They strive to ensure sufficient capital is available to buffer against deterioration in asset quality, while continuing to fuel business growth.
Malaysian banks are boosting their capital buffers, that is, the excess capital above the 8% risk weighted capital ratio (RWCR) that is required by regulations here and in most other countries. But because our banks are hardly exposed to subprime instruments and other toxic assets, how much is enough?
RWCR is an indication of how much losses or bad asset write-offs (such as for subprime or toxic assets) a financial institution can take. According to Bank Negara, the RWCR for the banking sector at end-December was 12.7% and the capital buffer above the 8% requirement was RM38.8bil.
The buffer rose to RM41.9bil in February, with the industry RWCR at 13%. This meant the industry could absorb roughly up to RM41.9bil of losses before some institutions would breach capital adequacy regulations. The level of the RWCR varies from bank to bank, and it takes into account multiple factors, including business growth expectations, RHB Capital Bhd chief financial officer Kellee Kam tells StarBizWeek.
A look at the latest available RWCR numbers of local banks show a wide range – from 12.4% to 14.73% – with the industry average at 13%.
The factors that decide this range can be anything from the portfolio and geographic mix of a bank’s business to expectations of adverse effects brought upon by asset quality deterioration or impairments. “Both organic and inorganic factors,” as Kam puts it.
A look at the Tier-1 or “core” capital ratio shows a similarly wide range, from 8.13% to 13.47%, with an industry average of 11.1%.
Says Kam: “Taking into account the factors mentioned, RHB targets to maintain its RWCR at 12.5% to 13% (this year).”
At December last year, RHB Capital’s RWCR stood at 12.4%, suggesting the bank will be raising capital.
RHB Capital has already issued RM370mil of Tier-1 capital securities on March 31, with a further RM230mil under the same scheme to come.
An additional RM1.1bil in funds is planned under a commercial papers and/or medium-term notes scheme.
Kam clearly favours boosting the capital ratio, saying: “Given the expectations of tough economic conditions for 2009 and possibly spilling into 2010, financial institutions would look towards being more prudent to ensure sufficient capital is available to buffer against asset quality deterioration, while continuing to fuel business growth.”
But the CFO does acknowledge that having too high a capital buffer has negative implications, such as the inefficient use of capital.
“Yes, having excess capital which doesn’t generate sufficient returns will cause a drag on return-on-equity computations, and if the capital is debt in nature, it will cause a drag on earnings,” he explains.
Another banking group, Alliance Financial Group Bhd (AFGB), with the somewhat high RWCR of 14.73%, feels it is well prepared for a worsening of business conditions.
Alliance Bank Malaysia Bhd group CEO and AFGB director Datuk Bridget Lai says: “At present, Alliance Bank (a unit of AFGB) is well-capitalised, with our Tier-1 capital at 12.2% and our RWCR at 12.7% as at Dec 31, 2008.”
At the AFGB level, the RWCR is 14.73% and the Tier-1 capital ratio at 10.25%.
Lai says: “We opine that at current levels, there is no urgent need to further raise our capital as we are well prepared with AFGB’s RWCR of 14.73%, (which is) ahead of the industry average of 12.5%.
“In addition, in view of the current economic conditions, AFGB, the listed holding company of the group, in exercising prudent management, has also made available a RM400mil standby fund in the event that Alliance Bank needs any additional capital support.”
Alliance is geared towards protecting the “best interest of the bank” in the current economic turmoil, but does not dismiss the possibility of loan growth.
“Having a strong capital position would allow the bank to be in an advantageous position as we prepare ourselves for higher loan growth in the future,” Lai says.
She also agrees with the moves to boost capital positions in Malaysia’s banking industry. “Most banks have adopted the necessary forward-looking capital management measures to further strengthen their capital positions,” she says.
On top of other risk management and cost-control measures, Alliance has instituted more stringent loan underwriting standards.
“The credit quality of our loans portfolio has been improving consistently quarter-on-quarter for the last three years, with both the net non-performing loans at 2.3% and loan-loss coverage at 91%, both being above the industry average.
“Our strategy in investment securities portfolio has also been biased towards maintaining strong liquidity. As such, we do not foresee any issues because we have successfully diversified our assets and liabilities in the last three years during our transformation process,” she says.
She adds that the banking group will remain vigilant in respect of market developments to ensure that its portfolios and businesses are not adversely affected by global and political events.
“We will also continue with the stress testing of portfolios according to lines of business and take proactive actions,” Lai adds.