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Indonesian banks less attractive due to shareholding restrictions

Publication Date : 18-03-2014


Banks in Indonesia are becoming less attractive to Malaysian financial institutions because of ownership restrictions.

RAM Ratings co-head of financial institution ratings, Wong Yin Ching, said while Indonesia was still an attractive proposition, prospective suitors were more cautious, given the 40% cap on single ownership of domestic banks there.

“This will be punitive on capital, as banks are required to deduct non-consolidated entities from common equity Tier-1 capital under Basel III. Other countries that Malaysian banks are interested to expand to include the Philippines, Cambodia, Vietnam and Thailand,” she added.

On the whole, she said Malaysian banks’ appetite for regional expansion, whether through mergers and acquisitions or organic growth, remained hearty as they pursued income diversity.

Wong was speaking to StarBiz in conjunction with the release of the rating agency’s Banking Bulletin 2014. The bulletin is an annual publication on RAM’s view of the banking sector.

Loan expansion, on the other hand, was projected to moderate to 8%-9% this year compared with 11% last year, she said. Retail loan growth, particularly residential mortgages, is envisaged to ease amid weaker consumer sentiment on the heels of further subsidy rationalisation and Bank Negara’s macro-prudential measures.

However, she said this would be partly offset by business loan growth, underscored by a rebound in exports and the rollout of various government pump-priming projects.

On concerns over the elevated level of household debt, Sophia Lee, the rating agency’s other co-head of financial institution ratings, said she did not see this as a systemic threat to the financial system, given the country’s still-low unemployment rate and banks’ sound lending practices.

The segment the rating agency was keeping a closer watch on was the lower-income group, as they had less financial flexibility, she said.

Lee said Malaysia’s household debt came up to 86% of gross domestic product as at end-December 2013, and this was likely to stay elevated for some time.

A key underlying factor is the demand for housing and vehicles by the large pool of young working urbanites and the relatively matured domestic banking industry, she noted.

The Malaysian banking system was still flushed with liquidity, said Wong, adding that bank capitalisation was sound.

“Last year also saw the debut of Basel III Tier-2 capital securities with non-viability clauses. These capital securities have been well received, reflecting continued investor confidence in the banking system,’’ she noted.

Although there is a slight increment in absolute gross impaired loans (GILs) due to some lumpy corporate defaults in 2013 from the steel industry, Lee does not expect the banking system’s GIL ratio to exceed 2.1% this year – a level which is still considered healthy. This ratio currently stands at a historical low of 1.8%.

Wong said RAM Ratings was reiterating its “stable” outlook on the Malaysian banking sector for this year.

“We expect Malaysian banks to maintain their healthy credit profiles despite the expectation of domestic headwinds, primarily a result of heightened inflationary pressures,” she said.


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