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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


(%)

Inflation Rate (year-on-year)Upto Dec 2010 base is 2005. From Jan 2011 base is 2010.


-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


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


(%)

Statutory Reserve Requirement


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

(%)


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)


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

(%)


(%)

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

(%)


(%)

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


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


-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

(%)


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 [email protected]

The views expressed in this presentation are the presenter’s personal views and may not

necessarily reflect the views of his employer.

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