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