The banking sector has always been a strong indicator of how the economy will move forward. With three banking giants recording their highest ever earnings last year, can we then expect a much stronger economy ahead?
Last week, Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and RHB Bank Bhd announced record net profits of RM8.11 billion, RM5.58 billion and RM2.31 billion for the financial year ended Dec 31, 2018, respectively, boosted by, among others, loan growth, higher net fund-based income and lower provisions.
Despite their record performances, the banks maintained a conservative stance in their outlook for 2019.
Economists are uncertain if the stellar financial performances by banks will translate into strong economic expansion for Malaysia as looming external headwinds cannot be ignored.
An economist who declined to be named opined that the performance by the banks in 2018 was based on the scenario that year, so 2019 may not turn out to be the same due to many uncertainties.
“Economic growth will still be expanding, whether the momentum is sustained or not. At the moment, it’s not easy to say because we’re still waiting for the outcome of the US-China trade negotiation. That will determine a lot of things, whether the stock market and the currency market will rally or not; so we can’t see the visibility yet until the trade decision is out. The macro picture will translate into the micro picture, that’s how it goes.”
The economist said businesses are cautious now. Moreover, as it is the first year of the sales and service tax implementation, the cautiousness in the market is there.
The economist forecast gross domestic product (GDP) to grow at 4.9% this year, compared with the consensus 4.7%, driven by private consumption and the rebound in mining.
“We think the services sector is still going to be the driver, apart from manufacturing. We’re banking on manufacturing to remain steady in 2019 based on the positive expectation that the trade war will be over so you’ll see services and manufacturing continue to be the driver in 2019. We don’t foresee services to be going down anytime soon, at least on a base case scenario they will be performing in line with their long term historical average.”
Meanwhile, BIMB Securities economist Imran Nurginias Ibrahim agreed that the record performances by the banks signal that the economy is on a strong footing.
“It is considered positive for the economy. With banks showing profits, its shows that there is loan growth for the sector. For this year, despite expectation of gross domestic product to be slower compared to 2018, loan growth for 2019 will still be sustainable. That will help the economy as retail loan growth will be positive and will stimulate economic activities further,” he told SunBiz.
Loan growth moderated to 5.2% in 2018 and is expected to ease further to 5.0% in 2019, on the back of a slower global and domestic growth trend. He said the GDP growth of 4.7% last year was quite resilient and the activities seen in the first two months this year would indicate that GDP growth would remain healthy.
“From the supply side of the economy, the services sector is one of the major contributors to GDP growth. If the banking sector continues to show growth and profit, that will also contribute towards the GDP growth from the services sector side,” Imran added.
He expects GDP growth for 2019 to come in at 4.8%, on the back of supportive private consumption and investment activity in the demand side, as well as services and manufacturing in the supply side.
Imran believes Bank Negara Malaysia, to ensure capital market stability and ample liquidity and to remain supportive of growth, will hold the overnight policy rate steady at 3.25% this year with room to cut if the economic environment deteriorates.
Notwithstanding this, he cautioned on the external headwinds.
“So far it’s still early, we don’t know what’s going to happen to the US-China trade issue and how the Fed is moving forward. What we’re seeing now is that global growth is a bit slow, there is also the US-China trade war and other uncertainties so we have to look at the next few months to see how the activities in the economy are growing,” explained Imran.
- The Sun Daily