As Chairman of The Association of Banks in Malaysia (ABM), it gives me great pleasure to present ABM’s Annual Report 2010 which details its contributions in 2010 to the key areas of development in the financial services industry for sustainable economic growth amidst a more globalized and challenging environment.
I am pleased to have personally witnessed the evolution of ABM from a low profiled organization to a pro-active and dynamic champion of issues and matters relating to the commercial banking industry in response to the demands of the changing times.
Its efforts to increase its visibility and accessibility to the banking fraternity as well as the general public have indeed proven to be immensely successful over the last two years. Not only has ABM begun to play a more significant role locally, it has also left its footprints in the international banking arena with its much lauded hosting of the 7th Annual Meeting and Conference of the Asia-Pacific Economic Cooperation (APEC) Financial Institutions Dealing with Small and Medium Enterprises (SMEs) in 2010.
As the Malaysian economy grows and shifts with the global economic climate, the call for the banking sector to play a more inclusive and responsive role in providing better financial services to support the country’s economic growth has become more emphatic. I am certain ABM will continue to forge closer rapport with each of its three main groups of stakeholders, namely its member banks, the regulators and the banking public, to collectively help transform our country into a high income economy in line with the Economic Transformation Programme (ETP) and the 10th Malaysia Plan.
The Global Economic Scenario
The year 2010 has to a great degree turned out to be a year of quiet trepidation for the global economy. Despite the stabilization of the global economy, by and large, from the major tailspin brought upon by the financial crisis of 2008-09, economic recovery has been mixed.
Generally, the growth of the developed economies has remained subdued with high unemployment rates and low domestic spending. In contrast, emerging economies especially in the Middle East, North Africa, Asia and sub-Saharan Africa have seen fairly robust growth. By mid-2010, overall growth momentum slipped as all eyes veered towards the United States of America (US) and Europe. The US faced prospects of a double-dip recession due to chronic high unemployment rates, a shrinking housing market, low domestic demand and a 9% real effective depreciation in the value of the dollar since January 2009. Over in Europe, the situation was little better as Southern European economies, namely Greece, Portugal and Spain, were buried under mounting sovereign debts which called for restructuring and consolidation in the banking sector. Meanwhile, major emerging markets such as China and Brazil took preemptive measures to tighten monetary policy in view of the turn in the US and European economies.
As it stands, global financial stability appears to remain at risk and needs urgent and comprehensive response by the authorities. After almost four years since the onset of the global financial crisis, there are still significant policy challenges to be addressed. Confidence in the financial industry notably in developed markets and countries hardest hit by the financial crisis is still not fully restored. Regulatory reforms for both institutions and markets are critical for sustainable growth and global financial stability. Some major reforms have already been introduced, such as the Basel III regulations issued by the Basel Committee on Banking Supervision which requires banks to hold more and better-quality capital and liquid assets. The Basel III regulations are expected to have the strongest impact on banks in Europe and North America.
Whilst the International Monetary Fund (IMF) has predicted an increase in global output by approximately 4.5% in 2011, this figure is likely to be revised downwards given recent major events, such as the political tensions in Middle East and North African countries and the recent earthquake in Japan. Prices of crude oil spiraled to over US$100 per barrel in recent times, a level not seen in more than two years.
Rise of the Emerging Economies
Whilst 2010 saw overall growth amongst emerging economies, different regions experienced variations of it. On the one hand, the Middle East and North African countries, including those in sub-Saharan Africa recorded relatively small declines in output due to the modest exposure to trade and capital flows from the advanced economies. On the other hand, emerging markets in Europe and Latin America fared terribly in the face of the crisis due to their ties to advanced economies. Asia, however, enjoyed a far more robust economic recovery and growth compared to the other economies in 2010. In particular, China and India, the two largest up and coming economic power houses are poised to lead the Asian region in the coming years exemplified in their strong growth record in 2010.
Economies such as Singapore and Indonesia also displayed sharp recoveries. Singapore’s Gross Domestic Product (GDP) rebounded by 18.7% in the second quarter of 2010 vis a vis a contraction of 9% year-on-year in 2009. Indonesia meanwhile improved with its GDP posting an annual growth of 6.2% in the second quarter of 2010 compared with 4.1% annual growth in the same period the previous year.
The faster recovery of the Asian economies can be attributed to better macroeconomic policies that brought inflation under control through a combination of more disciplined fiscal and monetary policies, which resulted in low levels of fiscal deficit and public debt (relative to the GDP). Their reduced dependence on foreign financing and changes in composition of external capital, e.g. from debts (particularly short-term external debt) to foreign direct investments have also helped minimize their exposure to a reduction in capital inflows.
Additionally, many emerging economies built up large buffers of foreign exchange reserves following the Asian financial crisis of 1997-98, which acted as a form of self-insurance against the sudden halt in or reversals of capital inflows. Almost 50% of the US$5.5 trillion foreign exchange reserves accumulated by the emerging economies are attributable to China.
