Following years of political turmoil, Myanmar is looking to the international banking and insurance community to strengthen its domestic market and tackle a legacy of non-performing loans. Peter Janssen reports.

Myanmar

Myanmar has suffered on the international stage in recent years thanks to the Rakhine incident of August 2017 – when 700,000 Rohingya Muslims were forced to flee across the border to Bangladesh – in terms of growth, foreign investment and tourism. Nevertheless, the Myanmar economy is still alluring (the World Bank estimates growth in 2019 was 6.3%, coming on the back of 6.2% growth in 2018), and with per-capita income on the rise, greater consumerism seems likely. Foreign financial institutions, especially in the Asia-Pacific region, are showing greater interest in getting a piece of the action.

The backlash from the Rakhine incident has set the stage for the elected government of the National League for Democracy (NLD) to push through some much-needed reforms of the country’s notoriously weak financial sector. While the International Court of Justice case in December 2019, which saw Myanmar face charges of genocide, may have lessened party leader Aung San Suu Kyi’s credentials as an icon of democracy abroad (she defended her government’s role at the Hague in person), it has arguably strengthened her position domestically. This is good news for her party’s prospects in a general election scheduled for late 2020, and likewise good news for a continuation of the reform process currently under way in the country. 

Foreign ownership

Perhaps the most significant liberalisation the NLD-led government pushed through was the granting in April 2019 of licences to five of the world’s top international insurance companies to open 100%-foreign-owned subsidies in the country, comprising the UK’s Prudential, Japan’s Daiichi Life, Hong Kong’s AIA, the US’s Chubb and Canada’s Manulife. 

“I think it was the best thing they’ve ever done,” says Neville Daw, head of the special task force for listing promotion at the Yangon Stock Exchange (YSX). “I think the government realised it has to raise money through the issuance of bonds to cover its deficit. For me, that has been the game-changer.” A vibrant insurance market will create a huge pool of kyat currency that needs steady returns, such as government bonds. Mr Daw hopes that in the future they will be investing in YSX equities as well.

The entrance of foreign insurance companies was also good news for Myanmar’s banks, whose affiliated insurance firms will become the likely partners for the foreign giants and other newcomers. For example, Aya Financial Group (AFG), the umbrella under which AYA Bank also operates, in September 2019 set up a joint venture between Aya Myanmar General Insurance and Sampo Japan Nipponkoa Insurance, allowing the Japanese partner a 35% stake. 

Under Myanmar’s new Company Law, passed in 2018, foreign entities may now own up to 35% in a local firm and still qualify as a Myanmar company. In December 2019, AFG also entered into an exclusive partnership with the newly licensed AIA. AYA Bank, Myanmar’s second largest, will be the exclusive bancassurance distribution partner for AIA (as well as AYA-Sompo for its customers), and will also be the ecosystem of Max Myanmar Holdings, its mother conglomerate. “These international companies have the technology. We have the market,” says Azeem Azimuddin, AYA Bank’s chief financial officer.

AYA Bank has boosted its transparency, governance and adherence to international standards over the past five years, attracting a number of international institutions looking to invest in strategic partnerships. In September 2019, AYA Bank received approval from the Central Bank of Myanmar (CBM) to induct subordinated debt (Tier 2 capital) from international institutions in order to meet the required capital adequacy ratio. In November the bank took a drawdown of $40m from Mizuho Bank, one of Japan’s leading banks. “This subordinated debt is classified as Tier 2 capital, which boosts our regulatory capital,” says Mr Azimuddin. The debt can be turned into an equity stake in AYA in the future.

Overdraft legacy

Many of Myanmar’s banks have faced a sharp rise in their ratio of non-performing loans (NPLs), triggered in the latter half of 2017, when the CBM issued a series of prudential regulations. These included a requirement that banks’ overdrafts should be reduced to 20% of their lending portfolio, with the rest converted into term loans by the end of 2017. This caused a panic within the banks as they were forced to reveal the extent of the use of overdrafts in the system. 

“I think the central bank did not have the numbers,” says one financial expert. “The numbers that the overdrafts were about 70% to 75% of the market came out because of the regulation. The banks were not revealing this data on overdrafts to the central bank before.”

After the CBM realised the extent of the problem, there was a three-year postponement of the overdraft requirement, now looming in July 2020. There is debate over whether Myanmar’s banks will be able to meet even this deadline. CBM deputy governor U Soe Thein sparked a mini-run on some banks in September 2019 after he implied in parliament that the central bank might refuse to bail out private banks which fail to clean up their overdrafts by the deadline. After the run and complaints from the banks, the central bank issued a statement essentially denying the deputy governor’s statement. Mr Soe Thein proffered his resignation, but it was rejected.

The incident highlighted the fragility of the Myanmar banking system, which suffered a major crash in 2003, and the dilemma most banks face in dealing with the overdraft legacy. The banks argue that the prevalence of overdrafts over the past two decades was largely the result of the central bank’s limit on all loans to one year maximum (now up to three years). To get around the one-year limit, banks simply offered clients overdrafts collateralised with property, which were rolled over at the end of the year with no need to repay the principal. The system seemed to work fine a decade ago when the local banks were primarily acting as treasury departments for the large Myanmar conglomerates behind them.

