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

Changes seen at helm of three banks

Tuesday March 31, 2009

PETALING JAYA: Key changes are imminent at several local banks which will see the exit (and entry) of prominent bankers even as the global economic woes add to the challenges faced by the country’s finance sector.

According to sources, Bank Pembangunan Malaysia Bhd president and group managing director Datuk Tajuddin Atan is tipped to take over the helm at RHB Banking Group from Michael J. Barrett. It is believed that the appointment has the approval of Bank Negara.

Barrett joined the group in January 2005 as CEO of RHB Bank Bhd and was appointed group managing director of RHB Capital Bhd on Oct 8, 2007. He is currently also group managing director of the RHB Banking Group. His term would expire in June this year, a source said.
The Employees’ Provident Fund owns 57.55% and Abu Dhabi Commercial Bank a 25% interest in the banking group. RHB Capital recently released its financial year 2008 results which showed a 47% year-on-year improvement in net profit to RM1.049bil, in line with estimates. Still, there are concerns that the global economic slowdown may crank up the pressure on the group’s asset quality.

Tajuddin, who has 25 years’ experience in the sector, was CEO of Bank Simpanan Nasional before being appointed to helm Bank Pembangunan on Dec 1, 2007.

It is also widely speculated that EPF head of strategic planning unit Johari Abdul Muid may be appointed chief operating officer of the banking group. “There’s no news or confirmation of that appointment,” a source said.

EPF is under pressure to perform well and provide good returns against a tough operating climate that has seen a drastic fall in equity values. It declared a 4.5% dividend for 2008 versus 5.8% the previous year. It is also believed that Affin Bank Bhd managing director and CEO Datuk Seri Abdul Hamidy Abdul Hafiz’s term will come to an end in June; there is no word yet on whether he will continue heading the bank. Hamidy is also chairman of the Association of Banks in Malaysia.

Affin Bank’s parent company, Affin Holdings Bhd, is the flagship financial services subsidiary of Lembaga Tabung Angkatan Tentera (LTAT), which is its major shareholder.

Hamidy was appointed to the top seat at Affin Bank in June 2003, when the bank was going through a trying time, with rising bad loans that reached a staggering 25%. He has since managed to bring the non-performing loans to a more manageable level of under 5%.
Elsewhere, EON Bank Bhd is also set to have a new boss. In response to a news article, parent company EON Capital Bhd announced that the bank’s CEO Albert Lau Yiong “has indicated his desire to retire from the group” when his term of appointment expires on April 26. Lau is also group CEO and executive director of EON Capital. He has been with the group for more than 24 years.

It is understood that Michael Lor, who heads the bank’s consumer banking business, will be the acting CEO.

According to sources, Lau may have opted to retire for personal reasons. It is generally perceived that he is closely tied to EON Capital’s major shareholder, Rin Kei Mei. The company’s largest shareholder is Hong Kong-based private equity firm Primus Pacific Partners LLP.

http://biz.thestar.com.my/news/story.asp?file=/2009/3/31/business/3590721&sec=business

Safest capital for banks

Saturday March 28, 2009

REGULATORS and investors globally are beginning to look at banks’ shareholders funds as the safest form of capital that the financial institutions may use.

As losses have begun to wipe out shareholders funds, some Western banks now see they make up less than 1% of Tier-1 capital.

Tier-1 capital is widely considered the core measure of a bank’s financial strength, but not when shareholders fund is only 1% of the total, Jupiter Securities Sdn Bhd research head Pong Teng Siew tells StarBizWeek.

According to Pong, the reason for this is partly the use of structured products as Tier-1 capital, also known as innovative Tier-1 capital by some large multinational banks.

“You cannot be operating on structured products as capital. Losses can be absorbed by shareholders funds but not by these structured (products).”

Looking at Malaysian banks, the same problem does not exist with shareholders funds, as defined in the balance sheet, exceeding the total value of Tier-1 capital.

Pong agrees that Malaysian banks, being more conservative, are not facing the same problem and still stand up well in the light of this new benchmark measure.

He points out that Bank Negara in its annual report on Wednesday has expressed similar sentiments.

