Geopolitics, trade wars, spillover demand from Singapore and growing investor confidence in Malaysia. With declining interest rates threatening banks’ profitability, local and regional players are ready to battle it out for a slice of the country’s incoming investments
It is undisputed that Southeast Asia has become the world’s economic dark horse — a young, digitally savvy population primed to benefit from the fallouts of ongoing trade wars. And each country is taking turns to be in the hot seat for the season.
There was a time when Vietnam was named the biggest beneficiary of the US trade war against China, the factory of the world. Then, Indonesia was cast into the spotlight for its electric vehicle (EV) battery production capabilities and its young and largely unbanked population ready for any fintech disruption.
Of late, Malaysia has become the desired nation. Amid the explosion of generative AI, which sucked up more data centre space, spillover demand unmet by supply constraints in Singapore drove investors to Johor. A Malaysian property agency estimates that Johor will attract RM17 billion ($5 billion) in new data centre investments this year, building on the RM51.1 billion investments in 2022. (Read Johor’s data centre boom – or bust? in Issue 1146, July 15)
Up north in Penang, the state has been named “the biggest beneficiary” of the global semiconductor chip war. The industry attracted a record-breaking US$12.8 billion in foreign direct investment (FDI) in 2023, surpassing the total from the previous seven years combined. Global firms like Intel are investing heavily, with a US$7 billion commitment to a new Penang plant, while Chinese firms have also announced investments worth US$100 million ($130.5 million) just this April.
EY’s 2Q2024 Asean private equity (PE) report found that deal activity was up ten-fold in deal value and 1.6 times in deal volume compared to 1Q2024 in the region. Infrastructure deals comprised 78% of investments, followed by real estate and technology. Malaysia and Singapore contributed to most deals, about 92% of total PE value and 57% in PE deal volume in 2Q2024.
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From 2021 to 2023, the total FDI flow into Malaysia was almost RM600 billion. Of this, 60% came from the last two years and over 90% were directed into what is known as the four economic corridors of Malaysia. Greater Penang, Central Klang Valley, Johor and East Malaysia’s Sarawak saw FDI investments of RM251 billion, RM112 billion, RM94 billion and RM30 billion respectively.
Such large financial inflows have attracted the attention of local and regional financial institutions, who are all clamouring for a slice of the pie. Following the signing of the Johor-Singapore Special Economic Zone (JS-SEZ) memorandum of understanding (MOU) in early 2024, many banks have held investor days in recent months, displaying their desire to do business in the country.
Some have touted their unique selling proposition as having the most number of physical bank branches across the nation. Others boast their connectivity to other Asean nations and track record of working with large multinational corporations. As the banks once again tussle over Malaysia’s imminent prosperity, can everyone benefit?
Largest foreign bank in Malaysia
“Our franchise, our footprint, is exactly where the country is focusing on growth,” says Ng Wei Wei, United Overseas Bank U11 (UOB) Malaysia’s CEO. Ng was speaking at the bank’s corporate day in Kuala Lumpur on Aug 14, the first since Covid-19 and the first in 10 years that it has been held outside Singapore.
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Ng’s statement signals to businesses and investors that the bank is increasing its efforts to be the bank for Asean. Her declaration comes at the end of an era of high interest rates, which will force banks to look for other means to shore up fee income. For UOB, a solution has appeared across the border in Malaysia.
The unique spot for us here in UOB is we see ourselves as a key Asean player that can funnel FDI from across the region into Johor, says Ng Wei Wei, UOB Malaysia's CEO. Photo: UOB
“[Malaysia] is on its second economic takeoff,” says Ng. “The government has announced very confident national master plans in the area of industrials, pushing us up the value chain in manufacturing, as well as a master plan for our transition towards net zero.
“These new areas of growth — industrial, energy, consumer goods and in the TMT (technology, media and telecommunications) sectors — will require international trade and business, and that’s where our fee income comes in,” Ng explains in her presentation to a room of analysts and media.
