start of FY2012. The crisis, initially contained in the smaller economies of Greece, Ireland and Portugal, now threatens to engulf the larger economies of France, Italy and Spain with potential fallout on the banking sector on exposure and counterparty risks. In response, the European Union announced a slew of measures on 21 July 2011 that included a second bailout for Greece; voluntary restructuring and buybacks of Greek debt; and expanding the scopes as well as improving the terms and conditions for the utilisation of the European Financial Stability Facility (EFSF), while the European Central Bank (ECB) intervened in the region’s bond market in early-August 2011 to ease the stress on the Italian and Spanish bonds.
At the same time, there is the fear of a double-dip recession in the US on signs that the economy’s recovery is losing momentum following the deceleration in quarterly real GDP growth, and as the Federal Reserve’s second quantitative easing (QE2) enacted in November 2010 ended in June 2011. The US is also under pressures to reduce budget deficit and contain government debt after the downgrade in its sovereign credit rating to “AA+” from “AAA” by the rating agency Standard & Poor’s on 5 August 2011.
The downside risks facing the global economy were also amplified going into FY2012 as the global manufacturing purchasing managers’ index (PMI) continued its downward trajectory for the fifth consecutive month as of July 2011. The heightened concerns about growth prospects resulted in the global stock market plunge in early August 2011.
Current global real GDP growth forecasts for the calendar year 2011 and 2012 are based on the assumptions that the US economy stays on the growth path, the Eurozone sovereign debt crisis will be contained and resolved, China will achieve a growth “soft landing”, and growth in the emerging market economies will be sustained by strong fundamentals and positive socioeconomic dynamics.
Bearing in mind the above caveats, the Malaysian economy is projected to grow by 5.5% in 2012 after the forecast of 5.1% in 2011. Domestic demand is key to sustaining growth amid the external uncertainties. Infrastructure construction and business spending will be the major drivers with the rollout of the Mass Rapid Transit (MRT) project and the implementation of investments in sectors and industries such as oil & gas, electrical & electronics, agriculture (plantation and food-based), tourism, healthcare, education and business services, all of which have been identified and confirmed under the Economic Transformation Programme (ETP). At the close of FY2011, a total of 65 projects with investment values totaling RM169.8b were committed under the ETP. Gradual reduction in food, fuel and energy subsidies plus measures to address the public concern over the rising cost of living should keep the inflation rate in check and limit the downsides to consumer spending. In addition, monetary policy is expected to remain accommodative to support business and consumer spending amid fiscal consolidation. This was signaled by Bank Negara Malaysia’s decision to keep the Overnight Policy Rate (OPR) at 3% in the first Monetary Policy Committee (MPC) meeting of FY2012 on 5 July 2011. OPR is expected to stay at this level until the middle of 2012 at least.
Singapore’s real GDP is projected to slow to 4.4% in 2012 from 5.2% in 2011, reflecting the high degree of economic openness for a global trade and finance oriented economy, and the impact of high living costs. To ensure the economy stays on the growth path, the Monetary Authority of Singapore’s current exchange rate policy of gradual appreciation in the Singapore Dollar is expected to be maintained, and the country’s strong fiscal position will be utilised to support domestic demand.
Indonesia’s economic expansion is expected to be sustained at 6.6% in 2012 (2011: 6.3%), as domestic economic reforms and restructuring as well as its emerging economy status draws in capital flows, especially foreign direct investment (FDI), boosting output, employment and income, and in turn lifting domestic demand. Monetary policy is also expected to remain supportive of domestic demand amid recent indications of moderating inflationary pressures, with Bank Indonesia’s reference rate likely to remain stable into the foreseeable future, having stayed at the current rate of 6.75% since February 2011.
Banking system loans growth remained firm during the period under review, expanding 13.4% in FY2011 to RM947.7 billion as at end-June 2011, versus a growth of 12.5% in FY2010. While household loan growth remained robust, non-household loan growth noticeably gathered momentum towards the latter few months and outpaced household loan growth. For FY2011, household loans expanded 12.8% YoY to RM519.6 billion while non-household loans increased at a rate of 14.2% YoY to RM428.1 billion. Household loans made up 55% of system loans as at end-June 2011.
While compliance with FRS139 resulted in a jump in impaired loans during the year, overall industry health remained fundamentally strong, with the net impaired loans ratio of the banking system coming in at a relatively low 2% as at end-June 2011. Industry loan loss coverage dipped during the year but ended the year at a comfortable 94.5%.
The banking system continued to be well capitalised in FY2011. Core capital and risk weighted capital ratios were 12.3% and 13.9% respectively as at end-June 2011.
During the year, however, competition for both loans and deposits remained elevated and contributed to margin compression, which in turn muted profitability for the banking system. Earnings growth, nevertheless, was sustained on the back of lower credit charge-off rates.
Uncertainties in the global economies cloud the outlook for the domestic economy. Nevertheless, we expect system loans to expand further with project system loan growth of 10-12% in FY2012. Household loan growth is likely to moderate, in our view, with inflationary pressures and rising interest rates likely to temper demand. Nevertheless, we expect business loan growth to pick up the slack, riding on loan demand for projects under the Economic Transformation Programme (ETP). The kick-off of projects under the ETP should also serve to benefit the debt/equity capital markets, with flowthrough benefits to investment banks.
Price competition within the industry is unlikely to ease anytime soon and, as such, any recovery in net interest margins is likely to be muted, in our view. Nevertheless, asset quality is expected to remain healthy and charge-off rates should remain relatively benign, barring major economic disruptions.
It has been a decade since the 10-year Financial Sector Masterplan (FSMP) was introduced in 2001 and the journey continues with the expected unveiling of the 2nd Financial Sector Masterplan (FSMP2) in the coming months. Liberalisation of the domestic financial sector was a key emphasis in the FSMP and we expect it to be an ongoing theme in FSMP2.
The recently completed EON Capital-Hong Leong Bank merger has resulted in one less financial institution in the industry but Bank Negara Malaysia believes that there is room for further consolidation among the domestic banks and financial institutions, particularly as the sector continues to liberalise. To this end, M&As are likely to be a prevalent theme into the coming year.
With Malaysia being a fairly mature market, banks are increasingly pushing abroad for incremental earnings growth and this is a trend that is likely to persist. In fact, a common thread running through the ETP and Bank Negara’s Financial Stability and Payment Systems Report 2010 is the need to facilitate the push by local financial institutions beyond Malaysian shores for incremental growth. To this end, the Central Bank will proactively seek to open up opportunities abroad through bilateral and multilateral agreements. As at the end of 2010, six of the domestic banking groups had operations in 19 countries, with overseas operations contributing RM250 billion in total assets and almost RM2 billion in profits.
