Post on 05-Mar-2021
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
-15
-10
-5
0
5
10
15
20
25
3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11
Nominal GDP Real GDP(%)
Malaysia's Economic Growth Rate (q-o-q)
Source: CEIC
� 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
-8
-5
-2
1
4
7
10
2006 2007 2008 2009 2010
GDP Agri Industry Services
Growth in Economic Output (y-o-y)Constant Prices
(%)
Source: ADB
Trade
16%
Others
25%
Finance
17%
Manufact
uring
28%
Mining
7%
Agri
7%
Economic Structure2010
Source: ADB
� 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
2.75
3
3.25
Oct-
10
Nov-
10
Dec-
10
Jan-
11
Feb-
11
Mar-
11
Apr-
11
May-
11
Jun-
11
Jul-
11
Aug-
11
Sep-
11
Oct-
11
(%)
Malaysian Ringitt versus the US DollarSpot rate
Source: CEIC
4
5
6
7
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Base Lending Rate
Average Lending Rate(%)
Lending Rates of Commercial Banks
Source: Bank Negara Malaysia
-3
0
3
6
9
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
(%)
Inflation Rate (year-on-year)Upto Dec 2010 base is 2005. From Jan 2011 base is 2010.
Source: Bank Negara Malaysia
-8
-6
-4
-2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(%)
Fiscal Deficit as a % of GDP on an inverted scale
Source: CEIC
9
Other Statistical Indicators
0
10
20
30
40
50
60
1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11
(%)
Cash-to-Debt Ratios (Companies Listed on Bursa Malaysia)
Source: Bloomberg
0
1
2
3
4
Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10
(%)
Malaysian Unemployment Rate
Source: CEIC
0
4000
8000
12000
16000
20000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
#
Bankruptcies in Malaysia (Individuals)
Source: CEIC
0
2
4
6
8
10
1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11
(%)
Operating Profit Margins (Companies Listed on Bursa Malaysia)
Source: Bloomberg
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.
0
2
4
6
8
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Base Lending Rate Average Lending Rate OPR(%)
Interest Rate Environment
Source: Bank Negra Malaysia
0
0.5
1
1.5
2
2.5
3
3.5
4
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
(%)
Statutory Reserve Requirement
Source: Bank Negara Malaysia
Structure of the Banking Sector & Regulation
15
Malaysian Banking Landscape
n.a.
5
1
- Government owned
- Cooperative owned
Development financial institutions
n.a4- 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
OwnershipOperating 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 outstanding credit card debt.
Tax of MYR50 per primary credit card and MYR25 per supplementary credit card.
ImpactRegulatory 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.
-5
0
5
10
15
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Real GDP Growth Real Loan Growth Real Deposit Growth(%)
Growth Trends: GDP, Loans and Deposits
Source: CEIC
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.
55.6 54.0 55.0 55.4 55.2
28.9 28.6 26.7 25.7 25.4
15.6 17.3 18.2 19.0 19.4
0
20
40
60
80
100
2007 2008 2009 2010 8M2011
Households Working Capital Others
Loan Book Mix of Malaysian Banks
(%)
Source: Bank Negara Malaysia
25,45434,648 38,617
57,98441,636
25,769
47,661
18,345
42,117
35,663
0
15,000
30,000
45,000
60,000
75,000
90,000
105,000
2007 2008 2009 2010 8M2011
Household Loans Other Loans
Incremental Loan Growth (y-o-y)
(in RM mn)
Source: Bank Negara Malaysia
24
Loan Book Composition
Working
Capital
25%
Others
14%
Auto
Loans
15%
Mortgage
27%Personal
& Credit
Cards
8%
Commerci
al
Property
11%
Loan Book CompositionBy Purpose - August 2011
Source: BNM
Others
12%
Manufact
uring
10%
Trade
7%
Househol
ds
55%
Constructi
on & RE
9%
Finance
7%
Loan Book CompositionBy Sector - 1H2011
Source: BNM
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.
0
4
8
12
16
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1H2011
0
15
30
45
60
75
90
Impaired Loans Ratio Impaired Loans/Equity (RHS)
Asset Quality of Malaysian Banks
(%)
Source: Bank Negara Malaysia
(%)
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.
