The heat is on

By ELAINE ANG
August 08, 2009

Financial sector liberalisation measures are changing further the industry’s competitive landscape.

Competition will heat up in the banking sector in the future as measures continue to flow to liberalise the industry in the name of globalisation.

Public Bank Bhd founder and chairman Tan Sri Teh Hong Piow sees the industry’s competitive landscape changing further by the financial sector liberalisation measures announced in April which includes the issuance of new banking licences.

The liberalisation package provides for the issuance of seven new commercial and Islamic banking licences and the permission for incumbent foreign-controlled banks to open new branches.

Following this, Teh foresees the number of new foreign players in conventional and Islamic banking increasing in the next few years. Incumbent foreign-controlled banks are also expected to open new branches.

“The competitive landscape will exert pressure on net interest margin. To mitigate this pressure, banks will continue to focus on developing fee-based or non-interest income activities.
“The industry will also see banks stepping up their efforts to mobilise retail deposits,” Teh says.
Nevertheless, he says the banking industry in Malaysia will remain robust and resilient due to its strong capitalisation and asset quality as well as improved risk management standards and practices.

“Inevitably, competition will continue to intensify due to the liberalisation process and also increase the capacity and capability of domestic banks to compete,” he stresses.

The recent liberalisation of the financial sector also allows foreign equity participation in investment banks to increase up to a limit of 70% and is expected to add new capacity to the investment banking industry.

“Investment banking will continue to grow and remain an important component of the banking industry in Malaysia.

“In the medium term, the equity relaxation will attract investment banks to consider forming strategic partnerships to enhance international linkages and business opportunities,” Teh says.
He also expects the role of Islamic banking to increase in the future with such assets growing steadily in the country.

Islamic banking has increased its share of assets in the banking sector to more than 17%.

“Bank Negara has taken many initiatives not only to continuously strengthen the foundation of Islamic banking practices in Malaysia but also to transform the Islamic financial system into an increasingly liberalised and internationalised environment.

“The Islamic banking industry now provides an extensive spectrum of financial products and services, serving beyond the domestic economy,” Teh says.

He points out that strong risk management will be the focus of regulators and banks globally and domestically as they learn from the current global financial crisis.

He said bank regulators across the globe are expected to strengthen their financial regulations, surveillance and rules on cross-border transactions to maintain stability in the financial system.
“The building blocks for a strong and stable financial sector such as a comprehensive risk management framework and good corporate governance will continue to attract the attention of bank regulators,” he adds.

According to Teh, the current global financial crisis re-emphasises the need for financial institutions to have an effective risk management policy and framework.

“With hindsight, the crisis could have been avoided if the risk management capacity and infrastructure of the global financial institutions had been able to keep up with the rapid developments in the financial markets.

“Learning from the present crisis, banks will continue to re-look at their risk appetite and risk management infrastructure, including their funding sources, to ensure sustainable growth,” he says.

Teh suggests that the scope of regulation may need to be expanded to encompass non-financial institutions domestically as they too can be a major source of financial instability.

For Teh, Public Bank’s mission in the future will stay unchanged, in that it aims to remain a premier bank in Malaysia, while expanding its regional presence in the Asia-Pacific.

“We will continue to take measures to enhance our long-term competitiveness by focusing on our core competencies, particularly in credit skills, risk management and infrastructure to compete in a liberal operating environment.

“To sustain our market position, we will further leverage on the group’s wide distribution network, sales and marketing force, multiple delivery channels and superior service delivery standards,” he says. The group’s track record has been admirable so far.

When Malaysia’s economy contracted more than 6% in the first quarter of the year, the group recorded a growth of 3% in net operating profit and a net return on equity of 25.5%.

Despite strong loans growth in the last seven years, net non-performing loans ratio remained below 1% at end-March and loan-loss coverage stood at 164%.

How does the bank plan to position itself for the future?

We will remain focused on our organic growth strategies to increase market share in our core business of retail lending, deposit-taking and wealth management in domestic and overseas markets, while maintaining prudent risk management and strong asset quality.

The group’s capacity and capability to compete and make strong value propositions to its customers will also continue to be enhanced.

We will leverage on our lending and deposit-taking franchise to expand our business rapidly based on competitive product packages, superior delivery standards, strong branding, efficient delivery channels and corporate reputation for excellent corporate governance practices.

What are Public Bank’s targets for the different businesses? What are the strategies to achieve them?

We expect the group to build and grow its long-term sustainable core businesses of lending to consumers (such as home mortgages, passenger vehicle hire-purchase financing and personal financing) and lending to small and medium-scale enterprises.

We will tap on our expanded infrastructure to accelerate growth in broad retail-based fee income activities.

What are the plans for overseas expansion?

Despite the global economic slowdown, we are confident of the long-term prospects of the countries the group is operating in now. Thus, we will remain committed to our overseas business expansion plans through organic growth strategies in Hong Kong and China, Cambodia, Vietnam, Laos and Sri Lanka. We will expand our capacity and capability to compete and penetrate the commercial banking businesses there with competitive products and effective marketing strategies.

Also, we will continue to transfer our banking experiences and best practices in Malaysia to accelerate business growth in Hong Kong and Indochina. In 2008, the group added 13 branches in Hong Kong and China, Cambodia, Vietnam and Laos.

How does Public Bank plan to diversify its earnings base and loan portfolio?

To increase non-interest income, our unit trust subsidiary, Public Mutual, has established the largest agency force to distribute its unit trust funds in Malaysia. As part of its bancassurance strategy, the group has recruited more than 225 sales executives to sell and distribute bancassurance products. New unit trust funds and bancassurance products will be launched. We will pursue cross-selling and up-selling activities through various delivery channels.

We are comfortable with the current loan mix where 55% of total loans outstanding are consumer loans (mainly housing and hire-purchase loans for transport vehicles), 36% retail commercial loans and the balance corporate loans. We expect this loan mix to remain stable in the near future unless Malaysia’s economy changes significantly.

How will Public Bank compete in a more competitive market?

We will drive business by leveraging on our differentiation strategy. The group has already established a strong brandname. Our strategic responses also include active measures to introduce new products, services and delivery channels, acquire new customers and retain existing ones through loyalty programmes.

To sustain our strong performance, we will continue to improve operational efficiency and staff productivity to maintain a low cost-to-income ratio. We will remain prudent in credit assessment to preserve strong asset quality.