The diversification in production and export patterns, as well as greater trade and financial linkages among emerging economies have had a positive effect in buffering the said economies as a group. In particular, China’s continued rapid growth has played a significant role in ensuring that demand for commodities, raw materials and intermediate inputs have remained high. By mid 2010, the volume of goods traded regained pre-crisis levels by almost 50% due to increases in intra-regional trade compared with trade activities amongst advanced economies where export volumes re-gained almost the same level as in 2007, indicating almost no growth over a period of three years.
With the increasing affluence of the population as indicated by the per capita income, many Asian emerging markets not only saw augmentation of domestic demand but also enjoyed the added benefit of high levels of savings which kept pace with rising investment rates, leading to current account surpluses. These factors helped cushion some of the effects from the slowdown in demand from the export markets. Even with continuing uncertainties, Asia is expected to lead in global growth backed by strong macroeconomic fundamentals and sound financial systems.
The Malaysian Economic Outlook and Perspective
Propelled by the positive outlook for Asia going into 2010, Malaysia saw a strong start to 2010 with GDP increasing by 9.5% in the first half of 2010 compared with a 5% contraction in the same period the previous year. This was largely a result of two Economic Stimulus Packages amounting to RM67 billion which were implemented by the Government following the global economic crisis. The rate of growth slowed down towards the end of 2010 with GDP recorded at 4.8% in Q4 2010, compared with 5.3% in Q3 2010. Overall, however, Malaysia enjoyed a 7.2% growth in 2010 compared to the previous year buoyed by stronger performance in the manufacturing, services and construction sectors. Domestic demand improved due to increased private consumption, positive consumer confidence and higher levels of income. Private sector investment was also boosted by increased expansion of businesses.
Malaysia’s trade surplus for the year continues to be strong at RM110.2 billion although it is 6.3% lower than 2009’s surplus of RM117.6 billion. The ringgit was deemed as one of the better performing currencies in the region, strengthening 11.1% against the US dollar as at 31 December 2010. Being an emerging economy, Malaysia is cognizant of the ongoing issues and challenges that may hinder its growth and progress. Unlike advanced economies where major concerns lie in weak growth, deflation and mounting debts, some emerging economies may face increased inflation, volatile capital flows, the risk of bubbles in asset and credit markets and the possibility of currency appreciation. Inflation in Malaysia, as indicated by the Consumer Price Index (CPI), increased by 1.7% for the period January to December 2010, compared with 0.6% the previous year. This was mainly due to increases in three groups with high weights, namely food and non-alcoholic beverages, transportation as well as housing, water, electricity, gas and other fuels. Projections are for continued increases in the rate of inflation of between 2.5% to 3.5% in 2011. For April 2011, the CPI increased by 3.2% year on year.
Recognizing the need to normalize the extraordinary monetary stimulus introduced in 2009 as well as to keep inflation in reign, Bank Negara Malaysia revised the Overnight Policy Rate (OPR) from 2.0% to 2.25% in March 2010. The OPR was raised by another 25 basis points in May 2010 and again in July 2010, to the rate of 2.75% at the close of 2010.
The OPR was further increased to 3.0% on 5 May 2011. Given the concerns of the economic recovery losing momentum in 2011, the Malaysian government is committed to charting a new course to transform and strengthen the country’s economy to be more resilient in weathering global economic undercurrents, while exploring new opportunities for greater sustainable growth. Efforts to pursue and develop long term strategies to transform the country to a dynamic highincome nation through the ETP and the Government Transformation Programme (GTP) is in line with the 10th Malaysian Plan and has been very much welcomed by all industry sectors.
To successfully transform Malaysia to a high-income economy, a sound financial system to support the national objectives will be critical to take the country to the next level under the New Economic Model.
The Malaysian Banking Sector Outlook
The foundation of the Malaysian banking system, which is built on strong fundamentals in the aftermath of the 1997-98 Asian Financial crisis, continued to remain solid as seen in the wake of the financial crisis of 2008-09. While the Malaysian economy is expected to slow down due to lower external demand, the overall growth is expected to remain strong with a projected 5% to 6% growth in 2011. Nevertheless, the banking sector needs to remain vigilant and continue to monitor potential risks that may arise in 2011.
On the domestic front, concerns have been raised in relation to household debt accumulation which accounted for 75.9% of GDP in 2010 (compared with 76.6% in 2009 and an average of 66% for the years 2002 to 2008). As at end March 2011, outstanding household loans expanded by RM14.8 billion during the quarter to increase at an annual growth rate of 13.2%.
In November 2010, Bank Negara Malaysia announced the implementation of a maximum loan-to-value (LTV) ratio of 70% applicable for the third and subsequent house financing facility taken out by a borrower, as a preemptive measure to avert unhealthy speculative activities that could lead to a property bubble. This announcement was welcomed by the banking industry as the move is aimed at maintaining a robust and healthy property market where affordability of homes for genuine home buyers is maintained and banks can continue to lend prudently to first and second time home owners.
Banks will need to review the pricing of their loan products and apply due diligence as well as risk management procedures when it comes to lending. This will ensure there is stability in the financial system and that financial resources are allocated efficiently. Further, with the steady growth in lending, banks are expected to shift their focus to compete for deposits, which have not grown in tandem with their loan books. The challenge would be for banks to introduce innovative products which can compete to attract depositors.