Times have changed, however. Myanmar’s banking system is essentially evolving from a pre-Basel I era. In the transition process the banks’ NPLs have mushroomed as clients have been forced to pay back principal plus interest. 

“The first task that the banks face is to deal with the NPLs, because there is a strong view, within the banking system and government, that many NPLs are not a question of ‘can’t pay’ but ‘won’t pay’,” says Sean Turnell, special economic consultant to Aung San Suu Kyi and director of research at think tank Myanmar Development Institute.

Period of transition

In this transition period for the banks, as overdrafts are shifted to term loans, no one, including the central bank, seems to have a clear idea of the real NPL ratio. This is new territory for most of Myanmar’s banks, which have never demanded customers pay back principal on overdrafts before. In a test case, KBZ, the largest private bank in Myanmar, accounting for about 40% of the market, filed a suit in January against businessman Ko Ko Htoo and his family-owned port company Myanmar Annawa Swan A Shin at Yangon Region High Court for defaulting on an overdraft of some Kt326bn ($221m). This represented the largest such default to date, according to local media reports.

In 2019, the CBM issued five new prudential regulations, such as requiring higher capital adequacy ratios and demanding the presence of professional directors on banks’ boards. But some are suggesting that the central bank could do more to lessen constraints on the banks, such as change the maximum loan period from three years to a more flexible range hinging on risk. 

“Three years is too short,” says Kyaw Lynn, CEO of CB Bank, Myanmar’s third largest bank. “The duration should depend on their business requirement. If it is an infrastructure project, they need 10 years: and as a developing country we have many infrastructure projects that need financing.”

Another area in which many hope the central bank will help out is in allowing for a more flexible interest rate band. Currently, deposits have a minimal 8%, while loans are capped at 13%, with up to 16% now allowed for non-collateralised loans. “If we are going to ask the banks to be more prudent we have to be flexible in allowing them to be more profitable,” says Mr Turnell. “It seems to be not unreasonable to have much greater pricing control and properly price for risk. What incentive do they have to lend to small and medium-sized enterprises if the maximum is set at 13%?”

Modernising banking

To incentivise the local banks and expand financial inclusion (only 26% of the population is banked), the CBM is creating an increasingly competitive financial environment by inviting in foreign banks. There are already 13 licensed foreign bank branches in Myanmar, with nine granted in 2014 and four more in 2016. Now the CBM is preparing to grant more, including wholly owned bank subsidiaries, which would be allowed up to 10 local branches, starting in 2021. The liberalisation has sparked interest, especially from Asian banks. Thailand’s Siam Commercial Bank has put in a bid for a subsidiary, while Kasikorn Bank, also from Thailand, has taken a different route, opting to buy a 35% equity stake in Myanmar’s A Bank, a relatively new small bank.

The CBM is also encouraging the use of digital technology and mobile payment systems. Wave Money, a mobile payment platform in which Yoma Bank has an equity stake, is the local success story.

“We are the leading mobile financial services provider with more than 57,000 Wave shops across Myanmar covering 89% of rural areas,” says Wave Money CEO Brad Jones. “In 2019 we moved approximately Kt6400bn in remittances, which was three times higher than the Kt2000bn transacted in 2018.” The banks, fighting back, have set up their own payment platforms such as KBZ Pay and CB Pay. Remittance fees from Myanmar citizens working abroad used to be the bread and butter of the banks.

Yoma's international interest

Yoma Bank, Myanmar’s fifth largest lender, has been riding high on the growing interest in the local market from international players. In November 2019 the Philippines’ Ayala Corp announced a $238m deal to buy a 20% stake in the Singapore-listed Yoma Strategic Holdings and 20% of the Yangon-listed First Myanmar Investment. Ayala is one of the Philippines’ biggest and oldest family groups, with consumer businesses spanning real estate, telecoms, health and banking.

“The business lines that Ayala is in are almost [identical to] the business lines Yoma is in,” says Yoma Bank CEO Dean Cleland. “And obviously the capital is a strong stamp of approval in the strength of the Yoma Group.” 

The Yoma Group got another endorsement in January when Singapore’s sovereign fund GIC and Norway’s Norfund revealed they would purchase a 30% stake in Yoma Bank worth $88.7m, Mr Cleland confirms. Yoma Bank has been somewhat untouched by the morass of NPLs, in part because it has been stressing good governance and term lending for the past four to five years, aided by the International Finance Corporation (IFC), which recently transformed its subsidiary loan to the bank into 4% equity. “The IFC has had good governance in here for a long time. It has a board position with us. There is good credit discipline, good credit quality and NPLs are modest,” says Mr Cleland, who states that NPLs at Yoma are below 4%.

But what about the other banks? There are 28 private banks in Myanmar, four state-owned banks and 180 microfinance institutions. The top five banks control about 80% of the market, leaving a long tail of smaller, weaker banks. Even some of the bigger banks, such as Myanma Apex Bank, the country’s fourth largest, may struggle to boost capital by attracting strategic partners. 

“When you look for a strategic partner you must have your own strength and muscle first. If not, you will be eaten up by your partner,” says Myanma Apex Bank chief business officer Kyaw Ni Khin. “You need to work on your human resources, your corporate government. It all needs to be well positioned.”

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