The banking challenge

  • Business
  • Saturday, 08 Mar 2003


There are already signs that growth in the banking sector is beginning to slow down. This was evidenced by the latest financial results in the past quarter that was just released 


IT'S three months into the New Year and prospects for the Malaysian banking sector are still uncertain given the continuing volatility in the external environment and concerns over its potential impact towards the country's economy. 

In fact, many stockbrokers have described the banking industry's outlook as a “challenging” one, at least for the first half of this year, considering the various undesirable forces at play currently. 

Market observers say although recovery in the domestic economy has gathered momentum over the past year and is expected to do even better this year, such expectation runs a high risk of derailment should a widely expected war between US and Iraq erupt, and subsequently adversely impacting the global economy.  

Should that happen, Malaysia, being a relatively small economy to the US, would most likely be adversely affected. And the banking sector, being a major barometer and growth engine to the economy, will likely take the brunt, says a research head. 

There are already signs that growth in the banking sector was beginning to slow down. This was evidenced by the latest financial results in the past quarter to end-December that came out last month.  

While most Malaysian banks have reported earnings that more or less conformed to consensus estimates in the past quarter to end-December, a good percentage of the reported profits came from write-backs of bad loans and provisions, and improved cost structure.  

In fact, most banks continue to report slow growth in conventional interest-bearing loans, and many suffered from declining interest margin as competition for loans heated up. Many had to rely on fee-based income services and products instead. 

While the investing community generally believes that banks are still on track on their earnings forecast this year, it is becoming apparent that banks would not be able to extract topline growth from interest bearing products as they used to be, and that much of the reported profits would have to come from loans write-backs and provisions.  

These raised concerns that such a growth might not be sustainable, and that such a set of earnings figure would not reflect a genuine recovery in the banking sector. 

It was initially thought (in 2001) that most banks should report higher profits and lower amount of bad debts by the second half of last year, in line with recovery in the Malaysian economy, after having to go through two economic downturns since 1997.  

A major assumption made then was that the ample liquidity within the economy, coupled with the historical low level of interest rates – in both lending and deposit rates – should encourage spending and borrowings. This would not only stimulate the economy, but although help to restore confidence towards the country. 

It was also thought then that the economic weakness in US would be a short one and that the world's largest economy would stage a V-shape turnaround. 

But the projection took a back seat when the US economy went into a recession soon after the Sept 11 terrorists’ attacks in 2001. The subsequent corporate scandals and bankruptcy involving prominent US companies, terrorists’ bombings in Yemen Sea and Bali, Indonesia, last year had prolonged the expected US economy recovery. This, in turns, dragged the rest of the world into weak economic growth, if not stalled. 

And the latest war crisis between Iraq and US is widely believed to dampen the US and the world economy as well. 

Nearer to home front, the emergence of China as an economic powerhouse in Asia has also starting to put stress on neighbouring smaller economies, as international investors rushed to switch their funds and businesses away from The South-East Asian region including Malaysia, thereby reducing the supply of new foreign businesses into the country. 

Adding pressure on the country's economic recovery was that banks were becoming increasingly reluctant to lend, as they would have been before the 1997/1998 economic crisis. This was despite the fact that the banking system was flushed with ample liquidity and costs of funds were at historical lows, as bankers felt lending risks were still high and that many of them did not want to end up incurring more bad loans.  

At the same time, with the emergence of private debts securities (PDS), many companies were bypassing banks and seeking funding directly through the issuance of commercial papers and bonds. That process, known as “dis-intermediation,'' has resulted in banks losing a great deal of quality borrowers to the bond market. 

Analysts, in realising this, have started to lower their expectation in the banking sector. 

A foreign brokerage house, in its recent reports, said the Malaysian banking sector would face “challenging” times this year, as it projects a slower gross domestic product growth than the official projection of 6 per cent to 6.5 per cent due to slowdown in the external environment and excess capacity in selected domestic industries. “Being proxies to the local economy, the banking sector is expected to reflect the economic growth of the country,'' the report said. 

But to shed a positive tune, the research house pointed out that much of the concerns regarding the banking industry had been factored into share prices of the listed banks.  

Many economists and analysts believed that a cut in intervention rate was inevitable, as such a move was needed to drive domestic interest rate down further to stimulate consumption due to faltering confidence about the future. 

And both top government and Bank Negara officials have yet to offer a clear-cut stance regarding the interest rate policy. Both Prime Minister Datuk Seri Dr Mahathir Mohamad and Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz have indicated that interest rate would stay at its current level. 

But on Monday, Second Finance Minister Datuk Dr Jamaludin Jarjis said the government might include the use of bank interest rates as a tool to strengthen the domestic economy and encourage more Malaysian businessmen and entrepreneurs to invest locally.  

Jarjis was reported to have said that the government was exploring all options in making the economy more resilient. Saying that Bank Negara would announce interest rate policy later the month, he pointed out that the country's interest rate was already very competitive. 

A dealer of a foreign brokerage house says he expects interest rate to remain as it was. “Interest rate level in this country is already at historical low. The Central Bank might probably want to keep interest rate as it is now until it sees a significant weakness in the global economy steaming out from the possible war between US-Iraq. That will be its secret weapon,'' he says. 

Nonetheless, some analysts were already assessing such a possible interest rate cut scenario. One banking analyst estimates that banks' net interest income margins could decline by as much as 0.25 per cent should the Central Bank decide to cut intervention rate but keep deposit rate as it is.  

Indeed, prospects of local banks will be very “challenging” if banks are forced to further lower their base lending rate while maintaining deposit rate as it is now. 

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