Malaysian Banking Landscape, Competition, Markets & Trends - - PowerPoint PPT Presentation

Malaysian Banking Landscape, Competition, Markets & Trends

Anandakumar Jegarasasingam Malaysian Rating Corporation Berhad

Singapore, 02-Nov-2011 CIMB-NTU Accelerated Universal Bankers Programme

2

Presentation Outline

• Economic and operating environment
• Structure of the banking sector and regulation
• Performance of the banking sector
• Islamic banking
• Current issues
• Household sector debt
• Concluding remarks

Economic and Operating Environment

4

Challenging Macro Environment

• International Environment
• Sovereign debt woes and geo-political uncertainties.
• Commodity price volatilities and spill over effect into the real economy.
• Weak international trade conditions.
• Policy Environment
• Inflation and monetary policy dilemmas.
• Increased regulatory scrutiny.
• Domestic Operating Environment
• Saturating domestic market and intensifying competition.
• Escalating household sector debt.
• Improved corporate performance; however, uncertainties linger.

5

Economic Growth Outlook

• !"#!
• After staging a recovery from 2Q09 to 1Q10, Malaysia’s real GDP growth is showing

signs of moderation.

• However, Malaysia’s GDP growth still remains reasonably healthy compared to more

developed economies.

• Official estimates for real GDP growth is in the range of 5.0%-5.5% for 2011 and

5.0%-6.0% for 2012.

6

Economic Drivers

• $
• %&

#'()* +(

• !())(
• %,
• '

$ .)/(

• 12)

&

• 1&
• %&
• %,
• Contraction in industrial output in 2009 dragged overall economic growth

down during the year.

• However, the rebound in growth in 2010 was supported by a strong

recovery in the industrial sector and the improved showing of the services sector.

7

Export Driven Economy

• Malaysia’s economy is export driven, with exports accounting for 110% of GDP in

2010 (2009: 107%).

• Correlation between Malaysia’s real GDP growth and real exports was nearly 90%

for the period 1Q2000 to 2Q2011.

• There is a strong link between the Malaysian economy and the US economy as
• well. Correlation between US ISM and Malaysia’s export growth is about 64% for

the period 2001 and 2011.

8

Key Macroeconomic Indicators

3

• 3

.)

• +
• 4
• 05
• 1
• %6
• 1*
• 4
• 4
• %&
• 6
• .)
• 6))

!"#!

• $
• 4

4 4 4 4 4 4 4 ,(7'&) %+&7'&)

• !"#$%&

,8&1*(

• $
• 4

4 4 4 4 4 4 4

• '#

96)5((3045((3 ,8&1*(

• $
• $
• ( #)# *

+)'(

!"#!

9

Other Statistical Indicators

• $
• $ +

$!"%

,5&

• %6 %& %6 %& %6 %&
• !"#!
• $
• $
• :

%&'""

!"#!

• $
• *#

$!"%

,5&

10

Economic Transformation Programme

• The economic transformation programme (ETP) announced by the

government intends to uplift Malaysia into a high income nation by increasing per capita income from USD6,700 in 2009 to USD15,000 in 2020.

• Focus on 12 national key economic areas that will receive prioritised public

investment and policy support.

• The ETP is estimated to attract investments to the tune of MYR1.4 trillion.

Private sector to provide 92% of investments. Domestic sources to provide 73% of investments.

• The ETP is also expected to create 3.3 million additional jobs.
• As of July 2011 committed investments amounted to MYR170 billion

(12% of target).

11

• Budget 2012 – bullish on private investment, based on the post-global-

financial-crisis momentum.

• But the pace of projects awarded declined significantly, dragging

construction growth down in 2Q2011.

Malaysia’s private investments (index rebased to 100 at bottom cycle) Projects awarded and construction growth (%)

95 100 105 110 115 120 125 130 4Q 08 2Q 09 4Q 09 2Q 10 4Q 10 2Q 11

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

• 60.0%
• 50.0%
• 40.0%
• 30.0%
• 20.0%
• 10.0%

0.0% 10.0% 20.0% 30.0% 40.0% 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 No of projects awarded (LHS) Construction output growth

Investment Climate

12

Business Environment

• The World Bank’s ‘Doing Business’ survey of 183 countries ranks Malaysia

as the 18th easiest country to do business.

13

Interest Rate Environment

• Policy interest rates and the statutory reserve requirement (SRR) were lowered during

the global financial crisis as a countercyclical measure.

• The low interest rate environment facilitated credit expansion, while the reduction in

SRR freed up much needed liquidity.

• However, since March 2010 the overnight prime rate (OPR) has been on a rising

trend, while SRR has returned back to the pre-crisis level.

