Malaysia - Debt crisis has minimal impact on M'sian banks

At a time when the external outlook for the economy is bleak and the eurozone debt crisis continues unresolved, there is a thought that an increasing exposure to Asia might shelter Malaysian banks from the debt problems afflicting Europe.

Most analysts think the focus of expansion by Malaysian financial institutions into Asia in recent years has been for the purpose of growth to add to their stable and profitable domestic operations and that has been an ongoing theme for the large banking groups of the country.

Thus, it was not surprising that RHB Capital Bhd was looking at growing the size of its investment banking operations when it announced merger talks with OSK Investment Bank Bhd after submitting an application to Bank Negara to start negotiations.

Banking analysts viewed the move positively, as it would provide RHB Cap with a platform to venture into regional investment banking business where OSK Investment Bank was strong in. Currently, RHB Cap can be viewed almost entirely as a local bank, with hardly any overseas contribution to its earnings.

"Despite the debt crisis in Europe, I don't think Malaysian banks, which have more domestic operations, are necessarily better off than those with larger exposure elsewhere. The key thing is that Malaysian banks are expanding within Asia. It's still very much an Asian growth story," said one banking analyst.

Another banking analyst agreed and said that earnings-wise, the external impact was very minimal.

Regional attraction: Indonesia has been a favourite investment destinati on for local banks with Malayan Banking Bhd having a 95 per cent shareholding in PT Bank Internasional Indonesia.

"The turmoil in Europe is not a big event for our Malaysian banks because they don't have lending exposure in that part of the world," said a banking analyst at a foreign research house.

In the case of Hong Leong Financial Group Bhd (HLFG), its overseas operations include a niche branch in Singapore that brings in RM20mil to RM30mil in profits yearly, Hong Leong Insurance (Asia) in Hong Kong, a 20 per cent  stake in Bank of Chengdu, China, and a 100 per cent stake in Hong Leong Bank Vietnam with two existing branches and another two in the pipeline.

Contribution to profits, however, from those overseas operations to HLFG is still relatively low. Domestic operations still contribute some 90% to its bottom line. In fact, HLFG is looking to increase its regional contribution to some 20 per cent to 30 per cent over the next five years.

If there is one exception to the general rule where expansion overseas is best, that has to be Public Bank Bhd. It currently has a network of 83 branches in Hong Kong, three in Shenzhen, China, and 21 in Cambodia. Its Cambodian operations come under the group's wholly-owned subsidiary, Cambodian Public Bank plc, but those operations contributed just 7 per cent to its pre-tax profit for the first half of its financial year ended June 30, 2011.

"Public Bank has the best fundamentals, with return on equities in the mid-20s, the lowest impaired loan ratio of about 1 per cent and the best operating efficiency. Also, its pricing discipline has shielded the bank from a margin squeeze," said an analyst from CIMB Research.

One big risk to Malaysian banks, however, may stem from Indonesia where largest banks have made a beeline to in recent years.

Analysts worry about the currency risk for the banks with their exposure to Indonesia.

"There has been huge inflows into Indonesia earlier this year and if huge withdrawals were to take place, then the translation back to the ringgit could be slightly affected," said a banking analyst.

She added that another issue at hand would be policy risk, such as regulation on foreign shareholding issues in Indonesia.

Indonesia has been a favourite investment destination for local banks due to its huge population and rapid rate of growth. Thailand and China are also key destinations.

Local banking groups with sizeable stakes in Indonesian units include Malayan Banking Bhd (Maybank) with a 95 per cent shareholding in PT Bank Internasional Indonesia (BII) and CIMB Group Holdings Bhd with a 96 per cent stake in PT Bank CIMB Niaga Tbk.

Since reports of a possible cap on single-party ownership in Indonesian banks started to gain momentum over the past two months, analysts have said the ruling, if implemented, would likely force Malaysian banks to look elsewhere for growth.

If that were to pass, earnings contributions for banking groups like CIMB and Maybank could be affected. RHB Cap had earlier stated its intention to buy 80 per cent of Bank Mestika for RM1.16bil. This has now been put on hold.

For the half year ended June 30, CIMB Niaga was the largest contributor to the CIMB group's pre-tax profit at 29% compared with 36% in the first half of 2010.

Profits are only just coming in for Maybank, which received a profit contribution of only 6 per cent or 255 million ringgit (US$80.79 million) from its 97.5 per cent stake in BII for the full year of 2010.

Outside Indonesia, CIMB and Maybank have exposure to other countries, although the revenue contribution is still small.

CIMB recently announced it was in discussion to buy a stake in Bank of Commerce of the Philippines from San Miguel Corp. Expansion into South-East Asia has been a major driver for the CIMB group.

Maybank owns minority stakes in lenders in Pakistan and Vietnam. It is currently the fourth largest lender by asset size in South-East Asia after Singapore's DBS Group Holdings Ltd, Oversea-Chinese Banking Corp and United Overseas Bank Ltd.

While most will be thinking the risk is limited to regulatory or currency, another analyst said Malaysian banks might not be as sheltered as earlier thought.

A Nomura Research analyst said that Malaysia, being one of the most open economies in Asia (third after Singapore and Hong Kong in terms of exports-to-GDP ratios), would be susceptible to weakness if the global economy deteriorated.

Malaysia was Asia's second worst-performing economy during the 2008/09 global financial crisis.

"Back then, banking stocks de-rated from a peak price to book value (P/BV) of 2.4 times in July 2007 to a trough P/BV of 1.3 times in March 2009. Up to last week, banks had fallen to 1.9 times P/BV from 2.2 times in July 2011, by our estimates," said the Nomura analyst.

He said Malaysian banks were looking expensive and there was a risk of being hurt from higher credit costs and narrower net interest margins in an economic downturn.

Tee Lin Say

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