Developers must be creative

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

This year was generally a positive and vibrant one for the property sector, with the low-interest regime, special schemes like developer interest-bearing scheme (DIBS) and higher loan margins of up to 90%, despite some house-buyers holding off on the purchasing decision before the general election in May.

The recent cooling measures announced in Budget 2014 and those taken by Bank Negara Malaysia to end special schemes offered by developers are seen by many as timely moves to curb speculative activities.

As the market takes time to digest and absorb these measures, will there be renewed interest in the property sector, given that demand outstrips supply?  Will this be the right time for potential property buyers to go into the market, more so with the implementation of the GST on April 1, 2015?

FocusM spoke to developers, the Real Estate and Housing Developers’ Association, the House Buyers Association and an analyst on the performance of the property sector in 2013 and the outlook for next year.

Datuk Seri Michael Yam
President, Real Estate & Housing
Developers' Association (REHDA)

How did the year pan out for the property sector?

In general, the first half of 2013 was positive for developers as the trend, based on a survey of Rehda members, indicated that sales were better than in the preceding half-year in 2012 and 2011.

The survey showed a better sales performance in H1 2013, with 6,095 (56%) units sold compared to H2 2012 with 4,822 (46%) units sold, and the number of landed properties launched is dwindling, while launches of strata-property units are on the rise.

The main challenges are labour issues and the increasing cost of building materials like cement, steel bars, sand and bricks, which increased by between 5% and 10% in H1 2013.

What are your expectations for the sector in 2014?

With the cooling measures announced in the recent Budget 2014, we anticipate a challenging time for developers.  Although the budget is tailored to promote a more stable and sustainable property market, with the imposition of a higher RPGT, the removal of DIBS, affordable housing initiatives by the government and higher price threshold for foreign buyers, these measures will bring some major changes in both demand and supply sides of the equation.

The first half of 2014 will see an initial slow down in sales, as the market adopts a wait-and-see attitude.  This approach is compounded by the fear factor of a higher cost of living and lowered affordability due to increases in electricity, toll charges, gas and KL assessment rates that will be effected in 2014.

We expect the rate of sales to accelerate in the second half of 2014, as the population adapts to the situation and realises that fundamentally, the demand for housing will not change.  As more youths join the house-buying group and a lower supply comes onstream, there is only a small window in which to buy before the GST kicks in, in the second quarter of 2015.

What do you think will be the key events and challenges that will shape the sector’s prospects next year?

With the various stringent measures in place, developers will need to be more creative and diligent in terms of coming up with better product offerings and pricing.  Developers will need to focus on research and marketing to reach target customers.

With the MRT projects in the pipeline, especially in the Greater KL area, there will be a greater housing supply.  This will help relieve the imbalance in supply and demand, including the focus on affordable housing projects where developers are given an incentives of RM30,000 per unit by the government to build affordable housing, aside from the role of PR1MA.

Among main challenges will be the higher cost of compliance with new regulations such as 3% of the development cost as deposit for a developer’s licence and the backloading of progress payment drawdowns as stipulated in the revised Housing Development Act.  These changes will inevitably lead to higher cost of development, leading to higher selling prices.

Inflationary pressure will feature prominently as the rakyat adjust to the higher costs occasioned by increased tariffs, toll charges and the reduction of subsidies.

Which areas in Malaysia will be 2014’s hot property areas?

Greater Kuala Lumpur (Kuala Lumpur and nine other local authorities), Putrajaya and Cyberjaya, Penang (Penang Island and Seberang Perai), the Iskandar region and Seremban. FocusM

Property outlook rosy in 2014 despite cooling-off measures - Part 4

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

This year was generally a positive and vibrant one for the property sector, with the low-interest regime, special schemes like developer interest-bearing scheme (DIBS) and higher loan margins of up to 90%, despite some house-buyers holding off on the purchasing decision before the general election in May.

The recent cooling measures announced in Budget 2014 and those taken by Bank Negara Malaysia to end special schemes offered by developers are seen by many as timely moves to curb speculative activities.

As the market takes time to digest and absorb these measures, will there be renewed interest in the property sector, given that demand outstrips supply?  Will this be the right time for potential property buyers to go into the market, more so with the implementation of the GST on April 1, 2015?

FocusM spoke to developers, the Real Estate and Housing Developers’ Association, the House Buyers Association and an analyst on the performance of the property sector in 2013 and the outlook for next year.

