Malaysia Deposit Insurance ready for the worst

Monday April 6, 2009

MALAYSIA Deposit Insurance Corp (PIDM) has set up teams and a comprehensive risk assessment system in preparation for any crisis.

“Last year, we developed a risk assessment system which allows us to slice and dice the information, do trending between peer groups and monitor non-performing loans,’’ said PIDM CEO Jean Pierre Sabourin.

As an independent statutory body, PIDM assesses the financial institutions based on the least cost approach. Backed by a team of six risk managers, it meets Bank Negara, which is the supervisor, once a month to share information and discuss issues of concern.

“We also spend a lot of time on the intervention and resolution framework,’’ Sabourin told StarBiz. PIDM has powers to intervene into a problem institution to mitigate the loss, provide financial assistance, purchase assets, provide guarantees or make deposits. If the institution is deemed unviable, intervention powers include taking control, nationalisation, liquidation, finding the least cost solution, purchase assumptions, recapitalisation, doing bridge banks or agency agreements.

The US Federal Deposit Insurance Corp (FDIC) and the Canadian Deposit Insurance Corp (CDIC) have all those powers too. Sabourin had worked at the CDIC for 30 years, of which he was CEO for 15 years.

The deposit insurance system complements Bank Negara’s role in protecting depositors and contributing to financial stability.

The principle is to intervene properly and find quick solutions in the best interests of the financial system.

“If the institution is liquidated through the court process, we would be obligated to reimburse depositors,’’ said Sabourin who has experience with 43 bank failures in Canada.

Since the end of last year, PIDM has been developing a comprehensive payout system which will be rolled out in phases over the next two years. This involved complex calculations, looking at ways to obtain access to all the deposits, reconciling all deposit liabilities and aggregating accounts.

Besides that, the payout system looks at calculation of interest, uncleared cheques, reconciliation for depositors and transfer of the deposit base to a new institution. Another avenue is to sell the bank branches.

“When we do resolution, we don’t just look at costs but at other issues such as contagion and public concerns,’’ said Sabourin.

“We are the responsible organisation to deal with troubled banks. When the situation cannot be rectified by the regulator, it becomes a viability issue and our responsibility to intervene,’’ he added.

However, banks in Malaysia are in good shape based on financial stability reports and the data and observations made at PIDM.

“We have teams working day and night now on approaches and policies on contingency planning,’’ he said.

To reward banks with better risk profiles, a new method of collecting premiums called the differentiated premium system was implemented.

Taking into account qualitative and quantitative factors, it does back testing and checks on factors to assess banks individually and as a group.

PIDM has come up with the best bank model looking at ratios such capital, efficiency and profit volatility.

In comparison with the previous flat rate of 0.06% of insured deposits, banks in No. 1 category pay less premiums which had totalled RM100mil per year for three years since the formation of PIDM.

Based on the higher deposit base at banks, the premiums collected by PIDM is projected to increase. But this amount can be mitigated if a bank falls in No. 1 category (0.03%); No. 2 (0.06%); No. 3 (0.12%) and No. 4 (0.24%).

For 2008 which was the first year of implementation, the banks enjoyed a transitional mechanism where quantitative scores were adjusted upwards by 20%. Risk ratings also take into account Bank Negara ratings (35%).

For 2009, there is no transitional mechanism; by May 31, the results will be available of the first year of implementation of the new system.

“Based on the Canadian experience of the best bank model, we saw a substantial increase in banks going to highest category.

“This information is provided to the board which will probably ask the CEO why their bank is paying more premium to PIDM,’’ said Sabourin.

PIDM has a current fund size of about RM280mil. “The premiums charged cannot be large enough for the banks to start charging customers for it,’’ said Sabourin.
In most cases, deposit insurers build a target fund which is large enough to deal with losses expected. A system of early intervention based on viability, not insolvency, should help to contain losses.

In Malaysia, the deposit insurer is a government agency. It also has the authority to borrow from the Government or issue debt.

PIDM funds are invested only in government securities, based on the objective of capital preservation.

“This year, we are building a target fund with some proxies to evaluate the kind of fund and level we would be comfortable with. Then, we can reduce premiums further. We have done that in Canada and the process can take 10 to 15 years,’’ he said.

The target fund is based on probability of bank failures and loss given default (how much it costs if a bank fails). There is no history in Malaysia, hence the need to find some proxies.

Target funds can become very huge. The FDIC had more than US$50bil two years ago and paid rebates.

http://biz.thestar.com.my/news/story.asp?file=/2009/4/6/business/3637330&sec=business

Malaysian banks’ Tier-1 capital ratio high

Monday April 6, 2009

REGULATORS in financial crisis-hit countries are now using Tier-1 capital ratio as an indicator of a bank’s ability to absorb losses and subsequently, the likelihood of it collapsing.

Customers of Malaysian banks, however, have nothing to fear as the industry average of Tier-1 capital ratio for these banks stood at 10.7% in January and looks to be going higher.
By now too, most people will realise that Malaysian banks did not invest much in subprime assets and so did not see the kind of losses that have sucked out the capitalisation of some global institutions.