In fact the central bank mentions that Malaysia has begun using innovative Tier-1 capital instruments as well, although likely to a smaller extent.

“Despite the more active capital management activities by banking institutions in recent years and introduction of more innovative Tier-1 capital instruments, approximately 90% of Tier-1 capital comprised ordinary shares, share premium, statutory reserves, general reserves and retained earnings (net of unaudited losses) less goodwill,” Bank Negara says in its annual report.
As a result of the high use of share capital, the equity to assets ratio of the banking system is at 10% of total risk-weighted assets or 6.8% of total assets. Even for investment banks, the equity to assets ratio remains manageable at 6.9% to 47.7%.

“This still compares favourably with the benchmark used by the US regulators that deem any Tier-1 capital to total assets ratio of more than 3% to 4% as strong.

“Arising from the current crisis, there has been greater emphasis on traditional capital (ordinary shares and reserves) to gauge the capital strength of banking institutions,” Bank Negara says, adding that it will monitor closely international developments in this area.

http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3567560&sec=business

World stuck with dollar

Saturday March 28, 2009

THE dollar is, and will remain, the US’ currency and its own and everyone else’s problem.

The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.

The US’ desire for free access to the cookie jar that being the world’s reserve currency represents will be too strong, especially given its need to finance huge amounts of debt reasonably cheaply. As well practicalities are fearsome, even if consensus was more or less there.
Chinese central bank head Zhou Xiaochuan on Monday called for the creation of a new “super-sovereign” global reserve currency, advocating building on an International Monetary Fund instrument called Special Drawing Rights.

Zhou echoed a call by Russia last week, when it indicated it would raise the issue at the upcoming Group of 20 meeting in London on April 2, saying the idea had support from emerging market economies including Brazil, India, South Korea and South Africa.

There is no doubt that the current system breeds instability, but it enjoys the great advantage of entrenchment and sticking with it allows the US, and others, to avoid making hard choices and paying true market prices for their economic decisions.

No surprise then that President Barack Obama knocked the idea down in blunt terms. “I don’t believe that there’s a need for a global currency,” Obama said, terming the dollar “extraordinarily strong right now.”

Exactly. Too strong by some margin, especially when one considers the coming effects of both quantitative easing and a massive long-term need to fund the costs of the debt binge that exploded and the ever increasing bailout to clean up the aftermath.

In fact, you could say the dollar’s “extraordinary” strength can only be fully explained when you take into account the fact that foreign central banks keep piling up huge reserves of the thing and that it is the international medium of exchange for commodities and energy, well really for global trade and financial intermediation.

Treasury Secretary Timothy Geithner said on Wednesday the US dollar is still the world’s reserve currency and will remain so for a long time, but expressed openness to greater use of IMF SDRs.

The dollar’s central role has two main implications, both rather ugly but also very seductive for those involved.

For the US, it’s a bit of a free ride as far as debt financing goes. People buy and hold treasuries more and the US gets cheaper financing that would otherwise be the case. Of course, that’s a bit like an alcoholic bartender getting a discount at work; a real benefit, but not a true one. It also means that even if the US has the will to take away the proverbial punchbowl or drive the dollar down, it doesn’t always have control, as what it does at the short end of the interest rate curve can be confounded by foreign purchases that keep the long end and financing costs down and the dollar up.

The US reserve status also opens up the opportunity for mercantilist countries, like, say China, to keep its own currency cheap, building up huge dollar stocks and force-feeding the American milch cow with cheap credit with which to buy imported goods.

That may not work any more anyway, as all of the cow’s stomachs are full and the milk’s gone thin.

There is a temptation also to build up reserves as protection against bad times and bitter IMF medicine. Many Asian leaders seem to have vowed after 1997 that they would do what was needed, which often included building up dollar reserves, to avoid having to meet an IMF director’s plane at the airport and accept the accompanying prescription.

That rather indicates that the old system, with the US as global reserve currency, is dying, but I doubt it will do so without a fight and with cooperation among nations willing to cede part of their sovereignty, even for a greater good.

It is amazing and encouraging that China speaks of ceding control of a portion of its foreign reserve assets to IMF management, but I have a hard time seeing it happening widely soon.
So, we will have to get through the next year or two without a super-sovereign currency and with global imbalances being worked out, or around, under the current system.

