3 graphs that show the alarming deterioration of Malaysian banks' profitability

Decreasing RoA, rising NPLs, and pressured NIMs haunt banks.

When RHB Bank released its nine-month 2015 earnings results, it showed deteriorating profitability. Moody's Investors Service says the results were in line with other Malaysian banks’ decreased profitability owing to rising credit costs and shrinking net interest margins (NIM), a credit negative that may lead to capital pressures. "We expect Malaysian banks’ profitability deterioration to continue into 2016 as the operating environment will remain challenging."

Moody's says the banks' return on assets has fallen to a three-year low. Nonperforming loans and credit costs are also rising, and elevated funding costs has caused banks to have pressured NIMs over the past 12 months.

Here are three graphs that show these trends, as reported by Moody's.

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3 graphs that show the alarming deterioration of Malaysian banks' profitability

Malaysian banks' RoA
Malaysian banks' RoA
Rising credit costs have adversely affected banks’ profitability and return on assets (ROA) has fallen to a three-year low. The seven institutions’ average ROA fell 24 basis points to 1.03% during the first nine months of 2015 from 1.27% during the same period of 2013.
Malaysian banks' NPLs
Malaysian banks' NPLs
Slowing economic growth, low commodity prices and currency volatility in the region have all contributed to rising nonperforming loans (NPLs) and credit costs among Malaysian banks. The banking groups’ average loan loss provisions percent of pre-provision income grew to 9.37% in the first nine months of 2015 from 5.52% in the same period last year.

Banking groups that have large overseas loan exposures have the highest loan loss provisions percent of preprovision income, such as CIMB Group at 36.82% and Maybank at 15.00%. Consequently, they also have the largest NPL increases outside of Malaysia during the first nine months of 2015.

CIMB Group’s foreign NPL grew to 4.61% at September 2015 from 3.71% at end of 2014 as Maybank’s ratio increased to 1.35% from 1.03% at end of 2014 as shown in the exhibit below. Maybank also had moderate asset deterioration in its China, Indonesia, Vietnam and Philippines loan portfolio while CIMB Group had the largest NPL increases in Indonesia and China.
Malaysian banks' NIMs
Malaysian banks' NIMs
Additionally, Malaysian banks reported pressured NIMs over the past 12 months because of elevated funding costs from the introduction of the liquidity coverage ratio in 2015, which prompted the banks to attract better-quality but more expensive retail and SME deposits. The average NIM among the rated bank groups fell to 2.23% in September 2015 from 2.41% a year ago.

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