Evolution of the Malaysian Commercial Banking Industry

Presentation by The Association of Banks in Malaysia for the Financial Sector Talent Enrichment Programme (FSTEP) Prominent Leaders Lectures on Financial Service Industry Wednesday, 13 April 2011

Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Broad classification of financial institutions Commercial Banking Business Going back to history Bank Negara Malaysias Financial Sector Masterplan Transformation of the financial landscape - Mergers Strengthening the Commercial Banking Industry Building Blocks for Commercial Banking Business Financial Institutions Statistical System (FISS) Some Key Financial Data on the Industry Customer centricity Background of The Association of Banks ABMs Organization Chart 2011 Key Initiatives External Perspective

Broad classification of financial institutions

A commercial bank (or business bank) provides transactional and savings accounts and accepts time deposits. Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Shariah) and its practical application through the development of Islamic economics. An investment bank is a financial institution that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide ancillary services such as market making, trading of derivatives, fixed income instruments, foreign exchange, commodities and equity securities.

Commercial Banking Business

Commercial banking business has evolved to encompass corporate banking, retail banking, and in particular, trade finance and global markets. Cards business is also a key component of commercial banking business. On 31 March 1998, 39 finance companies were merged into their respective core banks resulting in hire purchase business being now undertaken by commercial banks.

Going back to history

Institutionalized Banking in Malaysia - 150 years and still going strong

Malaysia has a legacy of international trade dating back to the 15th century i.e. when the Melaka Kingdom traded with China, India and Europe. The roots of commercial banking in Malaysia can be traced back to as early as the 1860s with the burgeoning British merchant communities in Penang and Singapore; the Straits Settlement (Penang, Singapore, Melaka) was established in 1867.

Penang became a springboard for banks Mercantile Bank (later a subsidiary of Hong Kong Bank and now HSBC) set up shop in the 1860s, Chartered Bank (Now Standard Chartered) in 1875.
There were even banks set up by the Dutch and French communities in Penang in the late 1880s and the 1890s.

Going back to history (cont.)

The History of the Banking Industry in Malaysia. Courtesy of the following contributors:(please refer to ABMs website: http://www.abm.org.my)

From HSBC: Its Malaysian Story book of HSBC Bank Malaysia Berhad, published by Editions Didier Millet. From the historical archives of Malayan Banking Berhad. From the historical archives of Standard Chartered Bank Malaysia Berhad.

Bank Negara Malaysias Financial Sector Masterplan

The 1st Financial Sector Masterplan (FSMP) was launched on 1 March 2001 by Bank Negara Malaysia (BNM). It outlined the future direction of the Malaysian financial structure for the following decade (10 years). FSMPs main objectives were to develop a more resilient, competitive and dynamic financial system with best practices that will contribute positively to the growth and stability of the economy notwithstanding the economic cycle. It aimed to initiate the evolution of a core group of domestic financial institutions that are technologically advanced and ready to face the challenges of globalization and financial liberalization.

Bank Negara Malaysias Financial Sector Masterplan (cont.)

Some of the recommendations relating to the banking sector: to develop industry-wide benchmarks to drive performance improvement in domestic banking institutions (DBIs) to set-up board committees to further improve corporate governance to encourage strategic alliances to encourage development of new delivery channels to require management to emphasize on development of ICT to deregulate pricing and rules of association on rates, fees and charges gradually to facilitate the development of a conducive tax regime

Bank Negaras Financial Sector Masterplan (cont.)

Some of the recommendations relating to the banking sector (cont.): to continue implementing risk-based supervision with more focused supervisory attention on weak institutions to refine calculation of risk weightings for the purpose of capital adequacy calculations to increase product-specific and institutional transparency and move towards full disclosure to develop comprehensive framework for consolidated supervision of financial conglomerates to require provision of advisory services on financial planning and management to SMIs and small borrowers.

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Transformation of the financial landscape Mergers

Banks have always been encouraged to merge in order to achieve economies of scale and higher level of efficiency plus the need to maintain a high level of capital. In July 1997, the Asian financial crisis started in Thailand with the collapse of the Thai Baht. The crisis spread to most of South East Asia and Japan which saw slumping currencies and devalued stock markets and asset prices.