Earlier that day, UOB’s group CFO Lee Wai Fai unveiled the bank’s midterm ambitions. The bank aims to maintain a return on equity (ROE) of 14% until 2026 and see income contributions from its Asean 4 countries — Indonesia, Malaysia, Thailand and Vietnam — reach 30%.
As UOB’s largest subsidiary by profit contribution outside of Singapore, UOB Malaysia recorded a net profit of RM1.9 billion, a 44% y-o-y increase from RM1.3 billion in 2022. Operating income surpassed the RM4 billion mark for the first time as it grew by 19% to reach RM4.6 billion. This was bolstered by a 7.4% growth in net interest income to RM2.9 billion.
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With over 55 branches across Peninsular and East Malaysia, UOB is the leading foreign bank by income and profit measures and the 6th largest commercial bank in the country by the same indicators. It is a no-brainer that Malaysia is poised to be a growth driver for the bank in the intermediary.
Choosing Malaysia as the host country for this year’s corporate day is intentional. Lee explains that a year after its “Operational Day One”, where Citigroup’s retail clients were boarded into the UOB ecosystem, the bank’s Malaysia business can articulate its successful penetration, rather than in theory.
“When we look at customer balances, the number of customers pre- and post-acquisition, the average balance has increased. And that gives us conviction that this [success] is real,” he adds.
But perhaps more importantly, it is a message to investors and businesses that they are open for business. “As a Singaporean bank, there’s a lot of excitement because we can relate to it. We don’t mind crossing the causeway because it is so near,” says Lee. “If it works for the first time, I think at least KL and Singapore will look at us as partners. And if it works, it’s a win-win, whereas last time it was if Singapore wins, Malaysia loses,” he continues.
UOB's CFO Lee Wai Fai unveils the bank's 2026 mid-term targets in Kuala Lumpur on its investor day on Aug 14. The bank is aiming to sustain a 14% ROE over the next three years. Photo: UOB
Can UOB offer what a local bank can’t?
With over 25 commercial banks operating in Malaysia, foreign banks have been losing market share to domestic banks over the years amid a highly competitive environment, especially in consumer banking, according to a report by The Edge Malaysia in 2022. However, the report notes that there is still a role for foreign banks to compete in corporate and investment banking.
UOB’s regional business is structured differently from its peers. In 2011, the bank set up its FDI Advisory Office with 10 FDI Advisory centres. Outside of Asean, UOB has FDI Advisory centres in Japan, China, Hong Kong and India. More recently, a German office has opened in Singapore.
“We are looking at FDIs from a country perspective by aligning these objectives with the government agencies,” says Sam Cheong, managing director and head of FDI Advisory and network partnerships, UOB.
UOB has signed MOUs with government agencies such as the Board of Investment Thailand, the Foreign Investment Agency of Vietnam, the Indonesia Investment Coordinating Board, the Malaysian Investment Development Authority, and the China Council for the Promotion of International Trade.
“These MOUs aim to support foreign direct investments in Asean and utilise the bank’s tailored financial solutions and regional networks to connect businesses with various government agencies, trade associations and professional service providers across Asia,” Cheong adds.“We ask companies how much they plan to invest and how many employees they plan to employ over a three-year period.”
When questioned by analysts on how UOB can compete effectively against local banks, Andy Cheah, UOB Malaysia’s country head of wholesale banking, says the bank is “playing the ecosystem and supply chain angle”. Instead of targeting individual businesses, UOB introduces financing solutions for the ecosystem of an industry, including from the perspective of suppliers and buyers, across all the regions it has a presence in.
Notably, Asean trade flows between 2020 and 2023 have grown faster than global trade, with most of the pickup in trade flows happening between intra-Asean and China-Asean corridors. UOB’s financial supply chain management (FSCM) lets its clients carry out all processes on a single platform and connect with suppliers, buyers and distributors across key Asean and China.
