Banking in Emerging MarketsSeizing opportunities, overcoming challengesCountry report – Malaysia

A summary & key messages

Chan Hooi Lam

Key Findings – Malaysia

► Most respondents expect a moderate improvement in their bank’sfinancial performance – moderate economic growth post GE 13

► See cross-selling, & charging fees for more products & services, asessential to growth

► Expanding regulatory burden is creating a shortage of skilled staff

► Margin compression is a key concern as retail deposit & lending ratesare both under pressure

► Corporate lending is driven by demand to fund infrastructure projects

► Consolidation of the small Islamic banks operating could help improveefficiency & build capacity

► Ongoing liberalization of the financial sector will create opportunitiesfor partnerships to deliver long-term project financing & grow theonshore wealth management industry

2 Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

In retail banking, rising affluence will lead to increased demandfor savings & wealth management products

3

0.83

0.50

0.80

1.00

1.00

0.83

1.00

1.33

Personal loans

Personalreal-estate loans

Credit cards

Personalinvestment products

Private banking /Wealth management

Payroll loans

Auto loans

Personal savingsand deposit products

Improvea little

Improvea lot

Stay aboutthe same

*Mean score where decrease a lot = -2 and increase a lot = 2

Retail banking product demand

► Rising affluence provides further scope toexpand the consumer banking segment

► 5 out of 6 banks anticipate moderategrowth in demand for mortgages.

► Of 4 banks providing credit cards, 2 bankexpects a bit more demand, 1 a lot more.

► Of 5 banks offering auto loans, 3 expecta bit more demand, 1 a lot more.

► Unbanked population offers an untappedcustomer base.

► The World Bank estimates that 56% ofMalaysians without bank accounts, &that 27% do not have an account as theyare too far away from a branch.

► Many Malaysians choose to have their wealthmanaged offshore; domestic banks see growingopportunity to serve this segment.

► Need to build skills & capacity to servethese customers - there are signs theyare already beginning to recruit wealthmanagement staff to address skills gaps.

Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

Growth is also anticipated in corporate & commercial lending,driven by investment in infrastructure...

4

InfrastructureProjects

InformationTechnology

SME

Retail & ConsumerProducts

Energy, miningand minerals

Media &Telecommunications

Health care

Financial services

Commercialreal estate

Construction

Manufacturing andindustrials

Commercial andprofessional services

Transport-0.17

0.67

0.67

0.50

1.67

0.83

0.50

1.00

0.67

1.00

0.83

1.17

1.67

Deterioratea little

Improvea little

Improvea lot

Stay aboutthe same

*Mean score where decrease a lot = -2 and increase a lot = 2

Lending levels

► Anticipate growth in corporate lending to allsectors, except transport.

► Lending to infrastructure & constructionis expected to see the strongest growth,as a result of the government’s ETP.

► Facilitating public-private partnerships tofinance investment in infrastructure willbe a key opportunity for banks.

► Also anticipate growth in SME lending.

► As Malaysian banks struggle with margincompression we expect rebalancing ofcredit portfolios to higher margin SMElending.

► Investment in risk managementcapabilities is required when movingdown the credit curve.

► But lending growth may be accompanied byhigher LLPs.

► Expectation of LLP growth is higher thanin other APAC countries & mostestablished RGMs.

► 3 of 6 banks expect LLPs to increase, 1to decrease.

Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

Provisions Against Loan Losses

5

0.33

All RGMs FrontierRGMs

TransitionalRGMs

EstablishedRGMs

Asia PacificRGMs

Malaysia

Decreasea little

Increasea little

Stay aboutthe same

Provisions against loan losses: Over the next 12 months, do youexpect your total provisions against loan losses to…?

*Mean score where decrease a lot = -2 and increase a lot = 2

Range of countryaverages

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

...but improved capital markets financing capabilities will benecessary to ease pressure on bank balance sheets

6

0.00

0.67

0.60

1.00

0.83

0.67

1.00

1.50

1.00

Trade finance

Debt issuance

Corporate loans

Cash managementor treasury

Equity issuance orInitial public offerings

Hedging products

Project finance

SME loans

M and A advisory

Improvea little

Improvea lot

Stay aboutthe same

*Mean score where decrease a lot = -2 and increase a lot = 2

Business banking product demand

► Despite strong demand for corporate lending,price competition is squeezing margins.

► The transition to Basel III will reducethe availability of funding for projectfinance.

► Some banks may encourage clients tosecure capital markets funding forlarge projects

► Financing infrastructure projectsthrough the capital markets – reduceexposure to long-term credit risk, &boost fee revenue.

► It would also enable banks to directlending to the more profitable SMEsector, where they also expectincreased demand for credit.

► Should look to partner with globalinvestment banks to address a skill &experience gap in their IB divisions.

► Surprisingly, despite the growth of pan-Asiantrade flows in recent years, anticipateddemand for trade finance is low.Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

6.83

5.67

6.17

6.50

8.67

8.33

7.50

7.67

8.50

8.50

0 10

With intense competition putting interest margins underpressure...

