2015 turning point for Malaysian banking sector

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The Malaysian banking industry would most likely see a slowdown in loan growth to between 9% and 10% this year from 10.6% last year. Despite the hike in overnight rate policy (OPR) in July, banks’ net interest margins will continue to be under pressure due to keen competition for deposits. With the post-crisis remediation hopefully behind them, 2015 is shaping up to be the year the banking industry moves past “short-termism” to focus on improving the fundamentals of their businesses in the resolute pursuit of profitability. This is despite the new challenges and greater competition that they will face, says the 2015 Banking Outlook: Boosting Profitability Amidst New Challenges report, by the Deloitte Centre for Financial Services. Next year may be a “turning point” for profitability in the Malaysian banking sector.

“As we contemplate the future of the banking industry, the temptation to merely focus on the immediate concerns is only natural. After all, the post-crisis experience, unlike any other period in the recent history, has conditioned us to be myopic,” Deloitte said in its 2015 Banking Outlook: Boosting profitability amidst new challenges report.

“But we may soon be reaching the end-point of this chapter in the industry’s evolution that will force us to take a longer-term view,” the report noted.

Deloitte also said that with the post-crisis remediation hopefully behind it, 2015 is shaping up to be the year the banking industry moves past “short-termism” to focus on improving the fundamentals of its businesses in their pursuit of profitability. It noted that as the economy improves, banks could not hope to just ride the wave, but instead would need to become more savvy in their choice of target segments, product offerings and pricing. In a statement today, Deloitte said banks need to improve their balance sheet management as it became more necessary and complex, while addressing the rising interest rate environment. It added that with new regulatory requirements such as the liquidity cover ratio and supplementary leverage ratio that were finalised in 2014, banks – especially the large ones – would soon be forced to make changes to their balance sheets by holding additional low-yielding assets.

Deloitte Southeast Asia's Financial Services Industry Leader Ho Kok Yong said banks need to manage their balance sheets against multiple and sometimes conflicting regulatory metrics simultaneously.

“This includes, for example, their capital requirements, two liquidity ratios and a leverage ratio, on top of their bail-in-able and stress testing requirements. In the short term, the challenge of this task is further compounded by the fact that some of these metrics have not yet been finalised,” Ho added.

As banking regulators step up their pressure on banks, the compliance function is finding itself facing unprecedented demands. Deloitte also noted the changing banking landscape around the world, as differentiation was becoming less common, adding that “even a slight edge can yield positive results”.

“In attempting to boost profitability, banks will also have to ensure that ethics and a robust risk culture are embedded in the entire organisation. This has to be more than mere lip service: looking at this mainly as a compliance issue is missing the big picture,” Deloitte said.

Exacerbating the problem is a disjointed and uncoordinated regulatory reporting structure found in many organisations that leads to slower responses, inefficiencies and possible confusion plus the real risk of noncompliance and fines. This year, the report said, there had been acceleration in the number and severity of cyber attacks and there is every reason to believe these threats will only become more pervasive, sophisticated, and disruptive in 2015 and beyond. As such, in 2015, banks are likely to add new defensive and offensive measures to their toolkits, borrowing from military and government agencies, given their vast experience in defence and intelligence.