By YAP LENG KUEN
PETALING JAYA: Banks are watching closely the situation in Europe and China while exercising caution in terms of lending and pricing.
“European banks need to shrink their balance sheets and reduce lending to this part of the world,” said CIMB group deputy CEO and head of corporate banking, treasury and markets Datuk Lee Kok Kwan.
As a result, the local currency bank loan and bond markets would have to absorb some of the US dollar loans that are not rolled over or renewed as European banks retreat from the funding market.
However, that is applicable more in the region than in Malaysia which has almost negligible foreign currency debt or loans. Malaysia's ringgit bond market and banking system are more than able to meet the funding needs of corporations and the public sector.
As the Asian financial crisis in 1998 has proven, reliance on foreign currency funding was toxic for both the sovereign and its corporates. This was again vividly demonstrated in 2008 and in 2011. As a result, the country did not have much foreign currency debt.
For CIMB Group, it is business as usual. “Hopefully, it will be an orderly shrinkage in Europe as it brings its fiscal spending back in line,” said Lee.
In the case of China, all eyes are on whether it has achieved its domestic inflationary targets.
“If China starts their bank statutory reserves, currently at 21%, the impact on the rest of Asia's economy can be significant. In view of these uncertainties, the message is to exercise utmost caution.
“We are monitoring the first half which would be driven by global events. The message is be careful, and not be aggressive' especially on pricing, as global market conditions remain uncertain and potentially volatile even though it looks less perilous now compared with the second half of 2011,” said Lee.
Hor Kwok Wai, chief operating officer for global markets, Hong Leong Bank, said the bank's core business was still in foreign exchange.
In the last one year, interest rates had been volatile as the market speculated on whether interest rates would remain or be cut if there was a weakening in growth figures. Volatility gave rise to more hedging opportunities.
“We have not seen any big move in doing things,” he said. “There has been an increase from clients in hedging their interest rate exposure.”
However, in the last few months, there was more activity in the credit space as cash-rich investors bought offshore credit. At the moment, the most liquid offshore credit is the US dollar.
In Malaysia's case, these comprised the Petroliam Nasional Bhd and government dollar bonds sold offshore. “The offshore credit market is outperforming the onshore,” said Hor, adding that another dose of cheap cash was expected from the European Central Bank via a long-term refinancing programme at the end of the month.
This gives European banks long-term credit resulting in more investment activities and paying down of maturing bank debts.
“There is a lot of investment and strategising on our treasury side for clients of non-ringgit credits,” said Hor. “We have put more sales and trading people into the offshore credit market.”
A lot of US dollar liquidity has returned to the Malaysian market compared with the situation in September and October. That was when there were some withdrawals from the onshore market and pricing of foreign currency loans had increased.
However, Malaysian institutions do not have much foreign currency assets onshore and hence would move offshore seeking returns. “We see increased client interest in the offshore business which is experiencing exponential growth,” Hor said.
AmBank group managing director of markets Yvonne Phe said the rates/credit business was still vibrant especially in times of low rates and companies were still looking at infrastructure projects.
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