7

Maintaining netinterest margins

Price competition onloans to business/

corporate customers

New sources ofrevenue beyond net

interest

Developing newtechnology to serve

customers

Rate competition oncustomer deposits

Retaining talent infront office functions

Price competition onloans to retail

customers

Attracting talent infront office functions

Political pressure toreduce rates on credit

productsConsumer pressure toreduce rates on credit

products

Serving customers profitably

(Mean score) (0-6)No real challenge

(9 or 10)A major

challenge

(7 or 8)A challenge

► More worried about declining margins than alltheir peers► Of 6 banks, 1 see maintaining NIM as a

challenge, 4 see it as a major challenge.► Concerned about both price competition on

loans, & rate competition on customer deposits► 2 banks see price competition on retail

loans as a challenge, 4 as a majorchallenge.

► On business loans, 3 see pricecompetition as a challenge, 3 as amajor challenge.

► 4 see rate competition on deposits as achallenge, 2 as a major challenge.

► Competition on loans & deposits is moreintense in Malaysia than in other APACcounties, although Indonesian banks areslightly more worried about margin pressureoverall.► Despite these pressures, 50% of banks

believe consumer banking will be thefocus for growth, even if marginsdecline. Only 17% disagree.

Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

...will focus on improving efficiency & cutting costs to maintainprofitability, while grappling with regulatory change

8

Improving efficiency

Streamliningprocesses

Improving riskmanagement generally

Cutting costs

Strengthening creditrisk assessment

Disposing of assetsor businesses

Reducing thenumber of products

Retaining staff

Accessing longerterm domestic

currency funding

Preparing forBasel III

Changes infinancial reporting

Accessing longerterm foreign

currency funding

3.00

2.50

4.17

6.67

6.50

8.50

8.33

8.17

7.67

8.00

7.67

8.50

0 10(Mean score)

Managing change

► More concerned about regulatory change thantheir peers.

► All anticipate more regulation affecting thesector across the next year.

► 4 banks see preparing for Basel III as animportant activity, 2 very important.

► They expect Basel III to significantlyimprove the capital strength of banks, butwould slightly reduce risk appetite.

► Also, the introduction of the FSA & IFSA,intended to increase bank transparency &accountability.

► The combination of squeezed margins &increased capital requirements means banks arefocused on improving efficiency to maintainprofitability.

► 4 banks see improving efficiency asimportant, 2 as very important.

► 67% of banks expect C/I ratio to fall overthe next three years.

► The resource demands to support an array ofchange programmes are raising concerns aboutstaff retention.Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

(0-6)Not very important

(9 or 10)Very

important

(7 or 8)Important

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

4.17

5.40

7.33

7.33

8.17

7.33

6.50

6.83

7.83

0 10

Banks expect to face resource constraints while implementingan array of change programmes

9

Improving efficiency

Maintainingcurrent levels ofreturn on equity

Retaining talent incore functions

Attracting talent incore functions

Managing credit risk

Dealing with theimpact of the globaleconomic slowdown

Developing newtechnology to run

the bank

Raising funds inforeign capital

markets

Raising funds indomestic capital

markets

Profitability and efficiency

(Mean score) (0-6)No real challenge

(9 or 10)A major

challenge

(7 or 8)A challenge

► With margins under pressure, & high fees a keydriver of customer attrition, banks need to focuson cutting costs.

► Efficiency programmes, combined with regulatorychange, will stretch resources.

► Malaysian banks are slightly more likely toincrease head count than their peers. 4banks expect to increase their headcount.1 to decrease.

► 4 banks expect attracting & retaining staffin core functions to prove challenging, 1 toprove very challenging. The Malaysian StaffTraining Fund may help to reduce a war fortalents, but makes it difficult to recruitskilled individuals quickly & cheaply.

► Increased automation of processes will not onlydrive efficiency, but will also allow banks to focustheir resources, & may also alleviate talentshortages.

► 3 banks see developing new technology torun the bank as a challenge, 2 a majorchallenge.Established RGMsTransitional RGMsFrontier RGMsAll RGMs Malaysia

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

12 117

1417

46

33

50 48 50

12

22

7 10

17

AllRGMs

FrontierRGMs

TransitionalRGMs

EstablishedRGMs

Malaysia

% Decrease a lot % Decrease a little % Increase a little % Increase a lot

Headcount

10

% Stay the same and Don’t know not displayed.

Headcount: Over the next 12 months, do you expect theheadcount of your bank to...?

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

Malaysia – The banking landscape

11

33

11

4334

17

10

11

14

38

56

4331

50

6

11

7

17

AllRGMs

FrontierRGMs

TransitionalRGMs

EstablishedRGMs

Malaysia

% Strongly agree % Tend to agree

% Strongly disagree % Tend to disagree% Neither agree nor disagree not included

The banking landscape: To what extent do you agree that inthe next 12 months there will be a significant change in thebanking landscape in this country?

17

33 33

17

1 2 3 4 5 6 7 8 9 10

% respondents

25

75

25

100

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% respondents anticipating change

The banking landscape: What do you think is theappropriate total number of local banks in Malaysia?

The banking landscape: Which of the following do expectto be the primary driver of change in the ownership of banksin this country?

Banking in emerging markets – Spring 2013 – Countryreport - Malaysia

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