• $
• 4

4 4 4 4 4 4 4 ,(7'&) %+&7'&) .

• '

,8&1*(

• 3
• 3
• 3
• 3
• 4 4 4 4 4 4 4 4
• ,8&1*(

Structure of the Banking Sector & Regulation

15

Malaysian Banking Landscape

n.a. 5 1

• Government owned
• Cooperative owned

Development financial institutions n.a 4

• Subsidiaries of foreign

banks International Islamic banks 4% 7 8

• Standalone banks
• Subsidiaries of local

commercial banks Investment banks 17% 2 8 6

• Standalone banks
• Subsidiaries of local

commercial banks

• Subsidiaries of foreign

banks Islamic banks 79% 8 17

• Local banks
• Subsidiaries of foreign

banks Commercial banks Percentage of banking sector assets (2010) Number of banks Ownership Operating License

16

Non Bank Financial Institutions

• Non Bank Financial Institutions in Malaysia have a limited role in the

financial sector.

• Mostly focussed on servicing salaried government servants or households

seeking consumption credit.

• Non Bank Financial Institutions are owned by cooperative societies or by

merchant firms.

• These institutions are generally unregulated or are under regulated.
• They are a limited threat to the banking sector as they lack the stable

funding base, product range and branch network to compete with the banking sector.

17

Regulatory Environment

• The banking sector is regulated by Bank Negara Malaysia (Central Bank of

Malaysia).

• Principal legislations:

– Banking and Financial Institutions Act of 1989. – Islamic Banking Act of 1983. – Central Bank of Malaysia Act of 2009.

• Minimum capital requirements:

– Domestic banking group MYR2 billion. – Locally incorporated subsidiary of foreign bank MYR300 million. – Standalone Investment Bank MYR500 million.

• Current regulatory regime is Basel II based.

– Standardised approach for credit risk. – Standardised approach and basic indicator approach for operational risk.

• Gradual convergence of accounting standards to reflect international

standards.

• Prudential supervision by Bank Negara Malaysia involves annual onsite

supervision and regular offsite supervision.

18

Recent Regulatory Decisions

Partly successful as it requires higher capital. Higher risk weights for housing loans. Likely to be successful if well implemented. Introduction of an ‘affordability’ test for consumer credit facilities. Limited impact on mortgage disbursements. Loan-to-Value ratio of 70% for the purchase of a third house. Partly successful in screening out low income earners. Minimum income threshold on credit card applicants increased to MYR24,000 p.a. Applicants with less than MYR36,000 p.a. limited to a maximum credit limit of 2x monthly salary per card/bank and to two cards/banks. Effective credit limit 4x monthly salary. Cards in circulation declined. However, did not impact

• utstanding credit card debt.

Tax of MYR50 per primary credit card and MYR25 per supplementary credit card. Impact Regulatory Decision

19

Changing Regulatory Focus

• Selective liberalisation of licensing regulations

Higher (70%) foreign shareholding allowed for Islamic banks and

Investment banks.

Foreign shareholders are also likely to be allowed to hold a higher stake

in local commercial banks over and above the current 30% limit.

Selected issuance of new commercial and Islamic banking licenses for

credible foreign banks.

• Regulatory policy directions

More targeted prudential regulations, especially for household lending. Increased moral suasion. Focus is likely to shift towards enhancing prudential supervision

capabilities rather than providing blanket support for the banking system.

However, systemically important banks and government owned or

controlled banks are still likely to benefit from considerable regulatory support.

20

Deposit Insurance

• The Deposit insurance scheme is administered by the Malaysian Deposit

Insurance Corporation (MDIC).

• Enhanced MYR250,000 protection per deposit per bank (previously

MYR60,000).

• Includes local currency and foreign currency deposits held with licensed

banks in Malaysia.

• Excludes inter-bank deposits, deposits not payable in Malaysia, negotiable

instruments of deposits, repurchase agreements and unit trust products.

• Estimated to cover 99% of depositors .
• Insurance premium is linked to risk rating of insured institution and ranges

from 0.03% to 0.24% with minimum annual premiums ranging from MYR100,000 to MYR800,000.

• The blanket insurance on deposits announced during the global financial

crisis in 2008 has since expired in 2010.

• Apart from bank deposits, the MDIC also covers insurance and takaful

policies issued by licensed insurance companies and takaful operators.

Performance of the Malaysian Banking Sector

22

Balance Sheet Growth

• Real loan growth trending above real GDP growth.
• However, deposit growth has fallen below loan growth.
• Loan growth of 10%-12% expected for 2011.
• However, loan growth is expected to moderate in 2012.
• $
• ;)/

7;)/ 6();)/

• ,"- *.!"

