KUALA LUMPUR, 28 May 2014 - Concerns over the macro-economic environment and the expected interest rates hike topped the list of risks among the Malaysian banking industry (No.1 and No.2 respectively), according to the Malaysian cut of the Banking Banana Skins 2014 survey.
The Centre for the Study of Financial Innovation (CSFI)’s biennial Banking Banana Skins survey, produced in association with PwC, revealed that Malaysia isn’t too different compared to Asia Pacific territories such as China, Singapore, the Philippines and Australia, when it comes to the dominant concerns.
The top two risks – the macro-economic environment and risks of sharp changes in interest rates are similar to these Asia Pacific territories. Globally, the end of quantitative easing, the unresolved sovereign debt situation and uncertainty about conditions in emerging markets such as China remains a concern.
On the other hand, the uncertainty on how banks and borrowers could cope with a rise in interest rates on the domestic front could trigger a wave of bad loans, especially in household debts, resulting in higher non-performing loans or impaired loans ratio. The increase in household debt is also a consequence of rising property prices on the back of economic stimulus measures like the introduction of GST as well as the hike in the overnight policy rate (OPR).
The survey also revealed that Malaysian bankers are more nervous about the industry’s future compared to their global counterparts (characterised as having a “high level of anxiety” according to the survey). But Malaysian bankers are also relatively well prepared to face these risks (“high level of preparedness”).
“Traditionally, Malaysian bankers have always been cautious about the risk outlook of the industry, which explains the relatively high level of anxiety among Malaysian banks compared to other countries globally,” said PwC Malaysia Assurance Partner Ong Ching Chuan.
“Several factors contribute to this high level of anxiety – increased competition, rising costs of doing business and compliance (the 3Cs). However, this sentiment of prudence and self-regulation, together with Bank Negara’s support in supervising and regulating the financial market may well help Malaysian bankers to feel more prepared to deal with the risks identified,” he continued.
As a key trading partner of China, Malaysia’s trade balances is at the risk of being impacted negatively by falling commodity prices, due to the economic slowdown in China.
“Banks are stepping up their efforts on risk management and governance, and investing in talent,” said PwC Malaysia Executive Director Foong Mei Lin. “These are key priorities in addressing these external market pressures, which are part and parcel of managing the increasingly complex financial landscape, and developing sustainable growth and competitive advantage,” she continued.
Attracting and retaining talent is understandably a key concern among Malaysian bankers (No. 5), mirroring Asia Pacific priorities. Interestingly, Asia Pacific is the only region that viewed talent as a top ten issue. For the emerging economies, talent is a key competitive differentiator, hence building a strong talent pipeline remains a persistent challenge.
Other key concerns in Malaysia – quality of risk management (No. 3) and derivatives (No. 4) are also closely linked to the issue of talent.
Banks need to grapple with “ineffective” risk managers who lack influence and authority, in addition to the issue of losing critical talent to other regions. There is also the concern about the relentless pursuit of new and exotic products like derivatives. Risk management teams are expected to “catch up” with the latest innovations in the capital market as the risks associated with derivative products can be high.
Clearly, staying status quo is not an option for banks. The challenge is for banks to consider which posture they wish to adopt to succeed in the marketplace, in relation to the regulatory situation, the bank’s current market position, its aspirations for the future and its capabilities.
The poll is based on responses from more than 650 bankers, banking regulators and close observers of the banking industry in 59 countries. There were 10 responses from Malaysia. Respondents comprised 5 bankers, 2 observers and 3 risk managers. (See below for more details).
1. The CSFI’s “Banana Skins” series provides periodic snapshots of the risk landscape in the financial services sector. As well as the banking series, the CSFI conducts surveys of the risks in insurance and microfinance.
2. The Malaysian respondents comprise:
4. The Banana Skins Index tracks survey responses over time and can be read as an indicator of changing anxiety levels. In our survey, respondents rate each risk from 1-5, where 1 = low anxiety and 5 = high anxiety. The Anxiety index is the average score of all the risks. The ranking consists of countries which provided ten or more responses.
5. The respondents were also asked how well prepared they thought banks were to handle the risks they had identified on a scale of 1 – 5 where 1 = poorly and 5 = well.
6. The table below illustrates the 28 risks perceived by Malaysian bankers.
Banking Banana Skins 2014
|1. Macro-economic environment|
|2. Interest rates|
|3. Quality of risk management|
|5. Human resources|
|6. Corporate governance|
|7. Credit risk|
|9. Management incentives|
|10. Pricing of risk|
|11. Technology risk|
|12. Social sustainability|
|13. Back office|
|14. Emerging markets|
|18. Shadow banking|
|20. Social media|
|21. Equity markets|
|23. Reliance on third parties|
|24. Sales and business practices|
|25. Change management|
|26. Business continuation|
|27. Political interference|
|28. Commodity markets|
7. Global concerns
The poll shows that concerns expressed in earlier surveys about capital availability, liquidity, credit quality and exotic products in the banking system have begun to ease.
However, the survey reveals strong ongoing concern about the stability of the Eurozone.
The outlook for the tapering of quantitative easing by central banks is widely seen as crucial to global economic prospects.
A breakdown of responses shows that all major respondent types (bankers, observers and risk managers) are strongly concerned about regulatory excess and political interference, as well as the state of the global economy. However non-bankers are more worried about institutional risks in banks such as the quality of governance and management; bankers play these risks down.
By region, the responses show concern about regulation and politics to be strongest in Europe and North America.
CSFI is an independent not-for-profit think tank based in London which researches the future of financial services. It has an affiliate in New York, New York CSFI. The CSFI has been producing regular Banana Skins surveys since 1995. www.csfi.org.uk.
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