Measures were then taken to move the Ringgit from a free float to a fixed rate regime. Since the financial crisis, restructuring efforts were undertaken on the banking sector to put them on a stronger footing to withstand further pressures and contribute towards macro economic stability.
The merger programme for domestic banking institutions was initiated in 1999. As at 31 December 2000, the merger programme was successfully implemented, with 50 out of 54 domestic banking institutions consolidated into 10 banking groups and 94% of the total assets of the domestic banking sector rationalised and consolidated.

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Line up after Final Round of Mergers

Original Anchor Banking Group Merged with

Malayan Banking Berhad Group

Malayan Banking Berhad Mayban Finance Berhad Aseambankers Malaysia Berhad

PhileoAllied Bank (Malaysia) Berhad The Pacific Bank Berhad Sime Finance Berhad Kewangan Bersatu Berhad
BSN Finance Bhd BSN Commercial Bank (Malaysia) Bhd BSN Merchant Bankers Bhd International Bank Malaysia Bhd Sabah Bank Bhd Bumiputra Merchant Bankers Bhd Amanah Merchant Bank Bhd Bolton Finance Bhd Sabah Finance Bhd

Affin Bank Berhad Group

Perwira Affin Bank Bhd Asia Commercial Finance Bhd Perwira Affin Merchant Bank Bhd

Alliance Bank Berhad Group

Multi-Purpose Bank Bhd

Arab-Malaysian Bank Bhd Group

Arab-Malaysian Bank Bhd Arab-Malaysian Finance Bhd Arab-Malaysian Merchant Bank Bhd

MBf Finance Berhad

Bumiputra-Commerce Bank Bhd Group

Bumiputra-Commerce Bank Bhd Bumiputra-Commerce Finance Bhd Commerce International Merchant Bankers Bhd

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Line-up (cont.)
Original Anchor Banking Group Merged with

EON Bank Berhad Group

EON Bank Bhd EON Finance Bhd

City Finance Bhd Perkasa Finance Bhd Malaysian International Merchant Bankers Bhd Oriental Bank Bhd
Wah Tat Bank Bhd Credit Corporation (Malaysia) Bhd Hock Hua Bank Bhd Sime Merchant Bankers Bhd Advance Finance Bhd Delta Finance Bhd Interfinance Bhd Ban Hin Lee Bank Bhd Cempaka Finance Bhd Perdana Finance Bhd United Merchant Finance Bhd Perdana Merchant Bank Bhd

Hong Leong Bank Berhad Group

Hong Leong Bank Berhad Hong Leong Finance Bhd

Public Bank Berhad Group

Public Bank Berhad Public Finance Bhd

RHB Bank Bhd Group

RHB Bank Bhd RHB Sakura Merchant Bankers Bhd

Southern Bank Bhd Group

Southern Bank Bhd

(later merged with Bumiputra-Commerce Bank Bhd to become CIMB Bank Berhad)

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Consequent Changes
Following the mergers, membership stood at 10 domestic banks and 12 locally incorporated international banks.
On 16 December 2000, Bank of China commenced operations in Malaysia. Membership increased to 23 comprising 10 domestic banks and 13 locally incorporated international banks. In 2006, following the merger of Bumiputra-Commerce Bank Berhad with Southern Bank Berhad to form CIMB Bank Berhad, membership reduced to 22 banks comprising 9 domestic banks and 13 locally incorporated international banks. In 2010, Industrial and Commercial Bank of China (Malaysia) Bhd joined ABM and became its 23rd member.

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Consequent Changes (cont.)

Meanwhile, the domestic banks concentrated on organic growth to become strong players in the Malaysian banking arena with some expanding their reach into international markets. Todate, 6 domestic banks have established presence in different countries within the Asian region AmBank, CIMB Bank, Hong Leong Bank, Maybank, Public Bank and RHB Bank.

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New Licenses
On 27 April 2009, BNM announced another phase of liberalization of the financial services sector with foreign banks being allowed to operate in Malaysia under new licenses. Following the announcement, on 17 June 2010, pursuant to the Banking and Financial Institutions Act 1989, 5 new commercial bank licenses were offered to the following banking institutions:1. 2. 3. 4. 5. BNP Paribas SA, France; Mizuho Corporate Bank, Japan; National Bank of Abu Dhabi, United Arab Emirates; PT Bank Mandiri (Persero) Tbk, Indonesia; and Sumitomo Mitsui Banking Corporation, Japan (started operations on 11 April 2011). Joint venture between Malaysia-India:Bank of Baroda, Indian Overseas Bank, Andhra Bank

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New Licenses (cont.)

