The year 2018 marked my fifth full year of leading Maybank Group, the fourth largest bank in ASEAN by asset size and the largest-listed company in Malaysia. Our asset base has grown from RM560.32 billion as at end 2013 to RM806.99 billion as of financial year ended 31 December 2018 (FY2018) while our market capitalisation has risen from RM88.09 billion to RM104.97 billion.
Balance sheet and market capitalisation strengths were not our only achievements, as my team comprising around 43,000 Maybankers as well as those no longer with us, have collectively improved the fundamental performance of this organisation and brought Maybank to greater heights with our net operating income, pre-provisioning operating profit (PPOP) and net profit rising 27.5%, 29.2% and 23.8% respectively for the same period mentioned above. As such, we have been able to sustain our shareholder rewards with a gross dividend payout ratio surpassing 70% and an attractive dividend yield of 6%.
Reflecting on the past five years, having stepped into this role in August 2013, it is safe to say that the needs and conditions of leading this organisation have changed significantly. The financial services industry, specifically banking, has had to redefine itself owing to constant regulatory and accounting changes, with the former placing greater emphasis on capital and liquidity expectations while newer accounting standards such as Malaysian Financial Reporting Standards (MFRS) 9 and 16 increase credit provisioning amounts and affect the recognition of leases respectively, which has a downward impact on a bank’s earnings and capital levels. Over and above these evolving regulatory and accounting requirements, the operating landscape has become increasingly unpredictable due to volatility in financial markets, capital flows, currencies and commodity prices as global economic superpowers become more insular with rising protectionism measures that affect global trade and growth. In short, projecting revenue growth has become increasingly challenging.
Adding to these changes has been the swift entry of digitalisation, which has disrupted many industries in the past decade including the financial industry. This has altered our customers’ expectations, needs and behaviours, thus shaping the way we serve and deliver our services. Fundamentally, customers want electronic platforms (e-platforms) that provide user-friendly, safe, secure and fast financial services that meet their needs. Meanwhile, our fiduciary duty requires us to provide e-platforms that meet our customers’ expectations and adhere to governance and compliance requirements. To support these evolving customer trends, we will need to invest mindfully in the necessary infrastructure and analytical tools and ensure that our people are equipped to perform effectively in a digital economy. As digitalisation of services chip away at the traditional income streams generated by brick and mortar establishments, we are compelled to re-evaluate sustainable income streams and existing cost structures to remain relevant in tomorrow’s world.
Suffice to say, I’ve learnt many lessons while leading this organisation. Allow me to share my top five learnings; one lesson for every year at the helm.
We began 2018 with an expectation that the Group’s net interest margin (NIM) would expand by five basis points (bps) on the back of a rising rate environment. The expected NIM upside would be driven from selective re-pricing in home markets such as Malaysia and Singapore and selective loans growth across our markets and business segments. In Indonesia, we expected margin to come under pressure, due to intense pricing competition on both ends of the asset and liability composition.
However, our initial expectation of Group NIM expansion was before we decided in the first quarter to increase our liquidity buffers across our home markets, ahead of the Malaysian General Election held last May. This decision was made as part of our risk management practises and conservative risk posture to ensure that we would remain capable of serving our extensive regional clientele and continue meeting our obligations, in any election outcome.
As a result of our liquidity drive carried throughout the first two quarters of the year, our cost of funds rose as we increased our fixed deposit base, especially in Malaysia and Singapore. Arising from this, we decided to revise our full year NIM expectation to a slight compression on the back of higher cost of funds. Although we weaned off the expensive deposits in the second half of 2018, our full year NIM compressed marginally as anticipated, by three bps to 2.33% for FY2018.
To mitigate the higher cost of funds, we focused on selective growth across our home markets and business segments against a backdrop of slower economic growth in Malaysia and Singapore. Our key focus was to grow loans at the right price to preserve margins. We managed to see continued growth in our retail franchise and corporate segments, with loan portfolios in Malaysia, Singapore and Indonesia expanding by 4.8%, 4.5% and 7.0% respectively. Our loans growth across markets resulted in Group loans growth of 4.8%, which supported our net fund based income growth of 3.1% for FY2018.
To describe 2018 as riddled with challenges is an understatement. Escalating trade war tensions between the US and China and continued foreign capital outflows from ASEAN markets weakened some ASEAN currencies against the US dollar. This depressed trading volumes and impacted fee income streams for trading and investment books of banks across the region. Likewise, we saw our net fee based income decline by 1.8% owing to the weaker equity markets. Despite softer net fee based income, our revenue grew by 1.7% on the back of loans growth.
