As with many Asian financial sectors, Malaysia's banks have withstood the global recession well thanks, in large part, to the Bank Negara Malaysia's proactive supervision. Corporate balance sheets, meanwhile, remain sound and consumer sentiment has also remained strong, say local bankers.
"I think that the fact Malaysia didn't see a significant increase in unemployment and there were no major drops in property values have allowed us to maintain our growth trajectory," says Leong Kwok Nyem, the chief operating officer of Public Bank, the country's third largest lender. "Business has been helped by healthy consumer sentiment as more than half our business is in the consumer sector," he adds.
Market-watchers predict an up-tick in demand for both retail and corporate lending and the half- and full-year results for the top three banks look promising. In August, Malaysia's largest lender, Maybank Group, posted a record full-year profit of RM3.82bn ($1.2bn) against RM692m a year ago, driven by robust loans growth. Maybank says it expects to post better earnings in 2011. CIMB Group, the country's second largest lender, reported half-year net profit growth of 35.2%, while Public Bank saw profit increase 18.3% for the first half of 2010.
Loan growth has been healthy, with Maybank posting 10% growth overall for the full year, and CIMB posting total loan growth of 16.1% year on year for the first half of 2010. According to Mr Leong, Public Bank is targeting 15% growth for the full year. In the short term, however, a good chunk of this growth is expected to come from the retail sector, mortgages, credit cards and, in particular, vehicle finance, amid tepid corporate demand for credit.
"The corporate credit demand has been slow," says Mr Leong. "Investment and capital expenditure cycles have been relatively low. If you look at the results of some of the bigger Malaysian banks over the past few years, growth has generally come from the retail space. As a result, business strategy is to be very intense in the retail sector."
Consolidation ahead?
But competition is fierce in a sector that many analysts believe is still in need of consolidation.
In a local market comprising 28 million people there are some 22 commercial banks and this figure has remained largely unchanged in recent years. About 86% of system assets are controlled by nine local banking groups and competition for existing market-share is intense, leading to a pricing war, according to ratings agency Standards & Poor's. As is the case with other Asian markets, pressure on interest rates has led to thin margins.
Since 2001, however, the pace of consolidation has slowed with just one significant merger, between Southern Bank and CIMB Bank, taking place during the past 10 years. Because the system has proved itself to be robust over the past two years, analysts believe that any future consolidation will be market-driven.
Indeed, regulators are moving the other way. In line with prime minister Najib Razak's government's broader economic reform policy, the banking sector is embarking upon a period of gradual liberalisation which has already seen the market open up further to foreign banks. Recent moves include allowing foreign banks to open four more branches this year, while the regulator has issued a handful of new licences: in June, the central bank said it had granted commercial licences to Japan's Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp, as well as BNP Paribas, Indonesia's PT Bank Mandiri and National Bank of Abu Dhabi. "This globalisation is very much in line with the new economic model that the government and the prime minister have been talking about and the key component to this model is the liberalisation," says Mr Leong.
Key regional player
Malaysia is regarded as a key foreign market for other regional players, including Singapore and Indonesia's largest lenders, and the country is likely to see a slew of further new entrants in due course. This trend, combined with the fragmented base of the local banking sector, is expected to lead to a period of much-needed consolidation over the next few years as large foreign players look to acquire branches and deposit bases.
Both local and foreign bankers alike hope that the government's politically controversial economic reform programme, unveiled at the beginning of this year, will revitalise foreign investment and serve to deepen Malaysia's capital markets. "The government has come up with very pro-business and pro-market policies, in particular the plan to dispose of state-owned assets and that's good for the capital markets," says Dato' Charon Wardini Mokhzani, deputy chief executive officer for corporate and investment banking at CIMB Group. Under the new economic plan Prime Minister Najib has outlined an extensive programme of privatisation of state-owned assets, the sales of government land, and a review of restrictions on foreign investment in certain industries.