The presence of these foreign financial institutions are expected to:- add to the diversity of the financial services industry - support the new areas of growth including green technology - facilitate the transformation of the Malaysian economy towards achieving high value-added and high income economy status - further enhance Malaysias international linkages through facilitating international trade and investment flows between Malaysia and other parts of the world.

Strengthening the commercial banking industry

To safeguard against financial and operational risks that banks face, risk and capital management were adopted to ensure that banks hold capital reserves appropriate to the risks they are exposed to through their lending and investment practices. Basel I and II uses a three-pillars concept 1. minimum capital requirement (addressing risks credit risk, operational risk and market risk); 2. supervisory review; and 3. market discipline.

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Strengthening the commercial banking industry (cont.)

Basel III is a new global regulatory standard on bank capital adequacy and liquidity agreed by the members of the Basel Committee on Banking Supervision. Banks will have to increase their core tier-one capital ratio to 4.5% by 2015. In addition, they will have to carry a further counter-cyclical capital conservation buffer of 2.5% by 2019. Generally the rules would not impact Malaysian banks negatively as the banking system in the country was well capitalized. Proper risk management and surveillance systems have been put in place at the banks.

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Building Blocks for Commercial Banking Business

CAMEL = Capital, Asset Quality, Management, Earnings and Liquidity
Capital Utilization of capital is banks priority. Inefficiencies have to be removed quickly. Capital utilized by non-core businesses or by businesses which do not generate earnings ought to be halted Asset Quality Improve asset quality by entering into areas where risk is more aligned to the banks appetite Management Focus on better operational and cost efficiency. Reengineer processes, rebuild human resources and improve on the banks infrastructure Earnings Concentrate on growing the banks asset/loan base with the available capital freed up. Coupled with initiatives to bring cost to income ratio down, asset/loan growth will translate into profits for the bank Liquidity Manage liquidity better by narrowing the cap between loans and deposits and a healthier loans to deposits ratio.

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Reporting requirement - Financial Institutions Statistical System (FISS)

Banks are required to maintain sufficient cash flows to cope with events of unusually heavy withdrawals. BNMs Liquidity Framework sets out to: create awareness among banks of their funding structure and their ability to handle short to mediumterm liquidity problems; and provide banks with a better means of assessing the present and future liquidity positions.

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Financial Institutions Statistical System (FISS) (cont.)

Banks are required to submit to BNM via the Financial Institutions Statistical System (FISS) the following information: Maturity profile of all balance sheet items and off-balance sheet items denominated in Ringgit Malaysia (RM) and foreign currency, reported according to maturity in which have been adjusted for behavioural pattern prevailing at the reporting date Maturity profile of all balance sheet items and off-balance sheet items denominated in RM and foreign currency reported according to pure contractual maturity (no behavioural adjustment) Supplementary information on funding structure Stock of liquefiable assets.

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Some Key Financial Data

Commercial banks

As at February 2011:

Risk-weighted capital ratio (RWCR) remained strong at

14.3%

Net non-performing loans (NPLs) remained stable at 2.3% of net loans

Pre-tax profit of RM5.7 billion (as at 4th Quarter 2010)

* As per BNMs Monthly Statistical Bulletin February 2011

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Some Key Financial Data (cont.)

Total Assets of Commercial Banks

Year

(RM billion)

2005 2006 2007 2008 2009 As at December 2010

885.9 1025.3 1145.3 1275.1 1361.3

1482.9

* As per ABMs 2009 Annual Report and BNMs Monthly Statistical Bulletin January 2011

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Some Key Financial Data (cont.)

Total Deposits of Commercial Banks

Year

(RM billion)

Total Deposits FD DD SD

2005

432.3

66%

20%

14%

2006

489.3

68%

19%

13%

2007

518.4

64%

22%

14%

2008

557.4

64%

22%

14%

2009 As at December 2010

586.5

63%

23%

14%

623.3

62%

24%

14%

* As per ABMs 2009 Annual Report and BNMs Monthly Statistical Bulletin January 2011

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Some Key Financial Data (cont.)