FI
18%
Individual
36%
Other
4%
Govt
6%
Business
36%
Deposits by HoldersAs at Dec 2010
Source: BNM, MARC
0
3
6
9
12
15
18
2001 02 03 04 05 06 07 08 09 2010 1H2011
-
15
30
45
60
75
90
Loans Growth (LHS) Deposits Growth (LHS) LD Ratio (RHS)
Loans-to-Deposit Ratio
(%)
Source: Bank Negara Malaysia
(%)
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.
0
40,000
80,000
120,000
160,000
200,000
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11
-
50,000
100,000
150,000
200,000
250,000
300,000
Loan Applied (LHS) Loans Disbursed (LHS) Excess Liquidity (RHS)
Loans Applied, Disbursed and Excess Liquidity
in RM mn
Source: Bank Negara Malaysia
in RM Mn
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%.
6
7
8
9
10
11
12
13
14
15
16
2001 02 03 04 05 06 07 08 09 2010 1H2011
Tier 1 CCR RWCR Equity/Assets(%)
Capital Ratios of Malaysian Banks
Source: Bank Negara Malaysia
-30,000
-5,000
20,000
45,000
70,000
95,000
120,000
145,000
170,000
2005 2010
Tier 1 Tier 2 Deducted Investments
Capital Composition
RM mn
Source: BNM
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.
-0.25
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
Affin Alliance Ambank CIMB Eon HLBB MBB Public RHB
Last FYE - 1Y Last FYE Latest Qtr (Annualised)
Return on AssetsLast FYE varies among the banks; Dec 2010, Jun 2010 or Mar 2010
(%)
Source: Bank financials, MARC computations. Note: Eon has since been acquired by HLBB.
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
3.45.04.23.03.1Non-performing financing
ratio
7782848486Financing to deposit ratio
5559606262Household sector
financing / Total financing
7.327.021.914.95.4Deposits growth
12.619.925.320.110.4Advances growth
20102008200920101H2011
Commercial
Banks
Islamic Banking SectorKey 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
Lo
an
s-t
o-D
ep
osit
Rati
o
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?
0 150 300 450 600 750 900
Bank Loans
Corporate PDS
Financial PDS
G & Quasi G Bonds
Financing Trendsin RM bn as of Dec 2010
Source: BNM, MARC
0
9
18
27
36
45
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
3
6
9
12
15
18
Gross Nat Savings/GDP (LHS) Ind Deposits/Deposits (LHS) Deposit Growth (RHS)
Trends in National Savings and Deposits
(%)
Source: BNM, CEIC
(%)
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.
0
9
18
27
36
Maybank CIMB Public
T-2 T-1 Dec-10
Overseas Profit Contribution as a % of Total
(%)
Source: Bank financials, MARC
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.
Selected Regional Banks: Capital & Assets
MBB
DBSOCBC
SBI
HSBC HK
CIMBUOB
SCB LNANZ
-
500,000
1,000,000
1,500,000
2,000,000
- 50,000 100,000 150,000 200,000
Capital in RM mn
Assets in RM mn
Mid 3
Banks
17%
Next 3
7%
Top 3
Banks
41%
Others
35%
Market Share by AssetsAs of 30 Sep 2010
Source: Bank financials, BNM, MARC
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
StakeMajor 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
67 6476 76
132 130 129137
143
69
0
15
30
45
60
75
90
105
120
135
150
2006 2007 2008 2009 2010
HH Debt/GDP HH Debt/HH Deposits
Household Sector Debt Measures
(%)
Source: Bank Negara Malaysia
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.
Provident
funds
30%
Equity
17%
Deposits
31%
Endow-
ments
6%Unit
Trusts
16%
Household Sector Asset Mix (2010)
Source: BNM, MARC
-10
-5
0
5
10
15
20
2005 2006 2007 2008 2009 2010
HH Debt HH Financial Assets HH Deposits(%)
Household Debt, Financial Assets and Depositsyear-on-year change
Source: BNM
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.