Confidence In Malaysia's Banking System

APRIL 21 – Sometime earlier this year, Bank Negara summoned bank officials from every institution in the country to its offices and subjected each one to rigorous stress testing.

The upshot was that some banks, including Maybank, Public Bank and EON Capital, have announced plans to raise Tier One capital. Clearly, the lessons of the

1998 Asian financial crisis have not been forgotten and the central bank has decided that the price to be paid for banking stability is constant vigilance.

That can only be a good thing, because asset quality in the banking sector will undoubtedly deteriorate as the global financial crisis ripples through the Malaysian economy in the coming months.

International ratings agency Fitch expects Malaysia’s non-performing loans (NPL) ratio to rise to 6-6.5 per cent this year while the Rating Agency of Malaysia has projected a more pessimistic 9 per cent on a worst-case basis.

But it is nowhere near the 16 per cent seen in 2001 during the dot-com bubble – where all the banks survived unscathed – and the 19 per cent in 1998, when two banks went bust and had to be rescued.

However, asset quality at the banks will get worse because the sectors that will be hardest hit are the small and medium scale industries and consumers facing sudden unemployment. Loans disbursed to the SMEs constitute 17.2 per cent of total loans while the household sector accounted for 27 per cent of total financing.

But it won’t be so bad, because Malaysia’s corporate sector isn’t over-geared. The corporate debt to equity ratio, according to BNM figures, was around 39 per cent last year, way down from the 55 per cent level in 1998. And post-East Asian crisis, companies have resorted to private debt securities to raise money rather than depend on traditional bank loans.

Meanwhile, household debt has also declined to 63 per cent of gross domestic product from 69 per cent five years ago.

Adding comfort to borrowers is the fact that interest rates are at historic lows. Bank Negara cut its overnight policy rate by 150 basis points to 2 per cent last month: it has brought down the base lending rate to 5.55 per cent.

By contrast, the effective lending rate during the East Asian crisis was a whopping 20-odd per cent. To help the banks further, BNM, in January, relaxed the mark-to-market requirement that rules the trading portfolios of all banks: that has helped to shield balance sheets from volatilities in the share market.

Finally, the banks have helped themselves with tighter lending policies and improved risk management departments. The average loan-deposit ratio for the banking sector is around 72 per cent compared to the wild-west days of 1998 when ratios of over 90 per cent held sway.

Bank stocks have been trending upwards. This signals that despite the troubles ahead, there remains a degree of confidence in Malaysia’s banking system. – Business Times Singapore