KL banks must merge to be competitive: Abdullah

KL banks must merge to be competitive: Abdullah

Chan Tien Hin and Bernard Lo, Bloomberg/Kuala Lumpur

Malaysian Premier Abdullah Ahmad Badawi will encourage the nation's banks to merge as part of the biggest shake-up of the industry in four years, to prepare for increased competition from overseas rivals such as Citigroup Inc.

The government, which in 2000 combined 54 banks into 10 including Malayan Banking Bhd. and Commerce Asset-Holding Bhd., may also consider allowing more foreign investment in lenders, the prime minister said in an interview in Kuala Lumpur.

"Ten at the moment is perhaps a little bit big," Abdullah said. "Consolidation is something that will take time, but it is my intention to see that Malaysian banks are strong."

Abdullah, 64, aims to strengthen an industry protected by capital controls and limits on foreign direct investment. Smaller lenders such as EON Capital Bhd., which are struggling to raise interest income even with the fastest economic growth in four years, may need to merge if they're to compete once foreign rivals gain more access to the market in 2007, investors said.

"If banks want to compete globally, they have to merge to be more efficient and cost-effective," said Choo Swee Kee, who manages about $263 million as chief investment officer at KLCS Asset Management Sdn. Merging also "definitely makes them more attractive" to investors, he said.

Abdullah, who took office a year ago, didn't say which banks would survive the shake-up.

Azman Mokhtar, who in May was named to oversee the government's stakes in banks and other companies, said earlier this week that state-backed lenders Malayan Banking Bhd., Commerce Asset and RHB Bank Bhd. were "national champions" that "have something to offer regionally."

Even with the current restrictions, HSBC Holdings Plc, Standard Chartered Plc and other foreign banks account for 26 percent of all bank assets in Malaysia. Under a plan proposed in 2001, they will be able to open more bank branches and automated cash machines.

Malaysia has 1,736 bank branches, of which 137, or 7.9 percent, are foreign-owned, in the nation of 25.7 million people.

Malayan Banking, Malaysia's biggest lender, has assets of 179.5 billion ringgit ($47 billion), compared with almost $1.4 trillion of global assets at Citigroup, according to Bloomberg data.

The reforms may reduce the risk of having to bail out banks, said Choo. After the 1997-1998 Asian financial crisis, thousands of Malaysian companies and individuals stopped paying their debts, and the government spent more than $14 billion taking over bad loans and providing lenders with capital.

While lenders have recovered from the crisis, helped by an economy forecast by the government to expand 7 percent this year, its fastest pace since 2000, the government wants to undertake further reforms to reduce the risk of another crisis.

Forcing through changes will be difficult during "peacetime," Azman, managing director of Khazanah Nasional Bhd., which oversees more than $7 billion of investments, said earlier this week. "The urgency of crisis restructuring or the quick impact of financial restructuring is absent."

Declining Malaysian interest rates have shrunk margins because, while loan rates have declined, banks are still required to pay minimum deposit interest rates.

The spread between the 6 percent prime lending rate charged by most banks and the official minimum rate on three-month deposits is 3 percent, the narrowest in five years, according to Bank Negara.

"It's not an attractive proposition for the smaller lenders to compete in this kind of environment," said Geoffrey Ng, who helps manage $368 million of assets at Pacific Mutual Fund Bhd. in Kuala Lumpur. "They're sacrificing a lot of interest margins to remain competitive."

Net interest income at AMMB Holdings Bhd., Malaysia's fifth- largest lender, fell by a tenth in the three months ended March 30 as profit fell a third. At EON Capital, net interest income fell 6 percent in the quarter ended June 30, pushing profit down 19 percent.

That's even as loan applications in the country rose 18 percent in the first half, according to central bank data.

Malayan Banking shares have risen 15 percent this year while AMMB has gained 9 percent. Southern Bank Bhd., a smaller lender, gained 30 percent while EON Capital Bhd. rose 32 percent.

Direct investments by foreign lenders in local banks will also be considered, Abdullah said. "We will have to see to what extent we allow for foreign participation."

Foreign banks are allowed to own as much as 20 percent of a local bank as a single shareholder, though there have been no significant investments.