“That is important because we are starting to demonstrate to our stakeholders and customers, across the various sectors of growth that are touched on, where we have sector expertise and that we can support the entire value chain and help build resilience,” says Ng. “The unique spot for us here in UOB is we see ourselves as a key Asean player that can funnel FDI from across the region into Johor.”
“The next is that we’re driving the environmental, social and governance (ESG) agenda very hard,” says Cheah. “Every discussion my frontline staff has with a wholesale banking client, SME or large corporations would have an ESG element.”
This is particularly relevant for businesses coming into Malaysia with links to global multinationals, as they may already have mandatory sustainability requirements, Cheah adds. “We’re also talking to the various bodies and agencies in Johor to see how we can play a role, so instead of waiting for things to happen, we’re thinking about how we can catalyse the flow of investments as well as trade across borders beyond what we see today,” he continues.
UOB Malaysia’s CEO Ng cites two examples of green deals that the bank has facilitated. In Sarawak, UOB financed the first hydrogen power train in Southeast Asia; the bank has also entered an MOU with SEDC Energy.
Finally, Ng says that the bank has been consistent in all areas, from lending, and underwriting policies and practices to how they manage customers in Malaysia, of which many are family-owned businesses. “Customers want long-term consistency. The fact that today, even big multinationals are coming to bank with us shows the investments that have gone in over the last number of years to build out our digital platform and capability has opened up a whole new franchise.
“It’s not only the SMEs we are very good at understanding how to do business with. It is also the mid-market and the large corporates and multinationals,” says Ng.
Local challenger emerges
A day after UOB’s corporate day, Malaysia’s fourth-largest bank, RHB Bank, organised a Johor-focused forum which gathered over 500 participants from foreign and domestic investors, state agencies and government-linked companies at its event venue of choice — Forest City.
No doubt, RHB’s mission is to announce that as a local bank, they are primed and ready to capture the capital inflows coming into Malaysia. With 29 branches across the Johor state and an exposure worth about RM16 billion, it is self-evident that the bank wishes to ride on the nation’s prosperity.
Like UOB, RHB’s Together We Progress 2024 (TWP24) corporate strategy, launched in 2022, focuses on the four key engines of growth within Malaysia — Johor, Klang Valley, Sarawak and Penang.
Those who invested in Johor state in the past may not have had the best investment outcomes, but RHB’s group managing director Mohd Rashid Mohamad says they may stand to benefit from the current thriving market. Photo: RHB
The bank’s group managing director Mohd Rashid Mohamad, tells The Edge Singapore the bank is “very passionate” about Malaysia’s southern state and that holding the event shows its commitment. “With Johor identified as a key growth area under our TWP24 corporate strategy, we are eager to leverage the state’s vibrant economy, driven by strong consumer spending power and enhanced connectivity with Singapore,” he adds.
And RHB is not about to lose out on this opportunity. Its economists Barnabas Gan and Chin Yee Sian wrote in their Aug 14 report that Johor is the third largest economic contributor in Malaysia, representing 9.5% of its GDP. The state’s GDP growth has generally outpaced the national average in recent years, expanding by 4.1% y-o-y in 2023, compared to Malaysia’s 3.6% y-o-y growth.
Gan and Chin expect Johor’s economic growth to surpass the national average, fuelled by its robust manufacturing sector, sustained strength in the services industry, advantageous location and well-developed infrastructure, and supportive policies from both state and federal governments.
“Looking forward, the JS-SEZ and the Special Financial Zone (SFZ) in Forest City are expected to help speed up Johor’s economic growth,” the analysts say.
Rashid says RHB is well-positioned to ride on this growth by providing comprehensive banking solutions, including lending, deposit, investment banking and wealth management services, addressing the evolving needs of individuals and businesses in the southern state.
When asked for examples of wholesale banking projects that the bank has financed so far in Johor, RHB did not divulge on specifics.
