Malaysia: Maybank weathers the Covid storm

Abdul Farid Alias, Maybank’s chief executive, could be forgiven for feeling he has bad luck.

He took the reins of Malaysia’s largest listed company during the taper tantrum in 2013, when the US Federal Reserve signalled that it was stepping back from years of quantitative easing and sparked an emerging markets sell-off.

Malaysia was among the countries hit hardest by this volatility. But Alias rose to the challenge. As the financial sector quaked around him, he led Maybank to a 14% increase in profits by the end 2013.

He has since proved to be a remarkably safe pair of hands at the helm.

Maybank’s acquisition of Singaporean brokerage Kim Eng in 2011 – before Alias became CEO – was a landmark acquisition in the bank’s shift towards being a regional player, but the speed and urgency of the pan-Asian expansion has increased dramatically under Alias.

Maybank is the fourth-largest bank by assets among countries in the Association of Southeast Asia Nations, or Asean, with significant operations in neighbouring Indonesia, the Philippines, Singapore and Vietnam – as well as in China, Japan, Taiwan and the West. But volatility has returned, and it’s much worse than the taper tantrum.

The Covid-19 coronavirus presents serious problems for all bank CEOs but the challenges are particularly acute for a bank that has put cross-border flows and investment at the heart of its business plan. When the borders are closed, dreams of expansion start to look much less appealing.

Covid-driven economic shockwaves have hit southeast Asia. In the second quarter, Thailand contracted an annualized 12.2%, the biggest drop since the Asian financial crisis of the late 1990s, while Malaysia’s economy plunged an annualized 17.1%. Indonesia and the Philippines are suffering.

The geopolitical climate that pre-dated the pandemic, in particular rising tensions between Washington and Beijing, are prompting questions about international business models.

This is not to say a domestic focus would necessarily be a better idea for Maybank. There are no easy answers for the bank, or for any of its rivals. So how does Alias intend to navigate the bank through the crisis?

If Alias is panicking, the 52-year-old isn’t letting on.

“The global operating environment continues to remain cloudy, impacted by various issues such as the Covid-19 pandemic, the US-China trade war, the US presidential elections and other geo-political issues,” he tells Asiamoney.

Certainly, he adds, Maybank’s economics department didn’t have the IMF predicting a 4.9% decline in global GDP on its 2020 card. And even though the IMF envisions a rebound of 5.4% in 2021, it warns this forecast is still uncertain.

The World Bank encapsulated the risks to growth in a report dated June 25, aptly titled ‘Surviving the storm’. The lending institution’s sceptical take on Malaysia’s prospects came out just as prime minister Muhyiddin Yassin’s team was insisting that southeast Asia’s fifth-biggest economy could weather the turmoil.

At the time, finance minister Tengku Zafrul Tengku Abdul Aziz was predicting growth of more than 6%.

Zafrul is a former Maybank man – he ran Maybank Investment Bank before he moved to CIMB Group in 2014, becoming its chief executive soon after. That may make him a reliable person to have at the helm for the country’s banks – but he has warned that they face large losses, partly because of a government-mandated loan moratorium.

Malaysia, says World Bank economist Firas Raad, faces an “unusually uncertain” road ahead.

“Important social protection measures are needed,” he says, “to help vulnerable Malaysians survive the current economic storm and thrive in a new post-pandemic reality.”

Maybank is taking its own measures to reorient its business for the kind of Malaysia, and the broader Asean region, that Covid-19 leaves behind. It is also preparing for the risk that 2021 doesn’t rebound in short order, even if the pandemic recedes.

“Given this uncertainty,” Alias explains, “it is obvious that banks will have to ensure sufficient capital and liquidity levels to buffer against any possibility of this happening, as well as be alert to asset quality weakness that could arise from the volatile operating environment.”

Banks, Alias says, will “have to relook at their risk management strategies to navigate through a low-growth operating environment, while at the same time ensuring disciplined cost management and optimising productivity to overcome the challenging environment.”

This may all sound fairly bleak, but Alias highlights some of the positives.

“In spite of the challenging operating environment,” he says, “we also do see opportunities to relook at our strategies and pivot the organization to new growth paths.”

Maybank’s favourite targets at the moment? “Consumer banking, Islamic banking and insurance, as well as in growing our fee income such as from investment and trading, and in the global markets segments,” Alias says.

