Published April 29, 2009

KL draws flak over move to allow seven new banks

Banking sector is already too crowded, says securities house

By S JAYASANKARAN
IN KUALA LUMPUR

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A MALAYSIAN securities house has questioned Kuala Lumpur's decision to allow seven new banks in Malaysia between now and 2011, arguing that it was 'already too crowded' and says that the government should have instead increased the foreign shareholding threshold in local commercial banks up from the present cap of 30 per cent.

Mr Najib: Has announced sweeping new measures to liberalise the financial services sector

ECM-Libra Investment Research, the research unit of investment bank ECM-Libra, said the move also seemed to represent a U-turn from the 1999 consolidation exercise where the central bank forcibly mandated the merger of 39 banks and finance companies into 10 'anchor' banks. Now the central bank seemed to want to increase the number of banks in the system, ECM-Libra said.

'While it may prove a good move to improve the banking sector's efficiency and competitiveness,' the research report said, 'we are a little concerned on the effects that the seven new entrants may bring to the smaller players in the industry with margins possibly crimped from the increased competition.'

On Monday, Prime Minister Najib Razak announced sweeping new measures to liberalise the financial services sector including the licensing of nine entrants into the banking system - five commercial banks, two Islamic banks and two takaful (Islamic insurance) operators. He also allowed the foreign shareholding thresholds in investment and Islamic banks and insurance firms to be raised to 70 per cent from 49 per cent.

ECM Libra questioned whether there would be any takers for the new licenses given the grim global economic climate.

According to ECM-Libra, domestic Islamic banks were not equipped to venture into the global market, even with the presence of a new equity partner as they were currently under-capitalised.

It said the requirement of US$1 billion paid-up capital for the two new Islamic banks - another stipulation by Mr Najib - would entail massive capital injections by parent companies of the respective Islamic banks.

But other analysts said yesterday that there were companies in the Middle East that were quite capable of it and that there would be takers for the bank licenses although some agreed with ECM-Libra's view that there could be muted interest in the near term.

Indeed, AmResearch, the research unit of the Arab-Malaysian banking group, singled out Bank of China and Singapore's DBS Bank as likely bidders for the first two bank licenses.

'Recall that BOC, which has ambitions to expand into the region, competed against Maybank for bank International Indonesia,' said AmResearch in a report yesterday. 'Likewise, Malaysia remains a missing link for DBS Bank's extensive presence in Asia. We believe foreign banking institutions would be interested in Malaysia as the domestic banking industry enjoys better net interest margins than its counterparts in Hong Kong and Singapore.'