LEE CHUNG CHENG, JF Apex Securities head of research

How did the year pan out for the property sector?

The property sector has outperformed the FBM KLCI year-t-date (21% vs 8%).  The property index staged a sharp rally post the 13^th general election in May, buoyed by a rising investor appetite for high-beta stocks.  Also, the positive performance was partly due to a re-rating of developers having landbank / projects in Iskandar, following positive newsflow, robust property sales and rising residential prices in Johor.

What are your expectations for the sector in 2014?

For the physical property market, we expect the transaction volume to come down in 2014 while we anticipate property prices will be flattish due to recent property cooling measures which will drive away speculators.  The removal of the DIBS and the RPGT hike effective January 2014 may affect buyer sentiment temporarily and we anticipate fewer launches by developers in H1 2014.  However, buying interest will pick in H2, driven by pent-up demand.  Hence, we are “neutral” on the sector, following a good run of share prices this year.

What do you think will be the key events and challenges that will shape the sector’s prospects next year?

Catalyst for next year: a) Infrastructure development such as the MRT2 & 3; major highways in Klang Valley – KIDEX, DASH, SUKE, lrt 3; High Speed Rail from KL to Singapore; b) the listing of megadevlopers such as IOI Properties, Medini Iskandar, Iskandar Waterfront Holdings, the PNB Property Trust; asset injections of Ecoworld into Focus Aim Bhd; premium valuations of megadevelopers will spill over to existing property players; c) the award of federal land development (Rubber Research Institute of Malaysia, Bandar Malaysia, Tun Razak Exchange, Bukit Bintang City Centre) could stir investor interest in the sector.

Upside risk: GST & raw material costs hike could propel a property rush.

Downside risk: stringent lending policies (such as loan amount being based on the net selling price so buyers are required to fork out more in downpayments) and a potential hike of interest rates by BNM.

Housebuyers hope budget measures will curb speculation

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

CHANG KIM LOONG
National House Buyers Association (HBA)
honorary secretary-general

How did the year pan out for the property sector?

It was another good year for the key players in the property market, i.e. developers and banks.  Property prices continued the uptrend mainly because of the ill advice given to our prime minister, resulting in ineffective measures announced for Budget 2013, such as the real property gain tax (RPGT) and high threshold for affordable housing.

Budget 2013 imposed a RPGT of 15% (from 10% in 2012) if the property was disposed of within two years of purchase.  What the RPGT in Budget 2013 meant was that speculators could continue to purchase properties from developers on launch, then flip these properties over on completion (after 2 years), and pay only 10% (i.e. within the third and up to the fifth year).

We are glad that finally the prime minister has realised the seriousness of the situation and has increasing the RPGT in Budget 2014 to 30% if the property is disposed of within three years of acquisition; and an imposition of 20% if the property is disposed of within the fourth year, and 15% in the fifth year.

Under Budget 2012, housebuyers with a household income of less than RM5,000 a month were exempted from making the 10% downpament on properties costing less than RM220,000.  Budget 2013 has raised the household threshold to a RM10,000 combined income and property prices to RM400,000.

With the ever increasing cost of living, although a typical household income of RM10,000 could qualify for housing loan of RM400,000, the household will be left with little or no savings or any funds for emergencies after paying typical household expenses and said monthly loan instalments.

What are your expectations for the sector in 2014?

HBA hopes the (Budget 2014) measures will slow speculative activities in the property market which have driven up prices to levels no longer deemed affordable to the majority of lower- and middle-income wage-earners which form the bulk of the population.

We also hope the government will continue to monitor the situation and take additional measures such as to increase entry costs in the form of higher stamp duties for the transfer of titles for people who hold / buy multiple properties, as such measures are deemed more effective and can yield more immediate results.

What do you think will be the key events and challenges that will shape the sector’s prospects next year?

The challenge for the government in 2014 and beyond is to create a sustainable property sector.  For too long, the government has adopted a laissez-faire approach and left it to the market to regulate itself.

The problem with this approach is that the two key players in the property market – banks and developers – are profit-maximising entities.  Hence, property prices have skyrocketed in recent years due to aggressive lending and speculative activities.  Property in many urban and suburban areas is no longer deemed affordable to many lower- and middle-income families and especially to our current younger generation.

