Excerpts from the interview with Affin's managing director Datuk Seri Hamidy Hafiz with StarBiz's editor Yap Leng Kuen.
STARBIZ: We are now in a new world in the wake of the global meltdown. How is Affin Bank positioning itself for sustained growth?
Datuk Seri Hamidy Hafiz: Affin Bank has always prepared itself for the worst. We want our customers to stay in business and have factored in their business slowdown.
Basically, we understand our customers better. We don’t want anyone of them to think that during the difficult times, we are running away from them. If their business is affected, their employees will also be affected and so will their housing or car loans.
This is a time to prove that we are not sunny day bankers, but also cloudy and rainy days, as long as they can ride through.
What is the outlook for loans and deposit growth for your bank?
Loans will continue to grow as the need for cashflow support will be greater now. Deposits will also grow as there is a migration to cash. Given that the bank is well-capitalised and financially strong, their money is safe. The next best place with returns, other than your home (if you think that is safe), is the bank. Today, you are guaranteed by the Malaysia Deposit Insurance Corporation (PIDM) and Bank Negara.
Banks are flush with liquidity but they are cautious and selective in lending. Customers too are cautious in the manner and amount they borrow. Is there a credit crunch?
Yes, they are flush with liquidity. Banks have always been cautious about lending. Viable businesses have no problems. It is business as usual...we are not in the US. We have a very high level of confidence in lending inter-bank.
Malaysian banks are entering the crisis with strength. There is close supervision by the central bank. We are stress tested continuously. They would have detected any problems with banks.
With a lacklustre bond market, how are corporate raising funds? Do you see a danger in the resurgence of corporate loans?
They have moved towards bilateral lending and bonds are less in demand. Basically, companies find that in borrowing via bonds, they have to deal with so many bond holders who keep changing. It is difficult to create a relationship. In situations like this, it is very difficult to gather everyone and get them to agree with what you want to do.
If you are on corporate loans with a bilateral relationship, you can speak to your lenders and probably get support from them (to restructure).
You can also fragment in corporate loans (just like in bond markets). There is not much difference in prices and the process in the bond markets is quite tedious now.
Corporate loans have now caught up in structure almost like bonds. So you tend to get longer term loans now with a lot of pricing flexibility. It is more responsive to situations. Over time, it has caught up.
Over time, if you have over-exposure to anyone (type of lending), you face a risk. It is the same with bonds too. If you hold a big chunk of bond papers of one issue, you still have the same problem. The bank’s risk management is very important; how they define their risk parameters.
What are the factors affecting banks’ profitability? Do you see margins becoming even more squeezed in the current interest rate scenario?
Margins have always been squeezed. You can’t get good margins, even today, you find narrowing of lending and deposit rates. Banks have to pay more for deposits now and lending are being pressured down. (Competition in) mortgage, hire purchase and corporate loans is very intense.
As society gets more aware, companies do better and their risk profiles improve, they get better rates. It is always a challenge to maintain our margins. We cannot burden our borrowers with higher rates and put too much pressure on their cashflow.
What is the progress of your partnership with the Bank of East Asia? There are reports of writedowns at the bank.
We are coming along quite well. We are discussing with them to come up with some form of partnership to do Islamic banking in China. Islamic banking is something new to the China market. Bank of East Asia knows the China market but there are some legislation issues. We don’t want to rush into things but you can rest assured that the process is underway.
We have only read of reports of writedowns at Bank of East Asia. But they are a strong bank and will be able to take any of this impact. I think they do not bet everything on just one business.
There is an expectation of an uptick in non-performing loans (NPLs). Do you see that happening and how would restructuring of loans impact profitability?
I think NPLs will trend upwards slowly but it will not get out of control. Cashflow for companies will be tighter and these companies should get restructured on time. We also look at the employment market to ensure that people are fully employed.
Restructuring will not affect banks’ profitability. When we lend money, it is based on certain assumptions. When that is changed, we change our terms. They still continue to pay except that we change our tenure loan terms. We have to respond to clients’ position, not just stick to a policy. If you stick to (just the policy), you are pushing him to contract his cashflow.
So it must be quite gratifying for you to see that Affin Bank is still surviving while banks of over 100 years old, like Lehman, is gone.
It is very simple. Affin had its problems but we survived. We know our business very well and did not take high risk to sacrifice the bank. We did not chase profits. If you push and push, you have to take higher risk.
So long as the higher risk provided people the reward, they forgot about the risk. There is so much profit you can take from the market. In Affin, no individual can put Affin in such a situation where it can actually cause its existence (to collapse). Every month, the board tracks Affin’s performance. It is a very engaging process.
In the case of Lehman, how do you allow a bank to gear 30 to 40 times? The market will learn that there is so much to a name. Beyond that, it is fundamentals. The market will learn...the losses are incurred also by the man-in-the street who bought all sorts of structured products. At least for now, they will learn.
The board that monitors all this will be more careful and take more interest in such fancy things such as collaterised debt obligations and credit default swaps.
Can you recount how your experience in 1998 could help in understanding what could go wrong.
In 1998, we found there was ample liquidity. The banks were actually in a frenzy to lend and chasing profits. In their lending, they compromised on credit quality.
Suddenly, when the contagion came from Thailand, they were caught. Liquidity suddenly became short, so the banks withdrew from lending. Companies were starved of funds and existing companies with borrowings were caught. They also found that some businesses had actually abused their credit.
But we managed ourselves in a very organised manner. That saved us. First of all, the government wanted the banks to go back to lending money.
The banks were just recalling money and managing NPLs. To shift the banks from this, they formed Pengurusan Danaharta Nasional Bhd. They carved out all the NPLs under a certain criteria, removing the distractions for the banks.
Coming out of the NPLs was done at market rates, which meant that the banks had to take some losses in shareholders’ funds and their capital. Shareholders’ funds had to be restored and for those that could not recapitalise their own banks, the government created Danamodal Nasional Bhd.
Danamodal would put their money to recapitalise the banks on a first loss principle. You have to suffer your loss first and Danamodal would institute discipline. They would nominate people to the board. Bank shareholders were eventually allowed to buy back over time at market values.
Those big companies with large borrowings which could cause systemic risk came under the Corporate Debt Restructuring Committee.
To avoid a panic or rumours on the health of banks, the government came in to guarantee deposits. We did not have any banks that went bankrupt; some of them were merged.
Whereas at the start of the problem (this time), you have Lehman allowed to go bankrupt and Bear Sterns saved. The single most important element is confidence. You find whenever there are banks that go bust, you have big problems.
In view of your experience, are you in standby mode in case anything goes wrong?
So far so good. There are so many people. I’m just another banker but always willing to help. This is the country I know and love.
With so much happening at work, how do you take off to de-stress?
I spend a lot of quality time with my family, with an occasional game of badminton.
What are some of the values at work that you imbibe into your children?
Everything should be based on merit. I can afford to pay for their education and they should not, therefore, apply for scholarships and get other subsidies.
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