AFTER a decade of capacity building, Malaysia's banking sector looks forward to its next phase of strategic transformation. New long-term directions will emerge when Bank Negara unveils its second 10-year financial services blueprint.
Finer details on capital requirements and liquidity measures under Basel III are also expected with possible adjustments to local considerations.
“For Malaysian banks, it will be a key challenge to successfully re-position their strategies in line with these regulatory directions,” says Promod Dass, RAM Ratings head of financial institution ratings.
The move to top up capital may result in lower dividends being declared by some banks. “As for Malaysian banks with overseas operations, this may also result in additional capital calls from their overseas subsidiaries,” says Anandakumar Jegarasasingam, Malaysian Rating Corp Bhd vice-president and head of financial institution ratings. In the wake of the global financial crisis, a lot of businesses are re-learning the value of appropriate capital structure, and sustainable debt equity.
“And to understand that historically accepted counter-party risk, be it banks or sovereign, cannot be taken for granted on the risk ratings,” says Yvonne Chia, Hong Leong Bank Bhd group managing director.
In a sector that is increasingly dogged by competition, net interest margins are thinning amid pressure from two ends: loan yields and cost of funds. “Borrowing costs are much lower, banks are willing to lend, and volumes are up in both consumer and wholesale segments. However, margins are narrowing and price wars are happening,” Chia notes.
In its sector focus, Hwang DBS Vickers Research notes that most banks are offering very attractive lending rates, mortgage rates as low as base lending rate minus 2% as well as competitive deposit campaigns to attract low cost and structured deposits.
Currently, Chia says many businesses have raised funds to pay back older, more expensive debt.
That scenario may change when companies with mandates to start major infrastructure projects start to raise financing.
Under the economic transformation programme, projects worth US$444bil have been identified and the momentum for fund-raising is expected from 2011-12 onwards.
In fact, Hwang DBS senior analyst Lim Sue Lin expects the kicker in bank earnings to be non-interest income. Net funds raised in the capital market almost doubled to RM110bil in 2009.
New equity issuances amounted to RM26bil in 2009 when Maxis Bhd was re-listed, raising RM11bil, and rights issues by Malayan Banking Bhd and Axiata Group Bhd raised RM6bil and RM5bil respectively.
The uptrend is expected with the Government's effort to make Malaysia an attractive listing destination.For 2010, funds raised in the equity market are expected to reach RM30bil and debt issuance RM60bil.
For the first nine months last year, about RM51bil worth of debt had been issued. The recent slew of mergers and acquisitions will add to fee and advisory income of banks.
Net interest income will remain a sustainable source of revenue for banks against higher consumer spending and more robust banking activities. According to Lim, loans growth is expected to be stable at 12% with gross domestic product (GDP) forecast at 5.5% this year. Further spending momentum is expected as the Government targets to achieve gross national income per capita of US$12,140 by 2015 and US$15,000 by 2020 (US$8,260 last year). In the midst of robust banking activities, local banks are expected to gain traction over their foreign counterparts and even take over a larger share of the syndicated loan market from international players, says Chia.
“Local banks with firmer grasp of regional market conditions are more confident to lend to companies that might otherwise have trouble finding capital. Many local banks are also becoming more involved in cross-border financing for trade-related needs or for capital investments due to their higher levels of liquidity, not having suffered the severe effects of the recession,” she adds.
Among key concerns, Anandakumar highlights the high household sector exposure of the Malaysian banks for which the loans now account for nearly 55% of banking sector loans.
While the regional thrust is generally encouraged, he is cautions against an excessive emphasis in this regard as not all banks have the financial might and management expertise to successfully pull off their regional expansion aspirations.
Indonesia's banking sector, and to a certain extent that of China and Singapore, offer opportunities for higher loans growth.
“The relatively higher margins and larger markets in these regional markets, particularly in Indonesia, will to some extent, offset the margin compression trend in the Malaysian market,” says Promod.
“Malaysian banks will also be seen aggressively reaching into Indonesia through their respective Islamic banking franchises, which would provide a competitive edge over international banks operating in Indonesia,” he adds.
Chia notes that the rise of China and India will continue to drive global growth going forward.
However, she points out that China's move to tighten monetary policy further to cool an overheating economy and its impact on growth and regional trade will be closely watched.
“A major downside risk this year would be the ability of European countries to roll over maturing debt in the face of declining creditworthiness,” she says, adding that foreign exchange volatility is an increasing dimension to consider by all financial institutions and businesses.
“The worldwide quantitative easing has increased the movements of funds to Asia and the Far East regions. We need to understand the implications to the liquidity in the system and asset prices across the board,” she cautions.
Source : http://biz.thestar.com.my/news/story.asp?file=/2011/1/1/business/7567207&sec=business - Jan 1, 2010
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