My best guess is that things actually go in the right direction, more or less. The dollar should weaken as a result of US policy even without a deliberate push downhill from the Chinese. Asian exporting nations will see slowing reserve growth generally, which should translate into diminished flows into the dollar and Treasuries.

That’s going to be painful all around. The Chinese and others will see their investments dwindle, even as they have to resist the impulse to sell into the fall. For the US the process of implementing monetary policy and paying for fiscal policy will be made that much more difficult.

So, goodbye and perhaps good riddance to dollar hegemony, but don’t expect a stable system of global cooperation to rise easily and quickly in its place. – Reuters

http://thestar.com.my/news/story.asp?file=/2009/3/28/business/3575268&sec=business

Banks give advice on appropriate risk management

Monday March 23, 2009

BANKS have turned cautious on trade financing for which demand has dropped by as much as 70% in certain cases.

While these facilities remain largely available, banks are requiring customers to be more aware of the factors that could affect the viability of their business plans.

According to HSBC Bank Malaysia Bhd director (trade and supply chain) Vivek Gupta, the bank has been extending trade finance as usual but with additional advice on appropriate risk management.

“Clients need to understand and anticipate much better than ever before in this challenging economic climate. They need to be aware of the changes in foreign exchange, bank and country risks and impact of falling demand on their cashflows.

“Enlightened clients engage effectively with banks and gain easier access to trade financing,” he told StarBiz.

In line with the slowdown in business, banks are also expected to experience a decreased demand for trade financing.

Gupta said the sluggish business environment was due to lower demand in terms of the number of units sold and the plunge in global commodity prices.

“Consequently, customers do not require as much working capital now as they used to before the financial crisis,” he said.

“Generally, for customers dealing in commodities, the average trade financing required from banks has now fallen by 60% to 70% from peak requirements,” he said.

Citi Malaysia head of treasury and trade solutions, global transaction services, Noel Saminathan, said trade financing for established exporters would remain available under the current sluggish economic conditions.

“Banks continue to assess applications based on viability of business plans, which among others, take into account the health of the export markets. Trade financing will continue to be offered competitively, yet prudently, by banks,” he said.

He added that export credit insurance could also help exporters improve the risk profile of their cashflow to gain better financing terms from banks.

“Global banks have the ability to assess and assume cross-border risks through our international networks. Risk premiums have risen generally across the world and we expect costs for credit protection to be elevated for the rest of the year,” he said.

Saminathan said credit costs were reflective of risk premiums, besides underlying cost of funds.

“The difficult interbank credit markets globally have increased costs for financing in international currencies but local currency financing remains less affected.

“Trade financing costs for medium to large Malaysian companies are among the most competitive in the Asia-Pacific region,” he said.

OCBC Bank (M) Bhd head of global trade finance, group transaction banking, Chuang Boon Kheng said that although trade financing in terms of letters of credit and pre-shipment financing were among the core products of banks, customers’ needs now might be skewed towards credit enhancement and credit protection solutions.

“Customers’ need for trade financing may have slipped since the financial turmoil due to reduction in orders while manufacturing companies may be resorting to ‘just in time’ inventory control practices.

“But we believe that in any economic environment, there will be industries that flourish and new enterprises will emerge with viable business plans. At the same time, there will be industries that might face a tougher operating environment and businesses that fail to plan for their survival.

“Individual banks will have their own target segments and expertise to continue to support viable enterprises,” she said.

Recently customers seemed to have regained confidence following the various positive initiatives put in place by the Government, Chuang said.

“We have seen customers start to order consumables, necessities and spare parts in small quantities from the start of this month. However, the volume of trade financing may not be there due to an ease in (product and commodity) prices,” she said.

· About 90% of world trade valued at US$14 trillion is funded via trade finance.

· Trade finance is also needed to bridge the gap between the time exporters deliver the products and receive payment from buyers.

· The most common trade finance facility is the letter of credit (LC) that includes pre-shipment finance, post-shipment finance and import finance.

http://thestar.com.my/news/story.asp?file=/2009/3/23/business/3465379&sec=business