Key Challenge No. 1 – Constant monitoring to curb speculative activities

Vigilant monitoring is important to gauge the effectiveness of measures in Budget 2014 in tackling the steep rise in property prices and to take additional measures if necessary.

Immediately after Budget 2014 announced the DIBS would be banned, it was reported that some innovative developers would try to repackage the DIBS into another product called the “Developer interest Subsidy Scheme”, in which the purchaser would be reimbursed the interest charged by the banks on, say, a quarterly basis.  This is nothing but blatant attempt to repackage old wine in a new bottle.

Hence, Bank Negara Malaysia’s move to issue a circular to all banking institutions prohibiting the provision of any form of bridging / project financing to developers practising the DIBS, Developer Interest Subsidy Scheme (DISS) or any similar scheme in any shape or form is a right and timely move.

It is imperative we do not detract from the roadmap to the 10:90 system proposed by HBA in which only 10% of the purchase price is paid on the signing of the SPA and the balance 90% is paid only on the successful completion of the property purchase.  Under the 10:90 scheme, developers cannot finance projects from progress billings and must use either internal funds or project financing from banks.

Key Challenge No. 2 – Creating more affordable homes

There are simply not enough affordable properties for lower- middle-income groups.  By affordable, we are talking about a range from RM150,000 to RM300,000.

We note that the prime minister announced a subsidy scheme of up to RM30,000 to private developers to build more low- and middle-cost housing.  The maximum price of low-cost houses is set at RM45,000 and that of medium-cost houses is set at RM170,000.  It is hoped that private developers will take this initiative and build more affordable houses for the low- and middle-income segments.  We hope the threshold for middle-income properties can be raised to say RM300,000 to capture a wider segment of the population and to encourage more developers to participate in such a scheme.

Key Challenge No. 3 – Safeguarding interests of housebuyers

The government has previously announced a roadmap from the current sell-then-build system to build-then-sell 10:90 system (BTS 10:90).

Under the sell-then-build system, developers are allowed to sell their property without having to construct anything and then charge the housebuyer as the property is being constructed.  However, if the project is delayed or abandoned, it is the housebuyer who bears the full brunt of such a catastrophe.

Under the BTS 10:90 system, the housebuyers needs to pay only a 10% downpayment on signing the SPA and the balance 90% will be paid only on the successful completion of the property, together with certificate-of-fitness and ownership papers i.e. the title deed.  Hence, the interests of the housebuyer are secure and he is not exposed to any business or construction risk.

What areas in Malaysia will be 2014’s hot property areas, particularly for the low- middle-income groups?

The current hot areas such as Puchong and Kota Damansara are already far beyond the reach of our younger generation, particularly fresh graduates.

The next hot areas will be places with good connectivity to public transport hubs such as MRT stations.

Property outlook rosy in 2014 despite cooling-off measures - Part 3

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

This year was generally a positive and vibrant one for the property sector, with the low-interest regime, special schemes like developer interest-bearing scheme (DIBS) and higher loan margins of up to 90%, despite some house-buyers holding off on the purchasing decision before the general election in May.

The recent cooling measures announced in Budget 2014 and those taken by Bank Negara Malaysia to end special schemes offered by developers are seen by many as timely moves to curb speculative activities.

As the market takes time to digest and absorb these measures, will there be renewed interest in the property sector, given that demand outstrips supply?  Will this be the right time for potential property buyers to go into the market, more so with the implementation of the GST on April 1, 2015?

FocusM spoke to developers, the Real Estate and Housing Developers’ Association, the House Buyers Association and an analyst on the performance of the property sector in 2013 and the outlook for next year.

How did the year pan out for your company?

It has been an exciting year for us, with the completion and delivery of Verve Suites Mont’ Kiara’s fourth and final tower, Vox Tower, with its Versilical Sky Beach on the roof; and the soft launch of Verve Suites KL South on Old Klang Road.

It has been a significant milestone to see the completion of Verve Suites Mont’ Kiara, a pioneering project featuring sky lounges of various concepts on each penthouse level of all four towers.  The first sky lounge concept, the Vertigo Living Concept, was introduced to Malaysians in 2006 and delivered in 2009.  While many others have tried to follow, we are excited that Verve Suites Mont’ Kiara today has four world-class sky lounges and living concepts for the benefit of residents and for the enhancement of value for homeowners.