Total Loans by sector as at December 2010
Primary Agriculture 1.32 2.24 0.30 9.91 Manufacturing (including Agro-based) 1.29 Electricity, Gas and Water Supply 8.23 Wholesale & Retail Trade, and Hotels & Restaurants Construction Real Estate 4.69 2.59 7.51 3.36 Transport, Storage and Communications Finance, Insurance and Business Activities Education, Health and others Household Sector Other Sector
0.3% - Mining and quarrying 8.2% - Wholesale & Retail Trade, and Hotels & Restaurants 7.5% - Finance, Insurance & Business services 4.7% - Real Estate 4.5% - Construction 3.4% - Education, Health and others 2.6% - Transport, Storage & Communications 2.2% - Primary Agriculture 1.3% - Other Sector 1.3% - Electricity, Gas & Water Supply 54.1% - Households (Housing loans, Hire Purchase loans, Personal Financing, Credit Cards) 9.9% - Manufacturing (including Agro-based)

Mining and Quarrying

54.10%
Total loans as at end 2010 is RM716,878.9 million

4.45

* Extracted from BNMs Monthly Statistical Bulletin January 2011

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Some Key Financial Data (cont.)

Growth of Branches and Self Service Terminals of Commercial Banks from 2005 December 2010 The significant growth in Self-Service Terminals compared to bank branches indicates a growing in preference amongst Malaysian customers to use these alternative channels for banking transactions, given the flexibility of time and place afforded by these channels.

Year 2005 2006 2007 2008 2009 December 2010

No of Bank Branches

Self-Service Terminals (SSTs)

ATMs 4646 4972 6147 6927 7901 8600 Other SSTs 3424 3925 4985 6067 6725 7624

* As per ABMs survey and BNMs Monthly Statistical Bulletin January 2011

1918 1950 1993 2016 2010 2026

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Reaching out to customers

Banks have transformed their businesses to become more consumer orientated. This includes creating twoway communication avenues between the consumer and the bank through: increase in the number of bank branches in the country; establishing of contact of call centres; and investing in technology to provide online banking services via websites and mobile phones.

Consumers can contact (cont.):ABMConnect eABMConnect

BNMTELELINK Corporate Communications Department Bank Negara Malaysia Jalan Dato Onn 50480 Kuala Lumpur
List of Banks Dedicated Lines for Customer Services
1. Affin Bank Bhd : 1-800-88-3883 2. Alliance Bank Malaysia Bhd: 03-5516 9988 3. AmBank (M) Bhd : 1-300-80-8888 4. Bangkok Bank Bhd : 03-2173 7200* 5. Bank of America Malaysia Bhd: 03-2032 1133* 6. Bank of China (Malaysia) Bhd: 03-2162 6633* 7. Bank of Tokyo-Mitsubishi UFJ: 03-2034 8000* 8. CIMB Bank Bhd: 1-300-88-0900 9. Citibank Bhd: 03-2383 0000 10. Deutsche Bank (Malaysia) Bhd: 03-2053 6788* 11. EON Bank Bhd: 03-2616 1133 12. Hong Leong Bank Bhd: 03-7626 8899 13. HSBC Bank (Malaysia) Bhd: 1-300-88-1388 14. Industrial and Commercial Bank of China (Malaysia) Berhad: 03-23808688* 15. J P Morgan Chase Bank Bhd: 03-2270 4111* 16. Maybank: 1-300-88-6688 17. OCBC Bank (Malaysia) Bhd: 1-300-88-5000 18. Public Bank Bhd: 1-800-88-3318 19. RHB Bank Bhd: 1-800-88-4663 20. Standard Chartered Bank: 1-300-88-8888 Malaysia Bhd 21. The Bank of Nova Scotia Bhd: 03-2141 0766* 22. The Royal Bank of Scotland Bhd: 03-2160 9888* 23. United Overseas Bank : 03-2612 8121 (Malaysia) Bhd

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The Association of Banks in Malaysia 34th Floor, UBN Tower, 10, Jalan P Ramlee 50250 Kuala Lumpur
Tel : 1-300-88-9980 Fax : +603-20788004 Website : www.abm.org.my