We also made a concerted effort to be extra vigilant over cost management in an operating landscape where revenue pressures were felt. We focused on improving productivity levers and with the absence of one-off cost items seen in FY2017, our overhead expenses declined by 1.0% YoY. This resulted in a cost-to-income ratio of 47.4% and a positive JAWs position of 2.7%. The combination of income growth and diligent cost management allowed us to achieve a new record for pre-provisioning operating profit of RM12.42 billion.
Meanwhile, our Group gross impaired loans (GIL) ratio was relatively stable at 2.41% as of end December 2018 versus 2.34% a year ago, despite several new corporate impairments made across our home markets and the adoption of MFRS 9 effective 1 January 2018. Contributing to the stable GIL ratio was the slower new impaired loan formation as well as higher recoveries and write-offs made for some older impaired accounts. This resulted in overall lower net provisioning charges for FY2018, which saw our net impairment losses reduce by 20.5% YoY.
On the back of lower net provisioning charges, we achieved a new high in net profit for the second consecutive year. Net profit rose 7.9% to RM8.11 billion for FY2018, translating to an earnings per share of 74.2 sen versus 72.0 sen a year earlier. The Group’s return on equity (ROE) was 11.4%, above our full year key performance indicator (KPI) set at 11%.
As with previous years, we continued to prioritise liquidity and capital strength. Our liquidity coverage ratio was 132.4%, loans-to-fund ratio at 86.2%, loans-to-fund-and-equity ratio at 76.1% and loan-to- deposit ratio at 92.7% as of end December. Meanwhile, our CET1 capital and total capital ratios for the Group were 15.029% and 19.024% respectively. More details on our financial performance can be found under Reflections from my colleague, Our Group Chief Financial Officer on page 32 of the Corporate Book.
In preparing ourselves for the digital economy, we must remain relevant by being obsessively customer focused (which is a challenge we are taking) by offering products based on their evolving needs and having the right infrastructure and talent to support the development of these products. Being The Digital Bank of Choice goes beyond launching new apps or services online. It encompasses analysing customers’ behaviours and needs, and then delivering a solution to address that demand. We believe this ensures our continued relevance to our customers.
An example is the launch of our new and improved Maybank2u desktop website in early 2018. Similar to how it was done for our Maybank2u Mobile App launched in 2017, the new website was designed based on feedback obtained from our customers, with the aim of making it more intuitive and to deliver a personalised and seamless customer experience, with a faster turnaround time.
We were also the first bank in Malaysia to introduce a cashless payment solution, QRPay, which has over 200,000 merchants on-board now. QRPay offers merchants a quick and secure new way to accept cashless payments and reduce their physical cash holding. More details on our digital milestones can be obtained in The Digital Bank of Choice section on page 61 of the Corporate Book.
We believe it is important for us to build the right data architecture and infrastructure to support our transition to become The Digital Bank of Choice. On this front, we have initiated the creation of a universal data lake for the Group to effectively house and mine all data within the organisation in a secure manner. We have also established an offshore development centre in Bangalore, India so that we have access to digital talents with the necessary mathematical and computing skills to enable us to meet rapidly evolving digital banking needs. With the advancement in data analytics and science, banks can create models to provide better services to customers and improve their risk modelling. These are some of the initiatives that will allow us to determine the Group’s optimal balance sheet structure, identify the right pricing of our assets and liabilities to maximise risk-returns and ensure the right matching of liabilities to assets for effective liquidity utilisation.
Aside from investing in product development and the necessary architecture, we need to invest in our people to ensure that they are ready for the digital economy. We introduced the first phase of our FutureReady Digital Upskilling Progamme in January 2018 to increase employees’ digital literacy. This programme touches on six key skills and in summary, the programme aims to create an awareness among our people about the application of new technologies to business; how data analytics can be applied to decision-making, gaining insights or solving problems; how products and services should be designed from a customer’s perspective; how to engage customers quickly and effectively, as well as understanding and managing risk in the digital economy.
Maybank Group’s Board of Directors and senior management have invested over 500 man-days in intensive classroom learning sessions to pick-up new skills such as coding, algorithms programming and to understand how these skills can be developed in-house. Further details on our workforce futurisation initiatives can be found under the Group Human Capital section on page 71 of the Corporate Book.