The gradual liberalization of the financial services sector through the issuance of new commercial banking licenses is also part of the ETP objectives of facilitating a more robust banking sector. The introduction of more foreign players will bring in specialized expertise to address the gaps in the financial sector and spur development and growth in targeted economic sectors. Likewise, efforts to liberalize equity holding requirements have also seen foreign banks making inroads into Malaysia and forming strategic alliances, enabling them to compete effectively while offering a wider range of products and services.
In an effort to remain competitive and relevant, some of the commercial banks in Malaysia (including Maybank, CIMB Bank, Hong Leong Bank and RHB Bank) have, as part of their strategy of regionalization, been making inroads into the ASEAN region by expanding their presence in high-growth regional economies such as China, Indochina and Indonesia thereby contributing to economic growth in the region. Another important consideration is the implementation of the Basel III guidelines where banks will have to:
i. increase their core tier-one capital ratio to 4.5% by 1 January 2015;
ii. hold a capital conservation buffer of 2.5% by 1 January 2019; and
iii.implement a countercyclical buffer within a range of 0% to 2.5% of common equity or other fully loss absorbing capital according to national circumstances.
It is noted however that banks in Malaysia have already been operating well above the new regulatory requirements. As at December 2010, the banking system remained well-capitalized with the risk-weighted capital ratio and core capital ratio at 14.8% and 13% respectively. Non-Performing Loans (NPLs) including impaired loans remained at 2% of total outstanding loans. Based on recent data released by Bank Negara Malaysia, stress tests carried out on the banking and insurance sectors, both at the aggregate and institutional levels, reaffirmed the risk-bearing capacity of the financial system to withstand extreme macroeconomic and financial conditions.
The banking and financial services industry is also awaiting the launch of the new financial sector blueprint by Bank Negara Malaysia to replace the previous Financial Sector Masterplan which covered the 10-year period from 2001 to 2010.
Banks will continue to keep a keen eye on the business sector to explore growth opportunities by providing funding to support Entry Point Projects and Business Opportunities under the ETP. With the ETP, banks are cognizant that SMEs will stand to have greater opportunity to venture into new growth sectors and drive expansion and innovation in the country. In this respect, banks continue to remain as the main source of financing for SMEs. In 2010, financing to households and
SMEs accounted for 70% of total outstanding financing. Under the ETP, new areas of growth have been identified such as Green Technology where some of the commercial banks in 2010 have provided financing to viable green businesses that can offer a wide range of opportunities for economic regeneration, innovation and wealth creation.
ABM’s Strategy for 2011
Given the fast-paced changes in the Malaysian economy and banking industry, ABM will continue to play a participatory role, providing crucial feedback and advisory services to effect pertinent changes that will enhance the overall sector. We will continue to strengthen the close working relationship with member banks, Bank Negara Malaysia, the various ministries, and relevant stakeholders to address industry related and/or technical issues on a timely basis.
Over the last two years, ABM has set out clear focal areas – Connectivity in 2009 and Partnering our stakeholders in 2010, which have helped guide and center our activities. Accordingly, ABM’s theme for 2011 will be to further enhance and augment these aspects by further improving our service offerings to member banks as well as the banking public.
In this respect and specifically for SMEs, we will build upon the success of 2010 by continuing with the series of dialogues with various trade and business organizations. Following the successful launch of PARTNER, a phased SME initiative which looked at streamlining and simplifying the processes and procedures of SME loan applications under Phase 1 in November 2010, ABM has commenced work on Phase 2 to further refine and pursue other areas of improvement in providing access to financing for SMEs. ABM also works in tandem with our member banks to support programmes spearheaded by Bank Negara Malaysia to promote financial awareness, literacy and capability, which include the Financial Capability Programme (FCP) which was announced in November 2010 and the Train-the-Trainers programme.
The ABM hotline, ABMConnect, and its online version eABMConnect are gaining recognition and continue to be avenues for consumer inquiries and complaints for the public.
Conclusion
In closing, I would like to state that 2010 has been an exciting year as the nation moved into a recovery phase. Although the global economy still remains uncertain, more so with the recent natural calamities in New Zealand, China and Japan, I am confident that the policies, financial reforms and restructuring have and will continue to uphold the Malaysian financial sector and the overall economy. By working closely with the relevant ministries and stakeholders, we will not only be able to achieve the objectives set out in the 10th Malaysia Plan, but will truly engender the 1Malaysia spirit.
I would like to convey my appreciation to Bank Negara Malaysia, the Securities Commission, government ministries and consumer associations for their support, guidance and confidence in empowering us to drive various initiatives on behalf of the industry. I would also like to thank my colleagues in the Council, the ABM Committees, the various working groups and the ABM staff for their continued contributions, support and dedication throughout 2010. As Chairman, I find it heartening to have played a part in shaping ABM’s role. I look forward to a great 2011 as we continue to work closely with one another and pursue industry related issues for the banking sector.
Dato’ Sri Abdul Wahid Omar
Chairman
April 2011
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