The scheduled initial public offering (IPO) of the behemoth Petronas Chemicals, a unit of the state-owned oil corporation Petroliam Nasional Bhd, is one such privatisation that has local bankers talking: the deal is expected to raise up to $3.53bn, making it one of south-east Asia's largest ever IPOs. "That should be a very significant listing, not just for Malaysia but for south-east Asia as a whole," says Mr Charon. Marketing on the deal was scheduled to begin at the time of writing. At the same time, book-building was slated for the IPO of Petronas' Malaysia Marine and Heavy Engineering subsidiary, which is expected to raise about $646m.
FDI slowdown
In recent years, foreign direct investment in Malaysia has slowed dramatically, and even Malaysian companies are reluctant to repatriate capital back to their native market where fewer investment opportunities can be found. Investment bankers report that it has become increasingly difficult to attract foreign investors to participate in local IPOs and bond issues. "We would like to see more of the execution of the new economic model so private investors start to really drill down into five or six industries," says Clement Chew, senior country officer at JPMorgan in Malaysia. "Bringing back private investment is going to be critical. The whole plan is going to be very important in terms of deepening the capital markets."
As such, bankers believe that Malaysia presently sits at a crossroads: as its level of income rises, the country will need to find new avenues of investment and expansion. If the new economic model is implemented with a degree of success - and there is no shortage of sceptics on this issue - the local banking sector can look forward to a period of consolidation and growth. "Business activities in the corporate finance area are expected to ramp up particularly in the infrastructure and construction sectors, and Malaysia's new economic model and associated plans articulated by the government hold promise of significant new opportunities," says Osman Morad, managing director and CEO at Standard Chartered Bank Malaysia. "Projects outlined under the 12 National Key Economic Areas, which will contribute to the country's future economic growth, will require financing," he adds.
Meanwhile, a dearth of home-grown investment opportunities has prompted the larger players such as Maybank and CIMB to expand their businesses beyond their core customer base in Malaysia and expand into the riskier Indonesian market. S&P's predicts Malaysian banks' loan exposures to Indonesia might grow to 30% to 40% of total loans, from the current 10% to 20%, in the next few years, given the rapid growth of the banking industry in the Indonesian market and, in the case of CIMB, into Thailand.
CIMB leads the way
But while a handful of Malaysia's banks may have ambitions to expand, few if any are truly regionalised - although CIMB is certainly leading the way. "At the moment we see ourselves as very much south-east Asian and at the moment that means Indonesia, Singapore, Malaysia, Thailand. There is still huge growth potential in those markets," says CIMB's Mr Charon. "Indonesia is the probably most well-known: the whole world sees Indonesia as one big growth story and we are increasing our business in Indonesia."
CIMB's Indonesian subsidiary, CIMB Niaga, is performing well: its contribution to the group's pre-tax profit for the first half of this year was the largest of any in the group at 36%, and the company's management expect Indonesia to surpass Malaysia as the group's single biggest income stream in due course. Maybank also attributed its excellent profit growth in part to its Indonesian operations, which saw 33% loan growth for last year.
CIMB Group also has an office in Hong Kong, but it is mainland China that holds the most allure for the bank. April saw CIMB acquire a 19.99% stake in Bank of Yingkou, which, having received approval from the Chinese regulator to act as a regional bank, will offer CIMB access across China. "We're realistic; there's no way we'd be able to gain the size and scale as the big Chinese banks," says Mr Charon. "In that case we may look at smaller companies rather than the biggest deals in China and probably focus more on mid-market deals - but a mid-market deal in Hong Kong is a pretty sizeable transaction."
For Public Bank, Hong Kong represents the main overseas outpost where the bank has operations that account for about 15% of all earnings, according to Mr Leong. "We have been building a mid-sized presence in Hong Kong as a stepping stone to expand into China," he says. "We're not seeking to compete against everyone but very much in the niche retail space."
He points to Bank of East Asia, better known as BEA, which built a niche retail franchise in mainland China, as a model the bank hopes to emulate.
According to Standard Chartered's Mr Morad, local Malaysian corporates are also looking to expand abroad, and this is creating opportunities for the bank. "There is a strong regional focus among our clients who are actively seeking new projects and ventures in Asia and the Association of South-east Asian Nations specifically."