With Verve Suites KL South, BKP is pushing the envelope with the introduction of the Vercadicos Living Concept and Vercadicos Sky Bridge.  The Sky Bridge, and engineering feat spanning two towers, will feature some of the popular features of previous sky lounges while introducing ideas to Kuala Lumpur and Malaysia.  Its iconic form will attract much attention and once again be a benefit of residents as well as a unique feature that will continue to protect and enhance the value of the project for homeowners.

What are your expectations for your company and the property sector in 2014?

It is shaping up well for BKP and the property sector.  While the government has introduced cooling-off measures, these effects will be absorbed and digested by the home-buying public some time in 2014.  Thereafter, expect renewed interest as demand continues to outstrip supply.  In fact, I am telling my friends and peers that now is a great time to pick up a property if they are in the market for one.

What do you think will be the key events and challenges that will shape the outlook of the property sector next year?

Affordability will continue to be a challenge for homebuyers looking for property in the years to come.  It is a theme that is a global one, not unique to Malaysia.  Governments in developed countries are printing money irresponsibly.  The US was doing it, Europe was doing it and Japan joined in this time last year.  Asian countries have had to do likewise, whether they are willing to admit it or not, to ensure their currencies remain competitively weak, so as not to affect their exports.

With all this liquidity, cost are being pushed up and immediately being reflected on the stock markets and property markets globally.  The challenge facing governments is that while they are printing money, they are unable to move the lower-income strata to a middle- or higher-income model.  This is the biggest responsibility and challenge of governments globally, and will ultimately reflect how people view property prices.  It is no wonder people are upset and often, developers incorrectly get the blame for this.  This Syndrome is another example of the commonly-used phrase “Don’t shoot the messenger”.

Cooling-off measures are a short-term fix, that in the long run create more problems than they solve.  It has been shown many times in our region that these measures are ineffective over the long run, as long as money continues to be irresponsibly printed by governments around the world.  China, Hong Kong and Singapore have had countless cooling-off measures, that work for a few months before causing property prices to spring back with a vengeance.

People intuitively know they need to protect themselves against the eroding value of fiat currencies, and that property is one of the safest ways of doing so.

Property outlook rosy in 2014 despite cooling-off measures - Part 2

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

This year was generally a positive and vibrant one for the property sector, with the low-interest regime, special schemes like developer interest-bearing scheme (DIBS) and higher loan margins of up to 90%, despite some house-buyers holding off on the purchasing decision before the general election in May.

The recent cooling measures announced in Budget 2014 and those taken by Bank Negara Malaysia to end special schemes offered by developers are seen by many as timely moves to curb speculative activities.

As the market takes time to digest and absorb these measures, will there be renewed interest in the property sector, given that demand outstrips supply?  Will this be the right time for potential property buyers to go into the market, more so with the implementation of the GST on April 1, 2015?

FocusM spoke to developers, the Real Estate and Housing Developers’ Association, the House Buyers Association and an analyst on the performance of the property sector in 2013 and the outlook for next year.

Mr. Khoo Cheng Hai @ Ku Cheng Hai, KSL Holdings Bhd Group managing director

How did the year pan out for your company?

It has been a volatile year, in which buyer sentiment was affected by the general election and budget measures.  But overall, our project in Johor Bahru is doing very well due to our strong brand there, and sales from the Klang Valley are within our expectations.

What are your expectations for your company and the property sector in 2014?

We hope next year will be a better year than the current one, as there will be fewer events which affect investor sentiment.  Our company is in relatively healthy condition, while we are still actively looking for a suitable landbank for development.

We hope for more investment-friendly guidelines to ease the burden of developers, and we hope local government can wipe out unnecessary red tape and speed (up) the process of application and approval.

What do you think will be the key events and challenges that will shape the outlook of the property sector next year?

The main challenge next year is to look at the impact of GST implementation in 2015.  The selling price of a house is not taxed under the GST but the cost of materials is.  We need to carefully plan the timing of launches, keeping track of construction progress and tax implications when the GST comes into effect.  With (regard) to that, we advise first-time buyers to make their house purchase as early as possible.  The cost of construction is a linear progression, as is cost of living.  It is more expensive to buy next year compared to the current one. 