Tel : 1-300-88-5465 Fax : +603-21741515 Email : bnmtelelink@bnm.gov.my Website : www.bnm.gov.my

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Background of The Association of Banks

History The Association of Banks in Malaysia was formed in November 1973. Objectives of the Association can be summarized five-fold as follows: Establishing and promoting a sound banking system in Malaysia in cooperation with Bank Negara Malaysia Formulating and reviewing banking rules, operations and policies Improving consumer awareness and knowledge of banking products and services Developing human capital for the banking industry Collaborating with other authorities, government ministries, private sector groups and relevant organizations

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Background of The Association of Banks (cont.)

Our Members Currently, there are a total of 23 commercial banks, comprising 9 domestic banks and 14 locally incorporated international banks.

Commercial banks constitute an important group of financial institutions in Malaysia.

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Membership
Maybank (Chairman Bank) EON Bank Berhad

Affin Bank Berhad

Hong Leong Bank Berhad Public Bank Berhad

Alliance Bank Malaysia Berhad

RHB Bank Berhad AmBank (M) Berhad

CIMB Bank Berhad

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Membership
Bangkok Bank Berhad Bank of America Malaysia Berhad Bank of China (Malaysia) Berhad Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad Citibank Berhad Deutsche Bank (Malaysia) Berhad HSBC Bank Malaysia Bhd Industrial and Commercial Bank of China (Malaysia) Bhd J.P. Morgan Chase Bank Berhad OCBC Bank (Malaysia) Bhd Standard Chartered Bank Malaysia Berhad The Bank of Nova Scotia Bhd

The Royal Bank of Scotland Bhd United Overseas Bank (Malaysia) Bhd

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Structure
Committee on Finance

Council
Committee on Budget Recommendations Executive Director

Committee on Banking Legislations, Policies, Rules, Regulations & Interpretation

Committee on Development of Capital & Money Markets

Fraud Risk Committee

Committee on Consumer & Market Conduct

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ABMs Organisation Chart

Council

Executive Director

Operations & Refinement

Finance & Admin

Strategy & Initiatives

Prudential Policy

Financial Market Development

Consumer & Market Conduct

International Desk

Accounting & Treasury

Human Resource

Admin

Rules & Compliance

Corporate Communications & Public Relations

Financial Intelligence & Research

Banking Legislation

Rules, Regulations & Interpretation

Compliance & Oversight

Corporate Communications

Public Relations

2011 Key Initiatives External Perspective

CONSUMERS & OTHER RELEVANT EXTERNAL PARTIES
Engagement A larger and dedicated team to handle complaints and enquiries Regular meet the consumers associations sessions Road show and dialogues Be accessible use of media (print, radio and TV) as conduit Reinforce ABMConnect as the conduit for public engagement Reinforce ABM website as a key communication tool Build a positive and responsive image with external parties Education Joint educational programmes and meet the consumers sessions with the various consumers associations Play a strong supportive role to major consumer/SME education programmes to be launched by BNM

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MEMBERS
Engagement Improved lines of communication Leverage on state level sub-committees Greater involvement of members Handling of complaints ABM to intermediate Ensure there is prompt and meaningful response Proper closure of cases

REGULATOR
Engagement Participation and involvement Continue relationship building with all key regulatory authorities Liaison and spokesperson for member banks Present industrys view point on various issues Enhance internal capacity to harvest industry comments and feedback as well as data

Communication Updates on current issues via the ABM website, issuance of press releases, public service announcements, press ads, etc.
Enhancing Banking Efficiency and Customer Services Commence work on, and roll out other phases the SME PARTNER initiatives Collaborate with BNM on new micro-financing promotional and educational initiatives Collaboration with PEMUDAH and BNM as well as other relevant sectors on initiatives to enhance efficiency and customer services

Improved services offering Clear and transparent guidelines Review and update of existing rules and regulations Best practices Introduction of a Code of Best Practices Benchmarking - Commence survey and standard setting - Establish minimum standard levels Reinforce common objective to be more consumer centric Compliance Incentivization and Awards Industry awards for excellence

Specific focal points for 2011

ABM

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Questions and Answers

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Thank you Terima kasih