Published September 19, 2008

M'sian banks untouched by sub-prime woes

By PAULINE NG
IN KUALA LUMPUR
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DECENT net margins on conventional banking business likely shielded Malaysian financial institutions from material exposure to the global sub-prime implosion. At least, that's what bankers and analysts say.

While now-disgraced US financial institutions were busily building up their over-exposure to toxic sub-prime-backed structured paper, Malaysian institutions were busy repairing balance sheets muddied after the Asian Financial Crisis of the late 1990s and concentrating on traditional lending rather than complex derivatives.

Of Malaysia's nine banking groups, only the two largest are likely to have the risk appetite for the complicated debt swaps. And if they had any sub-prime-related exposure, it would be small. 'The rest of us are unlikely to have these exotic risks,' said a banker at a smaller banks.

Malaysian banks can still derive net interest margins of 2.5 to 3 per cent - unlike in the US, where the ultra-competitive scene means banks have to eke out the slimmest of margins. This means Malaysian banks don't have to try all that hard to make money, says Standard & Poor's equity analyst Alex Chia.

'No Malaysian bank has reported any material exposure to the sub-prime mess and nothing has jumped out in past quarters,' he said. 'If there were any material exposure, it would have shown up by now. But generally, there was no motivation to take such risks.'



Earlier this year, Malaysia's biggest financial group Maybank revealed it had indirect sub-prime exposure of US$35 million - the only local bank to have reported any exposure.

Lack of direct exposure notwithstanding, the issue of exposure because of counterparty risks is less clear. Counterparty risk is the risk associated with the financial stability of a party entered into contract with.

In the US, credit default swap counterparty risk is a growing concern to many institutions, given the domino effect the unwinding of such debts has had on the markets.

Because of the opaqueness of such swaps it is difficult to quantify the risks. For example, a bank may transact with another bank without exposure to such swaps, but the second bank may have dealings with another bank with significant exposure.

'It's a very, very big circle you're talking about, and it's a million-dollar question I can't answer,' a banker said on whether Malaysian banks could be exposed in such a manner.

Few believe local banks have such exposure, but the sceptics point to Lehman Brothers' denial in July last year of sub-prime-related losses. By this week the 158-year-old firm was filing for bankruptcy.

Bank Negara Malaysia is monitoring the situation. Governor Zeti Akhtar Aziz this week said there is no need to inject any liquidity into the financial market as it is able to withstand any shocks that might arise from sub-prime losses.