KL banks must merge to be competitive: Abdullah<\/p>\n
Chan Tien Hin and Bernard Lo, Bloomberg\/Kuala Lumpur<\/p>\n
Malaysian Premier Abdullah Ahmad Badawi will encourage the
\nnation's banks to merge as part of the biggest shake-up of the
\nindustry in four years, to prepare for increased competition from
\noverseas rivals such as Citigroup Inc.<\/p>\n
The government, which in 2000 combined 54 banks into 10
\nincluding Malayan Banking Bhd. and Commerce Asset-Holding Bhd.,
\nmay also consider allowing more foreign investment in lenders,
\nthe prime minister said in an interview in Kuala Lumpur.<\/p>\n
\"Ten at the moment is perhaps a little bit big,\" Abdullah
\nsaid. \"Consolidation is something that will take time, but it is
\nmy intention to see that Malaysian banks are strong.\"<\/p>\n
Abdullah, 64, aims to strengthen an industry protected by
\ncapital controls and limits on foreign direct investment. Smaller
\nlenders such as EON Capital Bhd., which are struggling to raise
\ninterest income even with the fastest economic growth in four
\nyears, may need to merge if they're to compete once foreign
\nrivals gain more access to the market in 2007, investors said.<\/p>\n
\"If banks want to compete globally, they have to merge to be
\nmore efficient and cost-effective,\" said Choo Swee Kee, who
\nmanages about $263 million as chief investment officer at KLCS
\nAsset Management Sdn. Merging also \"definitely makes them more
\nattractive\" to investors, he said.<\/p>\n
Abdullah, who took office a year ago, didn't say which banks
\nwould survive the shake-up.<\/p>\n
Azman Mokhtar, who in May was named to oversee the
\ngovernment's stakes in banks and other companies, said earlier
\nthis week that state-backed lenders Malayan Banking Bhd.,
\nCommerce Asset and RHB Bank Bhd. were \"national champions\" that
\n\"have something to offer regionally.\"<\/p>\n
Even with the current restrictions, HSBC Holdings Plc,
\nStandard Chartered Plc and other foreign banks account for 26
\npercent of all bank assets in Malaysia. Under a plan proposed in
\n2001, they will be able to open more bank branches and automated
\ncash machines.<\/p>\n
Malaysia has 1,736 bank branches, of which 137, or 7.9
\npercent, are foreign-owned, in the nation of 25.7 million people.<\/p>\n
Malayan Banking, Malaysia's biggest lender, has assets of
\n179.5 billion ringgit ($47 billion), compared with almost $1.4
\ntrillion of global assets at Citigroup, according to Bloomberg
\ndata.<\/p>\n
The reforms may reduce the risk of having to bail out banks,
\nsaid Choo. After the 1997-1998 Asian financial crisis, thousands
\nof Malaysian companies and individuals stopped paying their
\ndebts, and the government spent more than $14 billion taking over
\nbad loans and providing lenders with capital.<\/p>\n
While lenders have recovered from the crisis, helped by an
\neconomy forecast by the government to expand 7 percent this year,
\nits fastest pace since 2000, the government wants to undertake
\nfurther reforms to reduce the risk of another crisis.<\/p>\n
Forcing through changes will be difficult during \"peacetime,\"
\nAzman, managing director of Khazanah Nasional Bhd., which
\noversees more than $7 billion of investments, said earlier this
\nweek. \"The urgency of crisis restructuring or the quick impact of
\nfinancial restructuring is absent.\"<\/p>\n
Declining Malaysian interest rates have shrunk margins
\nbecause, while loan rates have declined, banks are still required
\nto pay minimum deposit interest rates.<\/p>\n
The spread between the 6 percent prime lending rate charged by
\nmost banks and the official minimum rate on three-month deposits
\nis 3 percent, the narrowest in five years, according to Bank
\nNegara.<\/p>\n
\"It's not an attractive proposition for the smaller lenders to
\ncompete in this kind of environment,\" said Geoffrey Ng, who helps
\nmanage $368 million of assets at Pacific Mutual Fund Bhd. in
\nKuala Lumpur. \"They're sacrificing a lot of interest margins to
\nremain competitive.\"<\/p>\n
Net interest income at AMMB Holdings Bhd., Malaysia's fifth-
\nlargest lender, fell by a tenth in the three months ended March
\n30 as profit fell a third. At EON Capital, net interest income
\nfell 6 percent in the quarter ended June 30, pushing profit down
\n19 percent.<\/p>\n
That's even as loan applications in the country rose 18
\npercent in the first half, according to central bank data.<\/p>\n
Malayan Banking shares have risen 15 percent this year while
\nAMMB has gained 9 percent. Southern Bank Bhd., a smaller lender,
\ngained 30 percent while EON Capital Bhd. rose 32 percent.<\/p>\n
Direct investments by foreign lenders in local banks will also
\nbe considered, Abdullah said. \"We will have to see to what extent
\nwe allow for foreign participation.\"<\/p>\n
Foreign banks are allowed to own as much as 20 percent of a
\nlocal bank as a single shareholder, though there have been no
\nsignificant investments.<\/p>",
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