Cheap money, pessimism and banks’ profits – Let’s learn

General understanding when market is stable is when there are more money being printed, the interest rates would go down and it should push for more businesses to invest since cost of borrowing is lowered. The term is Quantitative Easing (QE). Google to read more. When interest rates are high, many businesses will face higher loan payments and when this happens, they should have less money to invest or feel that it’s not worth investing unless they are extremely sure. Well, what if there are MORE money but still there are LESS interest to borrow? The third equation comes in; sentiment. Pessimism means people spend less and when they spend less, the profits to businesses are lower. This would mean businesses would have less incentive to borrow from banks. In turn, banks would have LOTS of money but LESSER number of borrowers. Bad news. Do read here: Telegraph.co.uk for an article about UK and Europe’s banks, interest rates and the request for a positive sentiment instead of an overly cautious one.  Enlightening really.
What’s up in Malaysia, as at recent previous quarter? Specifically, the top 2 banks as well as a smaller one? Maybank, CIMB and Affin Bank. Maybank’s Q1 ending 31st March saw it reporting a higher net profit of RM1.7 billion.This is up 19 percent when compared to the same quarter a year earlier. The two major reasons would be due to higher income and lower provisions for bad loans. Revenue was also marginally higher at RM11.3 billion compared to RM11.2 billion a year ago.  Full report in TheStar here. In brief, a positive result as well as the fact that signs for a higher default from borrowers due to whatever reasons are not showing yet.
CIMB? Full report in TheEdgeMarkets here. In brief, CIMB reported a 46 percent increase in its net profit for Q1 ending March 31 2017. In number, it’s RM1.18 billion versus RM813.8 million a year ago. Reasons for this increase include higher interest, non-interest and Islamic banking income. Besides that, CIMB has lower bad loan allowance and its quarterly revenue was higher at RM4.36 billion from RM3.73 billion previous year. In brief, CIMB is also anticipating that its borrowers are not not likely to default on their loan repayments. Definitely a positive sign.
Affin Holdings reported a 4 percent increase in net profit for quarter ended 31 March 2017. In number, it’s RM120.8 million versus RM115.57 million in the previous year. The reasons for the better performance include the increase in other operating income, Islamic banking income and net interest income totalling RM82.7mil. Revenue increased from RM509.60mil from RM426.92mil a year earlier. It has also allocated an allowance for loan impairment loss of RM5.8 million Full report in TheStar here.  In brief, it’s a positive result.
Results from banks are good indicators of the health of the economy. It’s by quarter basis too which meant that we will get an early warning about what lies ahead. Market is negative for some but for some exporters, they continue to do well which explains the trade surplus that we continue to have currently. Bank Negara Malaysia (BNM) has maintained the interest rates thus far so as to continue its accommodative stance to the economy. I believe this is sufficient and BNM should continue to focus on measures to strengthen and diversify the economy instead of lowering the rates. More money does not mean much if the businesses are pessimistic with the market. Happy working Mr. BNM governor.
written on 17 May 2017
Next suggested article: BNM’s accommodative stance for the economy maintained