We also successfully completed the local incorporation exercise of Maybank Singapore Limited (MSL) on 5 November, which involved transferring the Community Financial Services business from our Singapore branch to MSL. Congratulations to Dr John Lee, CEO of Maybank Singapore and his team on the successful incorporation of MSL, which further solidifies our commitment to our customers and communities in Singapore, where we have had a presence for as long as we have been in Malaysia.
In conjunction with the incorporation, we committed SGD1.55 million to the Maybank Family Fund @ CDCs (Community Development Councils) to support programmes which provide financial empowerment, livelihood and employability for low-income families under the People’s Association. We were also recognised by the National Volunteerism & Philanthropy Centre as a Champion of Good, for exemplary volunteerism and corporate giving initiatives.
For the year ahead, our expectation is for global growth to moderate to 3.6% compared with growth of 3.8% in 2018. The moderating trends are premised on the build-up in headwinds experienced in 2018, namely global trade tensions underpinned by a possible continuation of the US-China trade war, tighter monetary policies and liquidity and the possibility of a no-deal Brexit outcome triggering short-term volatility in global financial markets.
Malaysia is expected to chart stable GDP growth of 4.9% in 2019, from 4.7% in 2018 on the back of growth in mining and agriculture sectors as well as private investments. In Singapore, we expect GDP growth to ease to 1.8% in 2019 from 3.2% in 2018, driven by softness in the export-based manufacturing sector and trade-related services amid a global semiconductor industry downcycle as well as effects from the US-China trade war. Indonesia’s economy is expected to remain stable at 5.1% in 2019, on the back of private consumption growth and continued infrastructure spending.
As a Group, we will continue to protect margins via selective asset growth, while at the same time expand our base of cheaper funding sources. That said, the upcoming regulatory implementation of the Net Stable Funding Ratio in 2020 for Malaysia could lead to deposit competition in the market, resulting in higher funding cost.
Our franchise growth engine will continue to be the catalyst for the Group in both the consumer and corporate lending space, while we look to leverage better on our regional presence to have a greater impact in markets where we have more propensity to grow, relative to the home markets.
Apart from our growth drivers, we will remain focused on cost and asset quality management Group-wide. Through the abovementioned areas, the Group has set an ROE KPI of 11% in FY2019.
On the digital front, we will look to enhance our suite of innovative solutions to benefit both our current customers, as well as tap into a large non-customer base who have not established any banking relationship with us. One such innovation is our newly launched lifestyle-themed ‘e-wallet’ named “MAE”, which is available in Malaysia starting March 2019. Anyone above the age of 12 can apply to create a “MAE” account, without the need to have a pre-existing Maybank account. Creating an account can also be done at the comfort of one’s home, without having to visit any of our branches. Solutions such as these will widen our customer reach and encourage a migration to a cashless economy.
Before I sign off on my statement, allow me to provide an update on key senior management changes which transpired during the year. Two Maybank veterans, Datuk Lim Hong Tat and Pollie Sim, retired in 2018. Both their roles were filled by internal talents owing to our strong internal leadership pipeline. Dato’ John Chong, another Maybank veteran, who was previously CEO of Maybank Investment Bank Berhad and Maybank Kim Eng Group, stepped into Datuk Lim’s role as Group CEO, Community Financial Services.
Michael Foong expanded his role as Group Chief Strategy Officer to become the CEO of International as well, taking over the latter responsibility from Pollie. Meanwhile, Dato’ John’s successors are also Maybankers, with Ami Moris appointed as CEO of Maybank Kim Eng Group and Fad’l Mohamed made CEO of Maybank Investment Bank Berhad.
To Datuk Lim and Pollie, please accept my deepest gratitude for your commitment and tireless service to Maybank Group. We wish you the very best. We are indeed fortunate to retain your wealth of knowledge with both continuing to serve as members of the Board of Directors for several of the Maybank subsidiaries.
To Dato’ John, Michael, Ami and Fad’l, my personal best wishes in your new roles.
I would like to thank all Maybankers for their continued commitment and tireless contributions to the Group’s performance in the past year and into the present year. I wish to also extend my deepest appreciation to our customers and shareholders for their unwavering trust, loyalty and support rendered in an extremely challenging year.
To our partners and the wider communities, my appreciation for your efforts and cooperation in our endeavours. I hope we will continue, side by side, to strive for greater heights in all our future ventures.
Finally, I’m exceptionally grateful for the guidance provided by members of the Maybank Board and those of the other entities within the Group, as well as the regulatory bodies in all the countries where we operate.
Our Maybank, Our Future
DATUK ABDUL FARID ALIAS
Group President & Chief Executive Officer