Slower demand for credit

AmBank Group chairman Tan Sri Azman Hashim expects the global financial turmoil to have a knock-on effect on Malaysia. But he says banks are well-capitalised to absorb the earnings pressure

What is your view on the banking industry next year?

The global financial turmoil is still worsening with an increasing risk of economic contraction in developed economies (West, Europe and selected Asia) and we expect a knock-on effect on Malaysia’s economy.

Most external analysts and economists are projecting a broad economic downturn next year, projecting Malaysia’s GDP (gross domestic product) growth at 2% to 3%, while the government is projecting 3.5% growth. Our current view is about 3% with a downside bias for 2009. Notwithstanding that, banks are well capitalised to absorb the earnings pressure and they have more robust credit risk and collections management.

In recent years, the loan growth has been double the GDP growth rate. Based on this trend, we expect loans to grow 5%–7% in 2009.

As a result, the banking system would be facing slower credit demand in most segments and potentially higher non-performing loans (NPLs) compared with 2008. The NPLs in the system are currently at their lowest since the Asian financial crisis. Bank Negara has attributed the improvement to continued recoveries and write-offs.

Tan Sri Azman Hashim

The intense price competition is expected to moderate in the coming months due to banks adjusting for tougher credit conditions. There were exceptions, with hire-purchase/motor financing and business banking margins recovering in 2007.

Banks would be focusing on safer segments, fee-generating business and growing deposits. Real GDP forecast for 2009 is around 2.5%–3% while a rebound is expected during late 2010.

As for inflation, it may ease to about 3% in 2009. Consumers will adjust to higher costs of living, subject to falling commodity prices.

Lending growth is projected to taper off to about 5%-7% in 2009, and gradually rising thereafter. Bank Negara is expected to reduce the overnight policy rate (OPR) by between 50 and 75 basis points to stimulate economic growth. The base lending rate is expected to be reduced to follow the reduction in the OPR.

On our outlook for the ringgit, which is currently weakening against the US dollar, it is projected to strengthen to 3.40 by end-2009.

What is your strategy to ride out the economic slowdown?

For FY2009, our focus would be on improving retail asset quality and pricing for risk; targeted lending and income growth for business and relationship banking; select focus on origination and diversify income streams for investment banking and grow distribution footprints.

What are the group’s ambitions for growing the insurance part of its business and how will this help future growth?

The group has just completed a restructuring of its insurance operations. The composite insurance business is now separated and conducted through two separate companies – AmG Insurance Bhd (AmG) for general insurance and AmLife Insurance Bhd (AmLife) for life insurance.

The group also has rationalised its strategic insurance partnerships with Insurance Australia Group (IAG) now holding interest only in the general insurance business of AmG, while a new strategic partner, UK-based Friends Provident Plc (FP), has been brought in for AmLife’s life insurance business.

The insurance restructuring enables the group to turn its insurance subsidiaries into well-focused specialist operating units, with AmG and AmLife having access to the expertise and technical strengths of IAG in general insurance and FP in life insurance.

IAG, a leading general insurance group in Australia and New Zealand, has been the group’s insurance strategic partner since early 2006 and has provided valuable contributions to the group’s insurance operations, particularly general insurance. The restructuring exercise saw IAG increasing its stake in AmG from 30% to 49%, demonstrating the value and confidence attached by IAG to the future potential of the group’s general insurance business. With its attention now solely focused on general insurance, IAG is expected to further increase its contribution towards improving the performance of AmG’s business.

The 30% stake acquired by FP in AmLife is a significant investment in its international expansion programme and demonstrates its confidence in the future potential of Malaysia’s life insurance industry.

With a 175-year history, FP will bring to the group a wealth of experience in the life insurance business. We expect that FP will contribute towards improving and strengthening the backroom support services while helping increase the range of life products which would include pension products.

How will the group achieve its ambition of being a top three bank in the country?

In late 2007, the group had identified four main goals to be achieved under its medium-term aspirations (three to five years from 2007 onwards).

The first goal was to build on our position as a leading financial services company in Malaysia and be recognised as an employer of choice in the industry.

The second was to double the group’s FY2007 underlying profit after tax by 2011 (with 20% compounded annual growth).

Our third objective was to deliver a target return on equity (RoE) of 20% and a cost to income ratio (CTI) of 40% in the medium term.

And fourth, to achieve a top three market positioning in all our chosen business segments in the medium term of three to five years.

While the economy and market conditions have changed significantly since then, we believe that it is necessary for us to remain committed to our medium-term aspirations to unlock our growth potential and continue relentlessly on delivering the best to our customers, shareholders and staff.

We acknowledge that these aspirations will now take us longer to achieve, given the material changes in the macro-economic conditions.