Another key challenger is to build affordable houses.  The rising costs of materials, various contributions to the government and the scarcity of land add up to the appreciation of property prices.  However, developers cannot just raise prices beyond the buyers’ ability to afford, as this will affect sales.  We also government will build more infrastructure to ease the traffic impact in the city centre, providing a better environment for citizens.

Property outlook rosy in 2014 despite cooling-off measures - Part 1

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 --

By: FocusM

This year was generally a positive and vibrant one for the property sector, with the low-interest regime, special schemes like developer interest-bearing scheme (DIBS) and higher loan margins of up to 90%, despite some house-buyers holding off on the purchasing decision before the general election in May.

The recent cooling measures announced in Budget 2014 and those taken by Bank Negara Malaysia to end special schemes offered by developers are seen by many as timely moves to curb speculative activities.

As the market takes time to digest and absorb these measures, will there be renewed interest in the property sector, given that demand outstrips supply?  Will this be the right time for potential property buyers to go into the market, more so with the implementation of the GST on April 1, 2015?

FocusM spoke to developers, the Real Estate and Housing Developers’ Association, the House Buyers Association and an analyst on the performance of the property sector in 2013 and the outlook for next year.

How did the year pan out for your company?

It has been a very good year for us, as the company performed according to expectation.  In the first three quarters of the year, for example, we achieved RM2.25 bil in sales en route to achieving our annual sales target of RM3 bil.  The group’s unbilled sales of RM4.18 bil as of Sept 30 are about 2.7 times the revenue of the property development division in 2012, providing us with strong earnings visibility moving forward.

The group has also grown in terms of land we own.  With five land deals with a combined gross development value (GDV) of about RM8.95 bil, we have exceeded our entire 2012 landbanking amount of RM7.38 bil by 21%.  Projects acquired this year include D’ Sara Sentral in Shah Alam, Lakeville Residence in Taman Wahyu, KK Convention Centre in Kota Kinabalu and M Residence 3 in Rawang.

What are your expectations for your company and the property sector in 2014?

We aim to achieve 20% growth from our 2013 sales target or a total of RM3.6 bil in property sales in 2014.  Our current remaining GDV for 1,084 ha is RM24.19 bil and unbilled sales of RM4.19 bil, which brings the total remaining GDV and unbilled sales to RM28.38 bil.

For the property sector, post-Budget 2014 sees the implementation of measures aimed at removing speculative elements from the market.  However, we believe the strong fundamentals that drive the property sector’s growth remain a key force in the performance of the property market.  This is especially true for property buyers purchasing for their own consumption or buying to invest for long-term rental income.

Among factors that contribute to the strong fundamentals are the large supply-demand gap, as supply growth for properties has been decreasing since 2003, with Malaysia’s supply growth in the second quarter of 2013 standing at 0.8%.  This has contributed to appreciation in house prices and a strong take-up of properties.  Malaysia’s young demographic, that leads to new household formation, a growing middle-income group, the supply-demand gap and stable employment conditions will all contribute to the growth of the property market in the coming year.

Where the removal of the DIBS is concerned, Mah Sing has stopped offering it since the beginning of this year for our new projects in all four regions in which we are active.  Despite this, we have seen strong take-ups of all our projects: for example in Southville City @ KL South, the first four towers of Savanna Executive Suites saw 78% of the total available units of 1,532 pre-selected.  This shows us developers with properties in well-placed, highly-accessible locations, reasonably priced, will thrive with or without DIBS.

On the raising of the floor price for foreigners purchasing Malaysian property, foreign buyers make up about 7% of our purchasers of properties above RM1 mil mark.  Most of our buyers are locals.  In fact, Malaysia’s property market remains largely domestically-driven.

What do you think will be the key events and challenges that will shape the outlook of the property sector next year?

We remain selectively optimistic on the overall outlook of the property sector next year.  This is because the middle-income group and large domestically-driven property market continue driving the demand side of the equation.  We are very focussed on products to meet the needs of this group and we have a host of well-designed properties at attractive price points appealing to the mass market.  Our landbanking strategy in the last two years has been focused on locking in larger tracts of township land, to offer affordable mid-end products.

In addition, the general lending environment is conducing, as financing liquidity is still attractive; interest rates are still low due to a competitive mortgage space, with banks offering BLR minus 2.4%, from BLR minus 2.1% to 2.2% a year ago.

