Banks to go big in risk management

The Star Online > Business
Friday April 18, 2008

Banks to go big in risk management
BY DALJIT DHESI

PETALING JAYA: The recent credit squeeze and huge write-downs by US investment banks will see such banks worldwide beginning to adopt more prudent risk management, build up product innovation capabilities, and more concerted efforts to migrate to Islamic financial services.

OSK Investment Bank Bhd director and head of corporate and legal services Woon Chong Boon said due to the write-downs resulting from exposure to US sub-prime mortgages, investment banks were now putting more emphasis on implementing risk management frameworks.
He said since investment banks' cautiousness in taking excessive risks would stifle the market, he expected them to focus more on product innovation and offering value-added services to remain competitive.

Woon Chong Boon “As a long-term strategy, the financially stronger players may take the opportunity to broaden their markets or geographical coverage by expanding and investing abroad, particularly in the region,” he told StarBiz.

HwangDBS Investment Bank Bhd managing director Lee Jim Leng concurred, saying that risk management would grow in importance among these banks in the promotion of good corporate governance and to maintain investor confidence.

According to Lee, banks would also need to find ways to strengthen their funding positions or options to avert a liquidity squeeze crisis as that witnessed by some international investment banks.
“Asset positions need to be adequately classified and the liquidity framework must be sound to ensure that these banks are not forced to tap the financial markets for funding in its most adverse situation, '' she added.
Kuwait Finance House (M) Bhd (KFH), in response to queries from StarBiz, said the bank anticipates a migration to Islamic financial services in certain markets due to the loss of faith in the conventional banking system.

Lee Jim Leng “The overall market for Islamic banking and finance stood at more than US$700bil in 2006, and has been growing at 23.5% annually over the past five years.
“More importantly, Islamic banks have been fairly insulated from the credit crisis given the asset-backed nature of funding,'' KFH said.
The bank also said Islamic bonds, or sukuk, were becoming an important avenue for raising funds globally.
“To date, the announced sukuk pipeline for 2008 is estimated at US$29.5bil, while the global sukuk outstanding is expected to reach US$200bil by 2010 from the current US$97.3bil, an annual growth rate of 35%,'' it added.

On the impact of the credit squeeze and write-downs by the US investment banks on its counterparts in Malaysia, Lee said the local market had remained fairly insulated.
However, she added, the secondary effects could be seen in the softer trade and investment.
“We are seeing an influx of foreign bond issuers tapping into Malaysian domestic liquidity and via the swap markets swapping the funds into US dollars, thus putting upward pressure on credit spreads and cross currency interest rate spreads.
“HwangDBS Investment Bank’s business focus has been and will continue to be local for the next few years. Being a relatively new investment bank, we have been focused on building our local track record,'' she said.
KFH said the investment bank's business in Malaysia was sound and that the slowdown had not affected its asset base, prospects or outlook for the region.
Woon said the degree of the impact would depend on the business model of the individual investment bank in terms of market niche, product/service offering and diversification, geographical coverage and its value propositions.