!"#!

23

Households Dominate Loan Book

• Household loans continue their dominance, while working capital financing

remains significant.

• Since the global financial crisis, loan disbursements to the household sector

has outstripped loan disbursements to the non-household sector.

3$ 3 3 3 3 3 3$ $3 3 3 3$ 3 3 3 3

• $
• 1

<(/'( =8&!6) .)/(

!%&/#%&

• ,8&1*(

> >$ >$ > >$$ >$ >$$ > > >$$

• >

> > $> > > >

• 1

<(/'7( .)/7(

'!

1 ,8&1*(

24

Loan Book Composition

=8& !6)

• .)/(
• %)

7(

• 1)&&
• (

?!') !'(

• !
• 6)*
• !%&$

,*6(%&()

,1 .)/(

• 12)

&

• '
• <(/

'(

• !())

?"

• !%&$

,*)<

,1

25

Improving Asset Quality

• Asset quality remains strong, while impact from unreserved impaired

loans on equity is at a decade low.

• Further improvements in asset quality is likely to be minimal as impaired

loans are already at a fairly low level.

• $
• $
• <
• $
• #6'7()

#6'7(@"A)*<

01#%&

• ,8&1*(

26

Deposit Trends

• Deposits growth is trending lower and the loans-to-deposits ratio is

trending higher.

• Individual deposits accounts for only 36% of total deposits.

0#

• #'+'

$ .)/

• +)

$ ,((( $

+2"

%()

,1>1%!

• $
• $
• <
• $
• 7(;)/7<

6()(;)/7< 7)<

!

• ,8&1*(

27

Liquidity

• Excess liquidity in the banking system sufficient to absorb additional

credit disbursements.

• Normalisation of the statutory reserve requirement unlikely to create a

significant impact on lending.

• >

> > $> >

• >

> > > > > 7%66'7< 7((5('7< "B((7A')*<

!0". +""/!"

1 ,8&1*( 11

28

Capitalisation

• Capitalisation remains adequate with comfortable loss absorption ability.
• RWCR of 14.8% as at end-June 2011 is well above regulatory minimum of

8% and reasonably above the market implied minimum of 12%.

$

• $
• $
• <
• !!

=! "A)*@%(()(

• $#%&

,8&1*( > > > > > > > > >

• ')'#+())(

$$

1 ,1

29

Earnings Trending Up

• Earnings and return on assets maintain upward trend.
• ROA in 2010 was supported by lower loss allowances and improving net

interest income and non-interest income sources.

3 3 3 3 3 3 3 3 3 %22 % %58 !#1, " <7,, 1,, 5 <, 7()0C"C 7()0C" 7)())%(' 7()0C"+(&)/58(D>41

• ,82(>1%!6))(3) "/((5A'5*<7,,3

Islamic Banking in Malaysia

31

The development of Islamic finance and banking is a key priority area for the Malaysian government. Several policy initiatives have been put in place to promote Malaysia as a global hub for Islamic banking. Islamic banks have grown in popularity to account for 18.9% of banking sector assets as at end-June 2011 from 15.1% in 2008. However, recent financial performance has not been up to expectations for stand-alone Islamic banks and foreign-owned Islamic banks. The four largest Islamic banks account for 57% of financing and 55% of deposits at end-June 2011, three of which are Islamic banking outfits of large local commercial banks. Concerns and possible growth constraints:

Small Islamic banks face an elevated risk profile due to their limited

deposit franchise and resulting deposit concentrations.

The sector’s asset focus skews it towards property-related lending.

The Islamic Banking Sector

32

Islamic Banking Indicators

3.4 5.0 4.2 3.0 3.1 Non-performing financing ratio 77 82 84 84 86 Financing to deposit ratio 55 59 60 62 62 Household sector financing / Total financing 7.3 27.0 21.9 14.9 5.4 Deposits growth 12.6 19.9 25.3 20.1 10.4 Advances growth

2010 2008 2009 2010 1H2011 Commercial Banks Islamic Banking Sector Key Financial Indicators in %

Source: BNM

Current Issues in the Malaysian Banking Sector

34

Public Hong Leong Affin MBB CIMB RHB Ambank Alliance Banking System 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% 5% 6% 7% 8% 9% 10% Equity/Assets Loans-to-Deposit Ratio

Financing the ETP

• Good opportunity for banks to expand their corporate loan books,

especially for foreign banks with proven expertise in project and infrastructure financing.

• Possible challenges:

Limited project and infrastructure financing expertise. Single obligor concentration and industry concentration limits.

