Amid the interest in GLC revamps, it is easy to forget those that are not listed. Undercapitalised and burdened by bad loans, Bank Industri & Teknologi Malaysia needs rejuvenation. The process has already begun, says Othman Mohd Rijal.
AMID the expectation that a successful revamp of government-linked companies(GLCs) will boost the stock market,it is easy to forget that not all ofthese companies are listed. For thatmatter, some of them will never getto Bursa Malaysia simply becausemaking profits is not their raisond'être.
However, even for these companies, there is no escaping the mounting pressure to perform better. Bank Industri & Teknologi Malaysia Bhd knows all about this. It celebrated its 25th anniversary last month, but this year is meaningful not just because of the silverjubilee.
Undercapitalised and burdened by the high-risk lending it is called upon to provide, Bank Industri is reshaping itself. The restructuring is expected to be completed by the year-end.
The idea is to become stronger in dealing with changes in the financial services business and in the strategic sectors that the bank focuses on.
Over the years, the bank's basic role has been the same – to give medium to long-term financing to strategic capital-intensive industries. What have changed significantly are the nature of these industries and the ability of the domestic capital market to finance their businesses.
Bank Industri chairman Tan Sri Othman Mohd Rijal says the bank must reposition itself to continue to be effective in its role as a development financial institution (DFI) thatsupports these strategic sectors. He points out that the bank has to keep up with rapid advances in high-technology industries so that it can continue to offer financialproducts that meet the demand of these industries.
In addition, DFIs are perhaps no longer the No.1 option when a high-risk business needs financing. Venture capital and debt securities have become reliable alternatives.
For Bank Industri, restructuring is a necessary response. Says chairman Tan Sri Othman Mohd Rijal, “We have to repair and clean our balance sheet, and address capitaladequacy issues. Of course, we next have to improve the bank’s organisational structure, processes and operations.”
The basis of the exercise is an ongoing review done jointly with professional service firm KPMG and Rating Agency Malaysia Bhd (RAM). A development that was instru-mental in pushing the bank towards some serious self-examination was the enactment of the Development Financial Institutions Act, which took effect in February 2002.
Following this, the bank and two main subsidiaries, Export-Import Bank of Malaysia Bhd (Exim Bank) and Malaysia Export CreditInsurance Bhd (Mecib), came under Bank Negara's supervision. Along with that came the inevitable comparison with other players in the banking sector.
At the same time, the government's push to reform GLCs, including the introduction of KPIs (key performance indicators), addsimpetus to Bank Industri's restructuring efforts.
“We welcome this initiative because it brings the management and direction of the business in line with what is stipulated in the act, which essentially emphasises goodmanagement, prudential risk management, and, of course, capital adequacy,” Othman explains.
The DFI difference
When stacked up against, say, the country's commercial banks, Bank Industri looks very much like a poor cousin. The latter's risk-weighted capital ratio (RWCR) is -29% (a neg-ative ratio means that the capital base is insufficient to cover the assets, including loans) and its net non-performing loans (NPL) ratio as at June was 13.5%.
According to Bank Negara's July statistics, the commercial banks's RWCR and net NPL ratio stood at 14.2% and 5.8%. The overall banking system had a RWCR of 13.9% and anet NPL ratio of 6.2%.
However, because Bank Industri is a DFI, there is room to argue that it and commercial banks do not even belong to the same family. “In a way, we are a slightly different creature,” says Othman.
In a few ways, actually. To begin with, the bank was set up in 1979 to fill a gap in the financial system. Back then, commercial banks were reluctant – and understandably, still are – to take on the high risk thatcomes with lending to certain businesses in the maritime and manufacturing industries.
But these industries were deemed important to the nation's development goals, and thus DFIs like Bank Industri were required tofinance such businesses. Naturally, that has led to a loan portfolio that has a disproportionate amount of assets of lesser quality.
Says Othman, “If we were to apply prudence in the same way it is applied among commercial banks, we wouldn't be lending any-thing.”
Another key difference is that Bank Industri was left out in the restructuring of the banking sector in the wake of the Asian financial crisis. For example, it did notreceive capital injection from Danamodal Nasional Bhd. But it is clear that there is a need to address the bank's weak RWCR.
Indeed, the bank has sought fresh capital from the government – Minister of Finance (Inc) owns Bank Industri – and at one time, had apparently fancied its chances of getting a positive response. In a rating review published last March, RAM says it had been “given to understand” that the government had agreed to restore the RWCR toat least 8%. According to the rating agency, that would need a capital injection of about RM800mil.
“The government’s plan to recapitalise the bank is viewed positively by RAM, although we believe that it may take some time before the actual capital injection takes place,”says the report.
It will be a long wait. Bank Industri is now resigned to making do without recapitalisation by the government. Othman says the capital injection is not likely to happen because the government is now intent on balancing the budget. “I think we have to figure out ways how to repair the bank's capital structure ourselves.”
Floating to the top
In that respect, it helps that Bank Industri has some useful investments on its books. Last December, for example, it unlocked substantial value when Malaysian Bulk Carriers Bhd (a joint venture with the Kuokgroup) was floated on Bursa Malaysia's main board.
Through subsidiary Global Maritime Ventures Bhd (GMV), Bank Industri still holds over 20% in the shipping company. “It's alreadylisted and we will harvest the proceeds from there,” says Othman.
In addition, the bank is banking on gaining from the possible flotation of another shipping business. According to GMV's 2003 annual report, it operated 12 vessels injoint venture with Wawasan Shipping Sdn Bhd, a unit of the IMC group, which is controlled by shipping magnate Tan Sri Frank Tsao.
The listing proposal is still in the planning stages, but Bank Industri hopes to reap almost RM1bil in cash flow when it eventually disposes of its shares in the two shipping companies.
“That should bring us to a positive RWCR of 14% to 18%, depending on how we package the deals. That's way above the minimum BankNegara requirement of 8%,” Othman says. “We consider ourselves very lucky because we have made very good investments that are maturing at the right time.” But he concedesthat the bank cannot depend on Lady Luck to bail it out the next time.
He says because of the kind of lending it does and the portfolio it carries, it may well be back to square one in a matter of a few years. He adds that the bank shouldbe compensated by other measures if a capital injection is not forthcoming.
The RWCR formula is a source of contention. The bank's group managing director, Datuk Md Noor Yusoff says the formula requires thebank's investment in subsidiaries to be taken out of the bank's capital base.
He argues, “We have to create so many subsidiaries. Given our small capital, we have to borrow from the market to increase it. The ratio is negative, but we still continue our operations like normal. And theinvestments in the subsidiaries are still good investments.”
Othman takes a somewhat different approach. He views it as a positive that Bank Industri is included in the authorities' moves to strengthen the country's banking systemand culture. At the same time, he feels that Bank Industri's responsibility for supporting high-risk ventures has to be taken into account.
“The standards as applied by Bank Negara relates to the business of lending and finance. You can't use a different measurement. A measurement is a measurement. That's it. You've got to accept that.
“But when the subject matter doesn't really fit (into the framework of standards), you have to look into what can be done to remedythat at policy and structural levels.”When asked if the bank has figured out the remedial measures, Othman says this is being done as part of the strategic review.
“Whether the government will accept it (the bank's proposal) or whether it has other approaches, I wouldn't know.”
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