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.