The Treasury & Markets (T&M) Division provides Shariah-compliant treasury solutions to meet the business needs of our clients across multiple segments. Our products and services include Money Market, Foreign Exchange (FX), Fixed Income Markets, and structured products. The year under review saw continued volatility in global financial markets as well as disruptive business conditions from multiple pandemic lockdowns. Enhancements in internal risk metrics and compliance also added rigour to the day to day management of the Bank’s profit rate, FX, and liquidity risk. We nevertheless remained focused and consistent in meeting our clients’ requirements and expectations in providing reliable and quality services, products and solutions. Despite restrictions in corporate activity and cross border funds flows, FX sales volume in 2021 continued to grow from the previous year, but intense competition has resulted in significant margin erosion. The US Dollar maintained its strength throughout 2021 on the back of expectations that the US Federal Reserve (Fed) will raise interest rates aggressively in 2022 and into 2023. The Dollar Index increased by 6.4% in 2021. Against this index, the Ringgit fared better, weakening by 4.1%. Against the Euro and Japanese Yen, however, the Ringgit emerged stronger by 4.2% and 6.7% respectively. This was supported by improved sentiment from the easing of COVID-19 restrictions and accelerated COVID-19 vaccine booster inoculations. The Ringgit was weaker against most Asian currencies with exception of the Thai Baht in 2021. There was steady and significant growth in total deposits for the Bank throughout the year. However, wholesale funding costs continued to be elevated due to intense competition, contributing to margin compression for both Treasury investments and Financing assets. The Bank’s liquidity metrics, nevertheless, improved further in 2021. Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 1.75% throughout 2021, maintaining an accommodative stance in support of business activities whilst cushioning the negative impact on household incomes affected by the pandemic. Short term Islamic interbank rates were capped within a steady range with overnight rates trading between 1.68% to 1.77%, 1 week between 1.76% to 1.79% and 1 month between 1.85% to 1.91%. Fixed income investments continued to deliver on both fund based and trading income whilst Sukuk distribution activities were commendable for the year despite a steepening in the Ringgit yield curve and tepid secondary trading liquidity conditions. The Bank was appointed as Lead Manager/Joint Lead Manager for 15 ESG-rated sukuk distribution deals and continued to perform an active role as Islamic Principal Dealer (iPD). The fixed income team achieved a Top 5 ranking in Bloomberg’s Malaysian Ringgit Islamic Sukuk League Table for 2021. T&M’s contribution to the Bank’s profitability from Asset Liability Management/Money Market, FX Sales and Trading, and Fixed income investment activities was much lower compared to the previous year but still significant at just below 30%. WHO WE ARE TREASURY AND MARKETS OUTLOOK AND STRATEGY FOR 2022 We expect volatility in the financial markets and the challenging business operating environment to persist in 2022 due to the continued uncertainties around COVID-19, rising oil prices, supply chain disruptions and geopolitical risks. Growing inflationary pressures will pressure the Fed to hasten rate normalisation and balance sheet reduction. On the local front, BNM is expected to remain cautious in its rate normalisation path in view of the growing external risk factors and market uncertainties. Most forecasts anticipate one hike in the OPR in 2022 and a likelihood of 4 hikes in 2023. We believe that it will take some time for the FX and Rates markets to stabilise. Continued improvements in the overall liquidity metrics of the Bank and generation of non-volatile trading income from sales and distribution will be the main focus areas for T&M in 2022. This will entail strategies of short-duration investments, further diversification of the Bank’s wholesale funding base and emphasis on customer service excellence. BANK I SLAM MALAYS IA BERHAD 96
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