Although he acknowledges the state’s past economic zone attempts and failures, Rashid says the difference this time around is that both sides of the causeway are now aligned, with both the Malaysian and Singaporean governments eager to make it work.
“While it is unfortunate that those who invested earlier are not in the best position, they may stand to benefit from the current thriving market. Property prices in Johor are rising and many of the projects that RHB finances have 100% take-up rates. This demand surge should increase property values, benefiting earlier investors,” he adds.
Projects with 100% take-up rates include Tropicana Uplands’ first residential precinct, Aster Heights at Gelang Patah, and Mutiara Spaces’ Rini Homes 8 Finale at Mutiara Rini.
RHB Bank recently organised a Johor-focused forum at Forest City which saw over 500 participants from foreign and domestic investors, state agencies and government-linked companies. Photo: Bloomberg
Banking on Singapore
In Rashid’s view, RHB’s position in Johor is also part of its regional play, given the bank is also trying to increase its foothold in Singapore. Outside of Malaysia, RHB has businesses in Singapore, Cambodia, Thailand, Laos and Brunei, of which the first two are its focus under TWP24.
RHB has four branches in Singapore — Orchard Road, Parkway, Jurong East and Cecil Street. It also used to have a stockbroking business in Singapore, which it closed down in 2021 as it “generated less income” for the group, Rashid explains.
Today, RHB’s business proposition in Singapore focuses on commercial, corporate and high-net-worth individuals. It has recently converted three branches to cater to these wealth management customers, targeting Malaysians interested in investment opportunities in Singapore and vice versa.
“Following the conclusion of TWP24, we are formulating our next strategy. I can safely say that again, Singapore will be our focus in terms of growing our business outside of Malaysia, so we are putting a lot of resources there. We are reviving the branches and positioning ourselves to ensure we are in the right business segment.”
In FY2023 ended December, RHB posted a 4.8% y-o-y increase in earnings to RM2.8 billion. Although RHB Bank Singapore posted a 47.7% y-o-y lower profit before tax to $50.5 million, Rashid expects improved performance this year.
In 1QFY2024 ended March, RHB Bank Singapore reported an 89.1% y-o-y growth in profit before tax to $29.1 million. As at end-March, RHB Bank Singapore’s gross loans, deposits and total assets stood at $8.1 billion, $9.2 billion and $13.1 billion, respectively.
In an interview with The Edge Malaysia earlier this year, Rashid shared that Singapore’s growth will help substantially with the bank’s aspiration to achieve a group loan growth stretch target of 7% this year. The official group loan growth target is 4.5%.
“Contribution-wise, our regional businesses contributed 8% to 10% of group assets. Now, it is at about 15%. In our TWP24, we hope to see a 20% contribution from regional businesses, so we hope to achieve that on the back of our business growth in Singapore,” says Rashid.
Bank for Asean
Yet, the rah-rah optimism over Malaysia is merely just one part of the whole Asean growth to be captured for banks in the region.
In Malaysia, local and regional banks who have set their eyes on incoming investments ultimately still have ambitions to be the bank for Asean. UOB’s Ng says that this competition to be the bank for Asean is a known fact.
“But the question is, are we able to deliver? Being an Asean bank is competitive and it is about the long haul. Can we consistently deliver for our customers? It must show in the numbers,” she says.
Without a doubt, one factor that will surely determine the success of banks across the region is how well they integrate sustainability into their operations and solutions. “It has become the most important topic hitting the financial sector over the last three to four years,” says Ng.
One only needs to look at the size of the green deals announced in Johor in the last two years in response to growing green finance needs for data centre build. Among them are Chinese data centre developer and operator GDS raised RM1.27 billion; Singapore’s Princeton Digital Group announced an RM1.276 billion green loan; Alliance Bank Malaysia Berhad has signed an RM250 million green loan facility with SKS Group to finance a mixed-use development in Johor Bahru City Centre.
“At the end of the day, no man is an island and the market is big. Most important is to stay focused on what we want to do and create value,” Ng ends.
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