THE Malaysian banking industry has evolved over the years and the business model for foreign banks operating in the country has been transformed as a result of the landscape change.

Today, foreign banks have to compete a lot harder in market segments in which they once had the lead. Major Malaysian players like Malayan Banking Bhd and CIMB Group Holdings Bhd, which have also become regional banks, have eaten into their market share.

At present, there are 19 foreign commercial banks and four international Islamic banks in Malaysia.

The total assets of foreign commercial and Islamic banks have increased 60% over five years to RM486.1 billion as at February 2015. Nevertheless, this is still small compared with that of local banks, which stood at RM1.7 trillion.

Standard Chartered Bank Malaysia managing director and CEO Mahendra Gursahani says the group has been steadily increasing its asset base despite the competition and uncertain global and domestic economic conditions.

“We look forward to consolidating our position as the economy steadies and grow even more robustly,” he tells The Edge.

“Malaysia’s banking industry has undergone a great deal of structural transformation and consolidation since market liberalisation. We are now operating in an environment where margins are coming under intense pressure from competition, compounded by non-traditional players entering the payment space. In addition, there are pressures from holding higher capital and liquidity thresholds as well as the anticipation of slower loan growth in the near term.”

He says their focus will be on asset quality and managing cost through operational efficiency.

OCBC Bank (M) Bhd CEO Ong Eng Bin says the consolidation of the banking sector has resulted in a more robust financial system and banks are now in a stronger position to manage external shocks.

“During the process of consolidation, there were mergers of banks and finance company subsidiaries, and some became part of the local banks we see today. Foreign banks usually have the greater ability to facilitate cross-border transactions and investment flows, and being regional or international banks, they are able to leverage the best practices and experience gained from other markets where they have been proven successful,” he says.

“The banking industry has evolved greatly, and with Bank Negara Malaysia promoting a sound financial structure, a lot of effort has been made to reduce fragmentation in the banking system and to create financial institutions that are well-capitalised and efficient to compete on the international front.”

According to Bank Negara’s Financial Blueprint 2010-2020, the risk-weighted capital ratio of domestic banks has improved from 11.7% in 2000 to 14.2% in 2010 while foreign banks saw their ratio increase from 14% to 14.6%.

Domestic banks’ asset quality also improved, with their net non-performing loan ratio dropping from 9.2% in 2000 to 2.6% in 2010. Foreign banks saw their ratio improve to 5.7% from 1.2%. Return on assets for domestic banks rose from 1.1% to 1.6% while that for foreign banks dropped from 2.1% to 1.6%.

In terms of return on equity, domestic banks saw an increase to 16.7% in 2010 from 13.3% in 2000 while foreign banks experienced a decline to 19.6% from 26.4%.

Ong observes that with tighter regulations on branch expansion, foreign banks will have to learn to compete with fewer touch points with customers by focusing on the non-mass customer segments.

“With mergers and acquisitions, the local banks have become bigger and are able to provide comprehensive banking and financial services to all types of customers. Their extensive branch networks and local bank status also give them an upper hand to garner cheaper deposits,” he says.

“The strengthening of the local banks and their ability to venture abroad bode well for the Malaysian economy, which has limitations to support the growth of our corporations. Competition among domestic and foreign banks also brings about higher standards that will benefit everyone — for example, banks attracting talent who want regional exposure.”

There was a time when foreign banks were viewed as the “big brothers” in the local banking scene where they dominated the market. However, after the 1997/98 Asian financial crisis and a consolidation of the sector, local banks started beefing up themselves and some went on to build regional platforms by venturing out of the country.

By strengthening their balance sheets and establishing themselves regionally, Malaysian banks are now giving their foreign competitors here a run for their money. Today, local banks like Maybank and CIMB have footprints in most Asean countries.

Standard Chartered’s Mahendra says foreign banks with cutting-edge technology and better marketing tools might have had an advantage over local banks, but over the years, local banks have narrowed the gap substantially through investment in technology and employing talent.

“With a much smaller distribution capability, international banks such as ourselves have to leverage what we have more effectively. This is through a clear strategy, digital delivery of our products and services, superior customer service and, above all, leveraging our network in Asean and beyond. This is our differentiation factor that is so relevant to many of our customers,” he says.

With a more open financial system, Ong says any global development will have an impact on the way domestic markets operate. “Slow recovery in some of the developed economies, volatility in the commodity markets and geopolitical uncertainties are some of the key challenges faced. With the global environment evolving so rapidly, change has become the new norm with increased volatility.

“The cost of compliance has also increased and investment in technology continues to be very high, and banks have to grapple with higher capital buffers that will ultimately affect returns to stakeholders. On the flip side, Malaysia remains a country that can continue to generate a decent growth rate of 4% to 5%, which augurs well for financial service players such as banks.”

Mahendra opines that the key challenges faced by the sector are changes in the operating and regulatory landscape as well as the perennial “war for talent”. “In addition, the very volatile financial and currency markets require quick thinking and a high degree of alertness to seize opportunities and avoid undue credit, market and operational risks.”

With the Asean Economic Community becoming a reality soon, Ong says it should intensify competition in the region, not just involving banks but also talent and business opportunities.

“Banks that operate efficiently with a low cost-to-income ratio and are able to generate high returns on equity will have an advantage over their competitors. This also means that banks will now need to respond quickly to changes as competition will arise not only locally but also regionally. The drive for regional economic prosperity will benefit such banks as a whole,” he adds.

Some foreign banks have been operating in Malaysia for more than 100 years. Both OCBC and Standard Chartered can trace their roots in the country to Penang. OCBC’s Penang branch started operations in 1917 as part of the then Ho Hong Bank and Standard Chartered opened its first branch in 1875 on Beach Street. Citibank has been in Malaysia for 56 years.

This article first appeared in The Edge Malaysia Weekly, on May 11 - 17, 2015.

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