Macro-economic concerns and rising interest rates the top risks among Malaysian bankers

‘Banana Skins’ poll identifies top threats to banks

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).

ENDS