Monday, September 2nd, 2019
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PETALING JAYA: Malaysia’s corporate earnings for the second quarter have been described as “uninspiring and not very encouraging” by analysts amid pressure from the US-China trade war and low commodity prices.
Public Investment Bank head of research Ching Weng Jin commented that corporate earnings have not been very encouraging so far.
He identified the plantation and aviation sectors as those that underperformed in the second quarter as well as some weaknesses in the property sector.
“By and large, the banks have been doing okay with a few surprises,” Ching told SunBiz.
For the second quarter of 2019, Malaysia posted gross domestic product (GDP) growth of 4.9%, higher than market expectations of 4.7%.
Despite that, Ching said, there is a mismatch as there has been a slowdown in business activity and consumer spending due to lack of confidence stemming from the ongoing trade tensions between the world’s two largest economies.
To boost market sentiment, he said, Budget 2020 could be one of the drivers, especially with the introduction of expansionary measures.
Since the US-China trade war broke out a year ago, there have been no signs of a resolution between the two economic powerhouses; instead, tit-for-tat retaliation has escalated the tensions.
“If there is no progress on the external uncertainties, it is likely to be business as usual, a similar path to what we saw in the equity market in the first half of 2019,” said Ching.
JF Apex Securities head of research Lee Chung Cheng offered a similar view, stating that he expects the equity market to be subdued despite Malaysia’s strong economic performance in the second quarter.
“Corporate earnings for this quarter have been uninspiring, as most come in within or under market expectations,” he said.
He pointed out even the banks failed to beat market expectations, while the poor performance from the plantation sector was within expectations.
Meanwhile, the manufacturing sector performed below the research house’s expectations due to the ongoing US-China trade dispute.
Lee noted that Malaysian equities are trading at a premium compared with their counterparts in neighbouring countries.
“Malaysia’s earnings per share growth is behind some of the markets in the region. Indonesia and the Philippines have a better corporate growth for the year,” he said.
The FBM KLCI has declined 4.6% year to date. Bursa Malaysia’s benchmark closed at 1,612.14 points last Friday, down from 1,690.58 points at the end of last year.
During the same period, the Finance Index has dropped 10.1% to 15,550.02 points from 17,296.47 points, while the Plantation Index has slipped 0.2% to 6,889.48 points from 6,902.96 points.
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LONDON, Sept 2 — The euro plunged to a 16-month low today as the impact of Washington and Beijing’s trade war on the European economy dominated investor sentiment. Germany’s export-dependent manufacturing sector remained in contraction in…
KUALA LUMPUR: S&P Global Ratings is maintaining a stable outlook on all Malaysian banks but flags external challenges and the financial technology (fintech) effect that could radically disrupt their industry.
Malaysia’s banks are battling on multiple fronts namely a trade war, a China-led regional economic slowdown, dampened domestic business sentiment, and continuously soft commodities prices.
“Moreover, the lenders need to contend with the possibility that financial technology may radically disrupt their industry, just as they are shaving costs,” said S&P Global Ratings analyst Rujun Duan.
“While such factors don’t yet affect our ratings – we maintain a stable outlook on all the Malaysian banks we rate – we believe it’s critical to flag the issues,” she said in a report titled “Malaysian Banking Outlook: Incumbents Feel The Squeeze”.
Malaysia’s incumbent lenders are facing cyclical and secular pressures that may slowly erode their financial standing if not addressed.
She said S&P projects Malaysian bank loans to grow 3-5% in 2019, about half the growth achieved in 2015.
“We also expect the industry’s net interest margin will contract 5-10 basis points in the year, following cuts to the policy rate and heated domestic competition for deposits,” she said.
Malaysian households have been deleveraging for the past three years. Most recently, the trade war and volatile capital markets have weighed on consumer sentiment and discouraged business investment.
Given that Malaysian banks do over half (58%) of all lending to households, any indicator suggesting softness in household borrowing bodes poorly for lenders.
Bank Negara Malaysia trimmed the policy interest rate by 25 basis points in May, and one more interest rate reduction is expected this year. The US Federal Reserve’s more accommodative monetary policy has given room for regional central banks to ease policy, weighing on banks’ net interest margin.
Competition for cheap, sticky retail deposits flares up repeatedly as banks vie for high-quality, liquid assets. All of this pressures margins, worsening banks’ profit outlook.
Seeing few growth areas, Malaysian banks have responded by trimming operational costs, closing branches, and retrenching staff. The cost-to-income ratio in the sector has stayed at around 47-48% over the past two years.
“While banks have been striving to improve this ratio, we believe that is unlikely without better support from earnings,” Duan noted.
Malaysian banks have also diversified to countries such as Singapore and Indonesia. Generally, this is a good strategy as the net interest margin is higher in these markets.
“But when times are bad, Malaysian banks’ overseas operations tend to drag down group profit, as seen in recent years’ losses in the Singapore offshore oil and gas sector, and the Indonesian mining and commodities sectors,” she said.
Singapore, being a highly open economy, is likely to feel the full effect of macro-headwinds over the next 12-18 months, limiting the profit upside for banks.
Notably, the Singapore economy grew by just 0.1% year-on-year in the second quarter, a marked slowdown from the 1.1% growth logged in the previous quarter, said Duan.
In this climate of cost-cutting and strained profit arrives digital banking. Malaysian regulators are expected to hand out the country’s first digital banking licences in the next 12-24 months.
This will allow local tech and telecoms groups such as Grab Holdings Inc and Axiata Group Bhd to compete directly with banks in lending and deposits-taking, without the encumbrance of an expensive branch network.
International leading technology giants such as Alibaba Group and Tencent Holdings, which already have a meaningful share of Malaysia’s digital payments market, could challenge the Malaysian lenders. Both have proved highly competitive in digitalised financial services in China.
“Tech groups have the potential to compete with traditional lenders on almost all fronts in retail banking. To manage this threat, incumbent banks will need to invest heavily in technology,“ she added. – Bernama
LONDON, Sept 2 — Global stocks dipped today after the United States and China imposed new tariffs on each other’s goods, reinforcing investors’ worries over slowing global growth, with no clear end in sight for the trade war. MSCI’s…