As the financial meltdown continues in the United States, western Europe and elsewhere, attention has shifted to Tier-1 capital and “core capital” of banks as a more reliable measure of financial strength, compared with other numbers and ratios.

Tier-1 capital and its cousin, Tier-2 capital, were first defined in Basel 1 accords in 1988 and, according to experts, have remained largely the same in the current Basel 2 regime.

There is a difference between Tier-1 capital and “core capital”. Tier-1 is composed of core capital that is ordinary shares and disclosed reserves, but may also include other securities that satisfy regulations, such as irredeemable non-cumulative preferred stocks.

So, even Malaysian banks, which are largely uninvolved in this round of financial mischief, have to “jump to” and boost Tier-1 capital, just to be on the safe side.

Since the tail-end of last year, our banks have made no secret of the fact that they are strengthening their capital positions, and putting themselves on more defensive positions to face global and possibly domestic recessions (refer to table).

Some of these institutions’ capital-strengthening exercises began even as early as April last year.
Some industry sources had earlier this year pointed out that Tier-1 capital ratio above 10% could be an inefficient use of capital, being too conservative.

Granted, the crisis has expanded beyond subprime assets alone and Malaysian banks may be justified to boost their various reserves and share capital.

A dealer points out the only two banks – CIMB Bank Bhd and Malayan Banking Bhd (Maybank) – have expanded in any meaningful way overseas.
It should be noted that CIMB is widely considered to be well capitalised and Maybank last month had its ratings outlook upgraded to “stable” from “evolving” by Fitch Ratings.

Maybank was put on ratings watch last year by Fitch when it completed the acquisition of PT Bank Internasional Indonesia Tbk for a price that was considered high and could hamper its dividend payout.

Maybank’s ratings outlook was upgraded due to an upcoming substantially underwritten rights issue that is expected to raise RM5bil to RM6bil that will replenish core capital.

There are comments that Tier-1 capital as a measure of financial soundness of banks is actually open to manipulation.

Certain Western banks have 90% of Tier-1 capital consisting of instruments other than ordinary shares and disclosed reserves, causing regulators to look at core capital.

As for Malaysian banks, Bank Negara’s recent annual report for 2008 says 90% of Tier-1 capital in the country’s banks consist of “ordinary shares, share premium, statutory reserves, general reserves and retained earnings net of unaudited losses, less goodwill.”

So Malaysian banks should be in a good position to weather the global financial storm.

In terms of stock price, however, investment interest prefers cheaper banking stocks that have been battered down in neighbouring stock exchanges.

A banking analyst at a local brokerage had told StarBiz: “We were slower to go down during the market meltdown and during rallies we are also slower to go up.”

http://biz.thestar.com.my/news/story.asp?file=/2009/4/6/business/3598496&sec=business

Insurance CEOs resigning

Friday April 3, 2009
The Star

Departure of 3 captains in less than 10 days could be a start to an exodus

PETALING JAYA: In less than 10 days, three insurance CEOs have resigned and more resignations and movements in the insurance industry are expected in the coming months.

According to sources, the three who resigned are Cliff Lee of Tahan Insurance Malaysia Bhd (who also resigned as chairman of the General Insurance Association of Malaysia or Piam), AXA Affin Life Assurance’s Vincent Kwo and Uni.Asia General Insurance Bhd’s Mohd Fauzi Yaakub.

Piam, in response to a StarBiz query, said Oriental Capital Insurance Bhd CEO Mohd Yusof Idris was appointed chairman of the association on Wednesday to succeed Lee whose resignation was effective the same day. Yusof was previously deputy chairman.

At this stage, their reasons for leaving the companies were still unclear and no successors had been identified, a source said.

The insurance industry has not been spared the impact of the global financial crisis. While the general insurance industry grew in 2008, in terms of gross written premiums, it is expected to be impacted this year.

Gross premiums for the industry (general) grew 8.37% to RM11.32bil in 2008 compared with RM10.45bil in 2007. New business premiums for life insurance experienced a negative growth of 6.2% last year to RM7.13bil from RM7.6bil in 2007.

According to sources, the insurance industry is also heading for consolidation in line with the risk-based capital framework, which came into effect in January.

A source said the spate of departures among CEOs could be due to them going for stronger capitalised companies and better remuneration.

Lee, who has more than 25 years’ experience in the insurance industry, was appointed Tahan Insurance CEO in January 2007. He was previously CEO and managing director of Ace Synergy Insurance Bhd.

At present, managing director Preim Singh is overseeing Tahan’s daily operations. Piam declined comment on Lee’s resignation as its chairman.

Idaman Unggul, the parent of Tahan, is in the midst of selling its entire stake in Tahan’s general insurance business, after hiving off its life business to AXA Affin Life a few years ago.

Kwo’s resignation came as a surprise to many as his close colleagues were unaware of his departure, sources added. He was appointed AXA Affin Life CEO when the company came into existence.

Kwo’s more than 20 years’ experience in the insurance industry include stints in various South-East Asian countries, in positions such as chief financial officer and CEO in a number of multinational insurers. Fauzi, who resigned last week, was appointed Uni.Asia General Insurance CEO last December. Prior to that, he was chief operating officer.

http://biz.thestar.com.my/news/story.asp?file=/2009/4/3/business/3592622&sec=business