Islamic banking remains a sweet spot for Maybank, with before-tax profit rising 10.4% in the first quarter. In 2019, its investment banking unit worked on 117 ringgit-denominated sukuk issues totalling nearly $4.4 billion, part of a wider sukuk business that included international deals, too. Maybank’s many other notable deals included arranging the sale of $6 billion of bonds for Petronas Capital.

Alias sees “significant opportunities in the digital banking and payments space” and when it comes to “further expand our offerings not only locally but across our key markets.”

It is vital, he adds, to be “conscious of the risks of being left behind by the digital revolution, not just in terms of new products and services, but also in equipping their employees adequately to take on a future where digital skills will be key to ensuring growth.”

The technology questions facing Alias and his management team have two distinct elements. The first is serving existing customers and ensuring business continuity at a bank that employs 45,000 people, has 2,400 branches in 20 countries and boasts total assets of $165 billion.

Will employees in any field ever return to work in the same way as before the pandemic? The increased volatility in commercial real-estate prices from Kuala Lumpur to Hong Kong to Tokyo suggests the working-from-home experience could become permanent for hundreds of millions of people around the globe. Remote working might be a megatrend with legs.

“Ensuring our employees are well-equipped and developed to work in the ‘new normal’ environment is another area of opportunity which we believe will enable us to realize better returns from our human capital in the future,” Alias says.

The pandemic may also have a lasting impact on what customers expect from their banks. That’s why, Alias says, “we have been working hard to accelerate” progress in the digital banking segment. Earlier this year, Maybank was first in the region to offer real-time account-opening options and ways for small and medium-sized enterprises to avoid having to visit physical branches. Such preferences won’t suddenly vanish if a Covid-19 vaccine appears.

That might catalyze a quiet revolution to add functions to Maybank2u Biz, which offers real-time online and mobile-based account balance checking, funds transfer, bills payment and uploading of bulk payment files. The same goes for QRPay Biz app, which allows for safe mass payments.

“Our banking and digital sales platforms for SMEs have also shown good traction, with more than 68% of our SMEs using our digital platforms,” Alias says.

Maybank now allows for the instant on-boarding of merchants who might not have even known what a QR code was in their pre-Covid daily existences.

“We removed the friction that most merchants had when it came to receiving their funds, which they now get instantly,” Alias notes.

One particularly notable Covid-era innovation: Maybank launched a digital platform that connects different businesses adversely affected by the government’s “movement control order.”

Called ‘Sama-Sama Lokal,’ the service aims to digitize old-economy businesses and underserved micro-SMEs.

Alias is cryptic about what else Maybank might have up its sleeve. All he would say is: “We have a number of exciting products aimed at the SME and retail segments which will come onstream in the next few months and which we believe will add significant value to these customer segments.”

The numbers so far are encouraging. Even when southeast Asia hit an economic wall in the first quarter, Maybank reported an 11.7% profit increase compared with a year ago.

Revenue rose 1.85% to RM13.22 billion, or $3.2 billion. Loans grew only slightly, but pressure on net interest margin remains reasonable; they narrowed by 7 basis points to 2.23%.

In a report dated August 7, Moody’s Investors Service noted that Maybank’s “financial performance will remain resilient, underpinned by its robust track record over the past decade, strong capital buffers, favourable funding and ample liquidity.” Moody’s also noted only “moderate strain on the bank’s asset quality and profitability due to the economic disruption caused by the coronavirus outbreak.”

International ratings companies are enamoured of the bank’s strong capital position. Its tangible common equity as a percentage of risk-weighted assets was 19.1% as of the end of March – well above regional peers.

In the past few years, the asset quality of overseas loans – particularly Indonesia and Singapore – took hits as a result of slowdowns in oil and gas, shipping and the structured trade credit industry. As Moody’s points out, Maybank’s gross impaired loan ratios in Indonesia and Singapore were 4.9% and 4.0%, respectively, on March 31, versus 2.0% for Malaysia.

Analyst Willie Tanoto of Fitch Ratings noted on July 9 that along with strong market share and deep investment-banking presence at home, Maybank’s expanding reach in southeast Asia makes it a unique regional player. As such, Maybank is able to secure lower-cost deposits and generate higher risk-adjusted returns than its peers.

There is no guarantee that the global environment will improve next year. There is still no vaccine against coronavirus, so second and third waves are a risk. The US election in November is another source of uncertainty, as is the long-running trade war between China and the US. But Maybank has proved it can handle a crisis.

“We have been proactively addressing these issues over the years,” Alias says, “to ensure we have the solid foundation that we do today, to manage such challenging times.”