QE tapering continues to be among the policies to watch

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 -- BANKING

By: FocusM

Cheah King Yoong
Senior Analyst
Alliance Research Sdn. Bhd.

How did the year pan out for the banking sector?

Despite a slow start, it has been a good year for the banking sector.  On a year to date annualised basis, outstanding loans rose strongly by 10.1% in October which comes within our industry loan growth forecast of 10.5% for the year.

Net impaired loan ratio for October remains low at 1.35%, implying asset quality remains healthy.  We do not see a significant uptick in the net impaired loan ratio.

The banking system remains well capitalised, with total capital ratio, tier-1 capital ratio and common equity tier-1 (CET1) ratios for October at 14.4% (Sept: 12%) respectively.  These imply that the domestic banking system is resilient to withstand unanticipated shocks to the financial system, if any.

What are your expectations for the sector in 2014?

Despite a series of measures implemented by the authorities to contain the growth of household debt, we remain positive on the sector outlook for 2014 since we believe that (1) underlying fundamentals of the domestic banking sector remain solid, (2) foreign shareholding levels are on the lower end of historical range, (3) ongoing M&A theme will spice up the sector, and (4) valuations of selective banking stocks are decent at present level.

What will be the key events and challenges that will shape the sector’s prospects next year?

These include (1) unexpected drying up in investment banking deal flows due to the volatility of the capital market, (2) lower than expected loan growth, (3) larger than expected net interest margin (NIM) compression due to competition, and (4) deterioration in asset quality.

Foreign shareholding levels of selective banks have declined over the last few months.  Other than concerns over the potential earnings risks on domestic banks, which we believe are overblown, we opine that the dissipating foreign interests are mainly due to (1) uncertainties arising from eventual QE tapering by the Fed , and (2) potential rating cut by credit rating agencies if the federal government’s fiscal position does not improve.

With foreign shareholding levels at the lower end of historical range, we see limited downside risk going forward as we expect the start of QE tapering by Q1 2014 to significantly remove much of the uncertainty, while the implementation of fiscal consolidation measures by the government should avert the risk of imminent sovereign credit rating downgrade.

QE tapering continues to be among the policies to watch

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 -- BANKING

By: FocusM

Pong Teng Siew,
Head of Research
Interpac Securities Sdn. Bhd.

The banking sector has begun to face headwinds it has not faced since the Asian financial crisis.  Unlike US banks, most Malaysian banks still earn revenue the old-fashioned way, from transaction fees and a net interest spread income.  Net interest income has been declining because of competitive forces as well as due to nature of lending.  Consumer loans were very lucrative for a long spell after the Asian financial crisis because they offered better margins than corporate loans and represented better spread risks; and some (residential property loans) taxed capital less due to their lower risk weights.  However, competition has squeezed the margins on such loans and more recently, despite the profit imperative, the focus moved away from one of the fastest-growing segments, personal loans, because of the realisation that as the economic cycle matures, income growth will slow and household debt has accumulated to systematically worrisome levels after years of rapid credit expansion.

Malaysia’s banking system loans growth peaked at 13.8% year-on-year (y-o-y) in September 2011, and consistently outstripped nomical GDP growth (if that can be taken as a yardstick of income growth) in the period following a three-year spell of systematic deleveraging after the Asian financial crisis.  Nominal GDP growth stood at 4.7% y-o-y in Q3 2013 and pales in comparison to a loans growth of nearly 10% y-o-y currently.  Only in the “safe” lending segments of infrastructure construction and development and carry trade-type loans for purchase ASB / ASN units are local banks still lending aggressively.

Net interest income has been on the decline for what may be an eternity and no temporary relief from BLR hike is on the cards.  The central bank is decidedly pro-growth and takes pain to emphasise it is not an inflation-targeting bank.  It can be expected to resist any upward pressure on interest rates for as long as possible although for all countries, the long end of the fixed-income spectrum can be expected to clime as the US Fed contemplates a tapering off of its bond-purchase programme.

