CEOs sizing up the global economic crisis

THE impact of the global financial and economic crisis has reached our shores as the country encountered the slowest quarterly growth in three years for the three months ended September.

Bank Negara Malaysia last Friday announced that the country’s real gross domestic product (GDP) moderated further to 4.7% in the third quarter, from 6.7% and 7.1% in the second and first quarters, respectively — the lowest quarterly growth since the second quarter of 2005.

With the economic slowdown upon us, Malaysian businesses are bracing themselves for times of great uncertainties, particularly in 2009.

The Edge Financial Daily asked corporate captains for their views on what lies ahead, challenges specific to their industries, and the strategies they may employ to counter them.

The following, in a question-and- answer format, parlays their candid views.

CIMB
Datuk Seri Nazir Razak
Group chief executive
CIMB Group
subsidiary of Bumiputra-Commerce Holdings Bhd — RM5.95

Q: How long do you think the economic slowdown will last? When do you expect the worst to come? When do you expect to see recovery?
A: I think that the global economic slowdown will be severe next year as there is still some further credit provisioning and substantial de-leveraging by global banks to come. I doubt Malaysia will be able to achieve the current official forecast of GDP growth of 3.5% as the global outlook has worsened since the forecast was made.

But Malaysia is better insulated than most countries from the financial crisis and the government has the financial resources to mitigate some of the pain on the real economy from the slowdown in the external sector.

So, I do not forecast a recession for Malaysia in 2009. Beyond next year, the risk is of a prolonged recession in the West as then the government’s resources will be fully tested. But I am optimistic that the unprecedented scale and nature of government action in US and Europe will quicken the economic adjustments needed for recovery and that we will see an upturn in the later part of 2010.

Q: What’s your loans growth target for next year?
A: The situation is dynamic and I am reluctant to put a target on loan growth. Profitability always takes precedence. I am confident we will exceed our 12% loan growth target for 2008 and my sense today is that in 2009, loan growth will probably slow to about 8%-9%.

But if the bond markets don’t recover, it could remain double digit. The more important point is that we are looking to lend; lending is our core business, and we have ample capacity to grow our loan books. The challenge is to ensure that business and project proposals from potential borrowers have realistic forecasts of the operating environment.

Q: How do you expect your asset quality to be next year? Do you expect NPLs to rise?
A: It’s normal for NPLs to rise when economic growth slows, but I don’t expect them to rise to worrying levels. Banks in Malaysia have diversified their lending portfolios and Malaysian consumers and corporates are not highly leveraged.

As for us, we have gone through two years of transformation of our banking business at the core of which was rebalancing the profile of our loan assets and introducing stronger risk management oversight. In some segments we have even shrunk our portfolios while in preferred areas, we have grown strongly. We hope that due to these efforts, our loan book will perform relatively well despite the economic environment.

Q: What is your biggest challenge now: slowing demand, margin compression, etc?
A: The biggest challenge now is the amplification of the risk/reward equation across the board. Decisions in today’s environment tend to have much bigger consequences, whether positive or negative.

I recall that we made some very good strategic moves during the Asian financial crisis that propelled the company ahead of the competition in the aftermath of the crisis, for instance. Similarly, today we see opportunities with attractive returns but the potential downsides are bigger than we have seen for a long time.

Q: How are you faring relative to industry peers?
A: The Edge-sponsored brand survey last week says that our brand value increased by 83%! That suggests that we are making some major advances versus the competition. I am pleased with our improving market shares in preferred segments of consumer banking, conventional and Islamic, and that we are defending our lead in the capital markets even if the market has been pretty quiet.

Q: What are you doing to counteract the business slowdown? Which business segment will you pay particular attention to next year and why?
A: We are looking more carefully at our cost structures, keeping our people motivated despite slowing levels of activity and focusing on foundation building.

In some ways the spare capacity is good as we have a lot of integration work, having just expanded our businesses in Indonesia and Thailand. Our primary agenda for 2009 is, in fact, tying up our various businesses into a cohesive regional banking platform, which will pay dividends in the medium term.

Q: Do you foresee acquisition opportunities given depressed equity prices? Do you see any M&A activity in the local banking industry?
A: There will be opportunities given the environment but we are going to focus on putting together the pieces that we already have. For the rest of the industry, I am on record as being pro-further consolidation of domestic banks.

Q: Do you think your shares have been oversold?
A: Our foreign shareholding as at end-March 2007 was 50.06%; as at end-October 2008, it was 33.7%. Our current share price is at least partly a consequence of heavy foreign selling. As to whether it is oversold, I defer to the wisdom of markets. Our job is to improve long-term share price performance by delivering on business performance whereas investors will take into consideration relative values of stocks on Bursa and other markets too.

sources: The edge Daily