BIMB Integrated Annual Report 2019

In Malaysia, Islamic banks’ growth continued to outperform conventional banks with earnings registering a double-digit growth. As at end 2019, financing by Islamic financial institutions accounted for 39.2% of total banking sector financing compared to 37.7% in 2018. Total funds placed with Islamic banks now represent 38.0% of total banking sector deposits, up from 36.6% in 2018. 104 Integrated Annual Report 2019 Group Overview Sustaining The Group Management Discussion & Analysis Group Governance MANAGEMENT DISCUSSION & ANALYSIS ECONOMIC AND SECTOR REVIEW 2019 MALAYSIA ECONOMIC REVIEW Impacted by External Headwinds but Held Resilient in 2019 Malaysia’s Gross Domestic Product (“GDP”) growth moderated to 4.3% in 2019, which was the lowest since the global financial crisis in 2009. Growth in 2019 was affected by strong external headwinds as a result of the intensified China-US trade war which, had been inflicting damage since 2018 and causing a fall in exports, supply disruptions especially in the commodity sector and contraction in the investment activities following lukewarm performance in the residential property construction. Despite the challenges, growth was largely supported by the consumer spending, which has been growing at above- trend growth throughout the year. This was made possible following supportive labour market conditions which saw the unemployment rate hovering at 3.2% to 3.4% during the year, a level that is deemed full employment. OPR and SRR were Reduced In view of the slowing economy, the overnight policy rate (“OPR”) was cut by 25 basis points to a nine-year low of 3%, and the Statutory Reserve Requirement (“SRR”) was brought down by 50 basis points to 3% in November. These measures were consistent with the monetary policy stance of supporting a steady growth path amid price stability and helped to release much needed liquidity into the financial system and spur economic activities. 2019 MALAYSIA FINANCIAL SECTOR PERFORMANCE Digitalisation Driving Innovation in Financial Sector The year saw financial technology (“fintech”) disruption reshaping the industry and continued to be the driving theme for the financial sector. Underscoring the importance of fintech innovation, Bank Negara Malaysia (“BNM”) has been actively advocating for fintech to be an integral part of the national initiative to drive digitalisation to remain competitive. These initiatives range from banking digitalisation to e-payment platforms and electronic data management as well as crowdfunding, among others. BNM also released guidelines that open the way for technology players and other non-financial institutions to participate in this sector through virtual banking opportunities. Modest Growth for Banking Sector Malaysian banks fared well in 2019 amid the impact from external headwinds and uncertainties brought on by the US-China trade tensions, Brexit and slower global demand which affected business confidence. Despite these, Malaysian banks demonstrated reasonably healthy profits and asset quality, with more than sufficient capital buffers against potential stress, although they contended with compressed margins and some credit pullbacks. The banking sector saw moderate growth in both earnings and loan, reflecting a slowdown in lending momentum and cautious sentiment on the country’s economic growth. Banks continued to be selective in preserving stable asset quality which supported the low credit costs by the banks given the accommodative interest rates. Islamic Banks Outperformed Conventional Counterparts While the growth of banking assets slowed down in many global Islamic finance markets, Malaysia continued to be one of the sources of industry growth 1 . The resilient growth and development of Islamic finance in the country has been due to the strong foundation and regulatory infrastructure that has been put in place with the Financial Sector Blueprint 2011-2020 underway in its implementation. In Malaysia, Islamic banks’ growth continued to outperform conventional banks with earnings registering a double-digit growth. As at end 2019, financing by Islamic financial institutions accounted for 39.2% of total banking sector financing compared to 37.7% in 2018. Total funds placed with Islamic banks now represent 38.0% of total banking sector deposits, up from 36.6% in 2018 2 . There is growing demand for more utilisation of Islamic financial services as a funding tool over conventional loans, given that the Islamic banking industry has broadened in breadth and depth. Islamic Finance Outlook 2020 Edition - S&P Global Ratings Bank Negara Annual Report 2019 1 2