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Asia-PacificApril 1 2007

Eyes on the retail prize

With the retail market key, Malaysian banks are placing great emphasis on cross-selling while rolling out simple technologies that improve service. Dan Barnes reports.
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The Malaysian economy is generally looking healthy for 2007 and the banking sector appears to share the prospects of a good year ahead. Fitch Ratings has predicted real gross domestic product (GDP) growth of 5% this year, a slight dip compared with 2006. Overall asset quality has improved: provisioning for non-performing loans (NPLs) of 50%-100% being taken up by a majority of banks despite no mandatory requirement.

Banks describe the slip in consumer confidence at the beginning of 2006 as a “blip”, which was caused by a sharp rise in inflation that started at the end of 2005, peaking at 4.8%. By the end of 2006, inflation had fallen back to about 3.1% and consumer confidence improved.

Financing for projects under the Ninth Malaysia Plan (9MP), will remain a major driver for investment and corporate banking until 2010. The plan is the initial five-year phase of an overall government blueprint intended to make Malaysia a developed nation by 2020.

The small and medium-sized enterprise (SME) sector accounts for about 85% of Malaysian businesses, and this offers strong opportunities, as the 2005 launch of SME Bank (a subsidiary of Bank Pembangunan Malaysia Berhad) indicates. The 9MP is also driving investment in this area. In Malaysia, there is everything to play for.

Courting growth

At Public Bank, group economist En Nasaruddin bin Arshad notes that the government is expecting inflation to drop below 3% this year, building a good platform for further growth. Leong Kwok Nyem, senior general manager, says that Public Bank will be using the situation to maintain steady, secure growth over the year to come. “We will be focusing on the traditional businesses we are in. We are very much a retail commercial bank, targeting consumers and [SMEs].”

A significant proportion of the bank’s customers are retail individuals, as has been the case long term, and the bank expects to continue pursuing organic growth in the loans business to the mid-market and retail areas this year. Last year, loan growth – with an average of 20% per year – dropped to 17%, although the absolute amount was roughly the same as in 2005 given the larger customer base.

This year, expected growth in loans is 15% – a figure Mr Leong puts at double the industry average. “We have achieved this success because, first, we are competitive in terms of our loans pricing. Consumer loans are very homogenous and commoditised – one mortgage or car loan is no different from any other. So the main competitive factor is pricing,” he says. The bank is proactive in observing the competition and reacting to market conditions to keep this edge, he adds.

“The second factor,” he notes, “is the effort that management makes in driving the business.” The bank uses structured target systems for branch managers and detailed targets for the business lines, plus infrastructure to monitor these performance targets. This drive comes from the chairman himself, he says. “He has meetings with regional managers, he meets the branches accompanied by the managing director, the executive director, the chief operating officer, so senior management spend a lot of resources and effort actually managing and driving the business.”

Cross-selling gains

The main challenge for Public Bank will be straightforward competition and the bank’s response to that will be to work harder and more efficiently, says Mr Leong. “We’re pushing down our cost income ratios – currently it’s below 35% where the industry average is 40%.” On the service side, cross-selling is proving successful, particularly in the unit trust area where the banks has a 30% market share, the largest in Malaysia, he says.

Cross-selling aside, the bank is also working to ensure high service quality, in an effort to strengthen customer confidence, says Mr Leong. Within the branch network, the bank is tackling customer waiting times to address the most common cause of customer complaints. “We have consciously invested in customer service to the extent that today we are recognised as providing very fast service. That has resulted in a standard waiting time of two minutes – a customer should not expect to wait any longer to be served,” he says.

This has partly come about through investment in simple technology that allows the bank to track each customer encounter, with monitoring centralised at the head office. The bank has two million customer transactions a month on average and achieves its two-minute target 80% of the time.

Long-term strategies

The bank will seek stable strategies –“nothing sexy” – as drivers for growth, says Mr Leong, who is clearly focused on the long term future. “Some banks like to try to react to every rise and fall of the market. However, we believe it is the prudent banks that weather these cycles, and so our strategy follows.”

Alliance Banking Group has had “decent growth” in consumer banking, particularly in unsecured lending (including credit cards, mortgage and wealth management) as well as commercial banking and Islamic banking, according to Bridget Lai, group CEO. “Malaysia offers an attractive potential financial market with an industry revenue pool estimated at $11.2bn by 2008. To this end, we are reshaping our portfolio to meet market growth and opportunities.

“Traditionally, Alliance Bank is strong in SME and commercial banking and so we will continue to build on this strength. The group’s other businesses, like consumer banking and wholesale banking, will then leverage on this for future growth.”

Retail battlefield

Alliance will be investing in its branch infrastructure and technologies to improve customer experience where it sees the most significant competition. Ms Lai notes that retail banking will be a real battlefield. “Some 60% of the financial industry’s revenue pool will come from consumer banking. As such, most banks will have to build up their core competencies in this business to gain greater wallet share of the consumers,” she says.

The bank has also put customer service at the front of moves toward centralising some functions, she says, noting that the front-to-back office ratio is currently about “90% for front office and 10% for back office. Most of the back-office functions have been hubbed to improve efficiency and reduce duplication of roles”.

The drive to gain organic growth in the bank’s market share is also being supported by investment in risk management to improve the overall quality of its assets. “We’re going to revamp our risk structure and we’ve already embarked on an integrated enterprise-wide risk management framework within the Basel II Accord,” says Ms Lai.

Competitive edge

“We’re establishing a culture of best practice that should augur well in terms of our reputation and confidence among our customers, regulators and key stakeholders. At Alliance, we have not interpreted the Basel II Accord solely as regulatory standards and requirements, but rather the foundation for enhancing risk management practices to build competitive advantage that will strengthen the value of the group by supporting the delivery of our business strategy.

Ms Lai says that Alliance Banking Group intends to maximise the business benefits of adopting Basel II standards. “By integrating risk measurements into our business objectives, and risk management discipline into our day-to-day operational processes, we are moving away from being reactive to adopting more proactive risk management practices,” she says. “This can be achieved through increased levels of risk awareness throughout the organisation, facilitating more informed decision making, early identification of risks and issues to enable proactive actions to be taken.

“We are also one of the few banks in Malaysia to adopt international accounting standards as listed in FRS 139,” she says.

Improvements to the risk management best practices is boosting the group’s asset quality and this is expected to continue, says Ms Lai. “The group’s net NPL ratio stood at 6.7% in December 2006, compared with 9.5% in March 2006 due to stringent underwriting standards and a strong special assets and collection team. Our gross loan loss coverage has also improved from 32% to 57%. We expect our net NPL ratio and our loan loss coverage to improve further in line with the industry average.”

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