35

Funding Trends

• Gross national savings remains low, while individual deposits have

remained relatively flat as a proportion of total deposits.

• Can the Malaysian economy fund its ambitious projects?
• $

,87( !6) ?(,'(

(,"

15(2 ,1>1%!

• $
• $
• $
• (()+&(@7<

#'6()(@6()(7< 6();)/<

,"3"

• ,1>!"#!

36

Managing Regional Expansion

• Regional ventures fraught with

complex regulatory, legal, political and socio-economic challenges.

• Limited expertise of Malaysian

banks and low brand recognition in international markets.

• Heavy financial and human

capital investments required for value extraction.

• However, regional expansion is

also proving to be rewarding for Malaysian banks.

• $

1*58 !#1, 5

• *#$+)#,
• ,82(>1%!

37

The Case for Consolidation

• Consolidation can create meaningful economies of scale for smaller banks.
• Going forward, interest in consolidation is likely to be renewed, especially by

interested foreign parties.

• 1'

,8(

• B)
• 6

,8(

• .)/(
• &+0

%(26

,82(>,1>1%!

38

Ownership Structure of Local Banks

46.2% 11.3% 5.8% Skim Amanah Saham Bumiputera EPF Permodalan Nasional Maybank 24.1% 11.9% Tan Sri Teh Hong Pio (Direct & Indirect) EPF Public Bank 44.9% 24.9% EPF Aabar Investments RHB Capital 61.6% 12.4% Hong Leong Financial Group (Tan Sri Quek Leng Chan) EPF Hong Leong Bank 28.6% 13.0% 10.2% Khazanah Nasional EPF Aberdeen Asset Management CIMB Group Holdings 23.8% 16.8% 14.6% 5.7% Australia & New Zealand Banking Group Amcorp Group (Tan Sri Azman Hashim) EPF Prudential PLC Ambank Group 29.1% 12.4% Vertical Theme EPF Alliance Financial Group 35.7% 23.5% 20.7% 5.3% Lembaga Tabung Angkatan Tentera Bank of East Asia Boustead Holdings Employees Provident Fund (EPF) Affin Stake Major Shareholders (as at 28th October 2011) Listed Entity

Household Sector Debt

40

Escalating Household Sector Debt

• Household sector debt to GDP has gradually inched up to 76% in 2010
• At the same time, household debt to deposits has also been increasing,

with the households being a net debtor to the banking sector

$ $ $ $

• $
• $
• $
• <<5)@

<<5)@<<6()(

2" +

• ,8&1*(

41

Household Financial Assets

• Financial assets of households include investments that are price-volatile and those

that cannot be liquidated in a timely manner without monetary loss.

• Furthermore, the distribution of household financial assets is likely to be less even

than the distribution of household debt as a result of asymmetric distribution of wealth.

• Therefore, only limited comfort can be derived from the households’ financial asset

holdings.

+') 2'(

• "A)*
• 6()(
• "';

)( $ 9)

• ()(

$

2"0/4565

,1>1%!

• $
• <<5)

<<0%(()( <<6()(

• 2" +.(0"

**/&

,1

42

• Underestimated household sector debt levels. Outside the banking system,

consumer credit is also offered by:

Cooperative societies. Easy payment schemes offered by merchants. Loans and salary advances provided directly by private employers. Nearly 1,800 registered money lenders and numerous illegal money lenders.

• Overestimated household sector stress tolerance

Significant income inequality and resulting concentration in asset ownership. The household sector remains vulnerable to adverse wealth and income

shocks.

Structural adjustments to improve debt service capacity. Anecdotal evidence suggests focus on the underlying collateral, especially for

housing and auto loans.

With most loans dispersed on a variable rate basis, an interest rate hike will

affect the household sector’s debt servicing ability.

Issues in Household Sector Debt

43

Concluding Remarks

• Malaysian banks have performed well during the crisis and the recovery

phase.

• The regulators have performed commendably well to ensure the stability of

the banking sector.

• Stability of the Malaysian banking sector is underpinned by:

Adequate capitalisation; Good asset quality; and Decent earnings streams.

• The key risks faced by the Malaysian banking sector are:

Overzealous growth and acquisitions; and Event-related risks, including possible escalation in household sector defaults.

• Overall the Malaysian banking sector is expected to remain relatively stable

compared to its regional peers.

Anandakumar Jegarasasingam is the head of financial institution and sovereign ratings at Malaysian Rating Corporation Berhad (MARC). He can be reached at janandakumar@gmail.com The views expressed in this presentation are the presenter’s personal views and may not necessarily reflect the views of his employer.