Asset quality remains well-behaved but recognising that the impaired assets ratio is ever closer to the zero bound, no further gain should be expected in this direction.  Scattered loan losses related to corporate failure will not cause systemic events but if global commodity prices take a beating in a global economic downturn, and if interest rates climb sharply in conjunction with an unexpectedly aggressive move to an end to quantitative easing in the US, which can cause a pronounced ringgit weakness, debt-service pressure could surface with respect to a smattering of corporations and individuals.  Disruptive currency moves that stoke inflation and corporate distress situations could also affect Malaysian banks now that many more have in recent years moved to expand regionally in search of profits.  Vulnerable emerging market economies include Turkey, Indonesia and India but it is instructive that even the isolated Blumont/Asiasons/LionGold episode in ”safe” economies like Singapore can cause unexpected and significant losses.

Specific prices of equity issues in the Asia-Pacific have risen sharply, some to bubble levels; and sudden and severe pullbacks could be disruptive even if the main indices remain relatively stable.  Most major banking groups in Malaysia have equity trading and derivatives exposure and unexpectedly large losses could arise if a generalized price correction suddenly takes hold.  Bank balance sheets are notoriously opaque to offering predictive qualities to any analysis of such risks.

Finally, banks cannot expect to rapidly expand their risk assets base as in earlier years, with the adoption of far stricter Basel III regulatory standards.  They are likely to settle down to being utility-line businesses, enjoying steady but unspectacular returns.

Household loan demand to moderate amid rising inflatin

Focus MALAYSIA WEEKLY ISSUE 055

THE WEEK OF DECEMBER 21 – DECEMBER 27, 2013

Review 2013 / Outlook 2014 -- BANKING

By: FocusM

Ashok Ramamurthy
Group Managing Director,
AmBank Group

How did 2013 pan out for Ambank Group?

It was another year filled with excitement and some challenges.  Despite slower economic growth and intense competition, we made good progress in our FY2014-2016 Strategic Agenda, delivered stronger earnings – with our first half FY2014 profits up 10.1% from a year ago – and achieved most of our FY2014 guided key performance indicators.

Our integration with our two new businesses acquired, Kurnia Insurans and MBF Cards, is on track and they have contributed to the performance of the Group.

We are seeking a new strategic partner to build scale in life assurance and the family takaful business in progress.  We have completed Phase Two of the bidding process in our search for a new strategic partner for the life and family takaful businesses, and aim to finalise a buyer by the end of the year.

Most recently, Phase One of our new core banking platform went live.  This investment will create a scaleable and robust platform for growth.  Its functionalities are expected to pave the way for delivering operational improvements, an enhanced customer experience and revenue growth.

As a testament to our strong governance and improved financial fundamentals, Rating Agency Malaysia (RAM) upgraded AMMA Holdings Bhd and all three of our main subsidiaries, AmBank (M) Bhd, AmIslamic Bank Bhd and AmInvestment Bank Bhd, credit ratings to AA2/P1 with a stable outlook.

What are your expectations for your company and the banking sector in 2014?

For AmBank Group:

·   To complete our integration of two newly-acquired businesses, Kurnia and MBF Cars, and seek a new strategic-partnership for our life and family takaful businesses;

·  Stronger earnings as we progressively deliver on our five strategic themes.

To recap our strategic agenda: (1) Integrate acquisitions and deliver synergies; (2) Simplify business model and streamline processes; (3) Accelerate organic growth with focus on cross-selling, flow business, small business, and emerging affluent customers; (4) Build scale in specialist businesses with partners; (5) Optimise capital and holding-company structures.

For the banking sector, we expect modest growth in line with economic growth (our in-house economist expects the Malaysian economy to grow 4.8% in 2014 from 4.6% in 2013), supported by stronger capital-market activities as Economic Transformation Programme (ETP) projects pick up.

What do you think will be key events and challenges that will shape the banking sector’s prospects next year?

The Group expects the domestic economy to pick up in 2014 due to improved global trade and supported by private expenditure.  Nevertheless, global sentiment underpins the domestic economic outlook and we expect headwinds in the banking environment to moderate growth.

Retail loan growth could moderate on the back of easing consumer spending from the rationalisation of subsidies and responsible lending measures to address household debt.  Margin compression will continue from increasing competition for deposits, loans and other financial products.  Asset quality trend may come under pressure from inflation, resulting in increased provisions.

While we are conservatively placed to handle volatility, these potential challenges will need to be carefully managed to avoid a material impact on financial performance.  I expect the banking sector to continue to increase loans / financing, adversely affected by margin pressure.  Overall, the banking sector should continue to deliver improved profits, though the pace of growth is expected to moderate compared with the preceding two to three years.