Malaysian Banking Sector Remains Strong, Says The Association Of Banks In Malaysia

Kuala Lumpur, October 23, 2008 – In a statement issued today, The Association of Banks in Malaysia (ABM) said that Malaysia’s banking sector remains strong and well capitalized despite the turmoil in the global financial markets.

Whilst it is acknowledged that the immediate outlook for the global financial markets and ensuing world economic growth prospects appear challenging, the commercial banks operating in Malaysia are healthy and will remain resilient. ”ABM is confident that the commercial banks are in the position to continue to perform their intermediation function in full support of domestic economic activities,” said Dato' Sri Abdul Hamidy Abdul Hafiz, ABM Chairman.

ABM confirmed, most importantly, that there was no credit crunch. “It is business as usual and commercial banks are not putting any brakes on lending,” said Dato’ Sri Abdul Hamidy.
According to ABM, banks in Malaysia are mainly domestic focused with more than 90 per cent of total assets in Ringgit-denominated assets, and most of their investments / assets concentrated in the ASEAN region.

Adding to the strength of the local banking sector is the fact that credit extension is more diversified today between business and household loans, with no heavy exposure to any single segment. There has been an improvement in banks’ assets quality, that being the 3-month Non-Performing Loan ratio, to 2.5 per cent in August 2008 versus a high of 11.5 per cent in 2001. In August 2008, industry capitalization is also strong with risk-weighted capital ratio at 13.2 per cent, exceeding the 8 per cent minimum requirement, while industry loan loss coverage is at a comfortable 95.2 per cent.

According to ABM, a second important factor contributing to the strength of the local banking sector is that there is no liquidity crunch. “Unlike the liquidity crunch that is seizing some of the key developed markets such as the USA, United Kingdom and the Eurozone, Malaysia has been relatively unaffected. Liquidity level in the banking system is healthy. As at end August 2008, loan to deposit ratio stood at 74.5 per cent, as compared to the high 90 per cent seen in 1997. The stable and low 3-month domestic inter-bank rates, and relatively narrow spreads against the 3-month Malaysian Government Securities (MGS) yields are also indicative of the robustness of our banking system,” said its Chairman.

Furthermore, domestically, Malaysia has a savings rate of 37 per cent which is high by international standards. The local financial system’s strong liquidity, backed by high domestic savings rate and Bank Negara Malaysia’s mid September 2008 external reserves of US$119 billion, will thus continue to facilitate the orderly functioning of transactional and lending activities so as to spur domestic economic growth, albeit at a more moderate pace.

“There is ample liquidity in the system. Bank Negara Malaysia’s commitment to continue to provide liquidity, whenever needed, to financial institutions under its purview and readiness to respond with coordinated measures with other monetary authorities in the region, will ensure that demands for financing as well as financial services, arising from economic and financing activities, remain intact and unaffected,” explained Dato’ Sri Abdul Hamidy.

ABM went on to highlight that the extent of financial leverage (total loans outstanding as a percentage of Malaysia’s Gross Domestic Product) of 98 per cent at August 2008 is a good indicator that on the whole, there is no over-borrowing.

In addition, through the consolidation process, Malaysian banks are now much stronger. There are presently a total of 22 commercial banks, comprising nine domestic banks and 13 locally incorporated foreign banks, which operate in Malaysia and which are members of ABM. Commercial banks constitute the largest and most important group of all financial institutions in Malaysia with total assets of approximately RM1,231 billion as at 30 June 2008.

ABM said that the central bank’s stringent supervisory and surveillance system has ensured that the Malaysian banking industry remains resilient in the face of the global financial crisis.

The experience learnt from the 1997-98 Asian financial crisis and continuous years of reforms thereafter have significantly strengthened the banking industry. “Both the corporate as well as the banking industry have since adopted stronger financial discipline towards institutional development and capacity building. Corporate governance has also been enhanced and risk management standards tightened,” said Dato’ Sri Abdul Hamidy.

Allaying fears on the position of international banks in Malaysia, he said that all these banks are locally incorporated and have to comply with the capital adequacy requirements of Malaysia.

Notwithstanding the current strength of the banking sector, ABM will continue to seek feedback from its members and vigilantly monitor the situation. “By adopting a pro-active approach, the commercial banks will actively engage with their customers to better understand their needs going forward,” concluded Dato’ Sri Abdul Hamidy.

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