## _cr1495 ## Source details **Canonical URL:** [_cr1495](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1495.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1495.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1495.pdf.json) --- ### Introduction and key findings - Focus: inward spillovers to the Malaysian financial system through (a) presence of foreign banks and potential spillovers from problems abroad, and (b) overseas operations of Malaysian banks. - Main findings: - BIS-reported foreign bank claims are over 50 percent of GDP. - Deleveraging pressures associated with eurozone troubles do not appear as big a vulnerability for Malaysia as for some other countries given past crisis experience, large local-currency content, and the importance of UK and Singapore banks. - Prudence warranted: continue monitoring developments closely, especially any ratings downgrades of UK banks with a systemic presence in Malaysia. - Malaysian banks’ overseas exposures appear manageable by international standards, at around 30 percent of both GDP and of operating income currently. - Likely growth in overseas exposures given ASEAN Economic Integration and opportunities arising from European bank deleveraging. - Rapid bank expansion in new markets can pose challenges if bank risk management and supervisory monitoring lag; uneven supervisory quality in host markets can mask vulnerabilities. - Policy recommendation summary: Bank Negara Malaysia (BNM) should continue to monitor overseas operations closely (especially rising loan-to-deposit ratios) and enhance coordination with host supervisors. ### Foreign banks’ presence and domestic footprint - Historical presence and structure: - Foreign banks have been in Malaysia for over a century; all commercial banks must be locally incorporated. - Longest established: U.K. banks HSBC and Standard Chartered. - Singaporean banks with extensive branch networks: OCBC and UOB. - Citibank: significant presence focused on credit cards and foreign-exchange market participation. - Local incorporation mandatory under the 1989 Banking and Financial Institutions Act; foreign parents allowed to keep 100 percent of the equity. - Market shares and liberalization: - Foreign banks hold around 20 percent of the assets and deposits of the Malaysian banking system. - Since 2000, total foreign claims have hovered above 50 percent of GDP, with U.K. claims at around 15 percent of GDP. - Singaporean bank claims (not published by BIS but included in totals) are about 20 percent of GDP. - Since late 2009, BNM liberalized entry: seven new entrants joined the existing 14 foreign banks. - ICBC awarded a commercial bank license in November 2009. - Indian International Bank (M) Bhd awarded a commercial bank license in April 2010. - Mid-2010 licenses issued to five other foreign bank institutions, including Mizuho Corporate Bank, Sumitomo Mitsui Banking Corp, and BNP Paribas. - In 2011, all foreign banks allowed to open up to eight new branches. ### Historical evolution and comparative patterns - Long-term trends: - Japanese banks expanded claims on Malaysia up to a peak of around 20 percent of GDP in the mid-1980s. - From the early 1990s, Eurozone banks and U.S. banks expanded credit provision until the AFC. - After the AFC, exposure of Eurozone and U.S. banks generally diminished; UK and Singaporean banks retained preeminence in the 2000s. - Comparative metrics: - Emerging Asia: foreign bank claims on Emerging Asia have been on a secular decline since the mid-1990s; Japanese claims on Emerging Asia reached nearly 16 percent of destination country GDP in 1995. - Latin America: foreign bank claims halved after the Latin American debt crisis, reaching a trough below 15 percent of destination country GDP in the mid-1990s, then rose as Eurozone banks expanded. - Foreign bank claims on Emerging Asia and Latin America as shares of destination country GDP are around half of those on Malaysia. - In CESE, foreign banks control on average 64 percent of domestic banking system assets (around 35 percent in Russia, Turkey, and Slovenia, and greater than 80 percent in Bosnia, the Czech Republic, Croatia, and Slovakia). - The ratio of foreign liabilities of deposit taking banks to domestic claims in Malaysia has always been lower than 12 percent. ### Currency composition of foreign claims - De-dollarization trend and implications: - Share of local currency claims in foreign bank exposures to Malaysia increased from around 20 percent to over 60 percent since the AFC. - Malaysia has a much higher share of local currency lending by foreign banks than the norm in Asia or Emerging Europe (where the share is around 40 percent). - Likely driver: increasing role of local subsidiaries in local currency lending given sizable Ringgit deposit bases replacing cross-border U.S. dollar lending. ### Likelihood and impact of foreign bank deleveraging - Historical precedents: - Latin American debt crisis: U.S. bank claims on Latin America fell from around 15 percent of Latin American GDP at the peak in 1983 to less than 5 percent of GDP by 1990. - Japanese banking crisis (1990s): dramatic withdrawal from East Asia; Japanese claims on financial centers and East Asian countries fell precipitously. - Malaysia-specific observations: - Following the AFC and the GFC, foreign banks (including eurozone and U.K. banks) delevered more from Malaysia than from many other emerging markets. - Deleveraging from Malaysia was particularly evident among eurozone banks during the GFC. - Most eurozone bank claims on Malaysia are likely holdings of government bonds and BNM bills since only one eurozone bank historically had a subsidiary in Malaysia and cross-border direct lending to corporates is perceived to be small. - Implications: - Deleveraging risks exist but are mitigated by high local-currency content of foreign claims and the significant presence of UK and Singapore banks. - It would take a sizable and protracted retrenchment to materially affect domestic credit provision. - Continued monitoring of foreign bank behavior, especially in stress episodes and any systemic problems in parent jurisdictions, is important for financial stability. ### Overseas operations of Malaysian banks: expansion, performance, and risks - Scope and scale: - Over the last decade, Malaysian banks have expanded abroad significantly, led by CIMB and Maybank; the 6 biggest banking groups in Malaysia all have an overseas presence (Maybank, CIMB, Public Bank, Hong Leong, RHB Capital, and AmBank). - Overseas presence includes branches, subsidiaries, representative offices, and associate companies in 20 countries; biggest branches and subsidiaries are in ASEAN (Indonesia, the Philippines, Singapore, and Thailand) and Hong Kong. - Key statistics as of 2011 and related metrics: - Group B had the largest share of assets abroad (around 40 percent). - Group E had the largest share of profits coming from overseas (around 35 percent). - The main overseas exposures of the top 3 Malaysian banks are just below 30 percent of GDP. - Overseas assets account for 19 percent of banks total assets. - Operating income from abroad comprises 30 percent of total operating income. - Traditional lending activities account for around ¾ of the assets of overseas operations. - About 90-percent of funding comes from deposits in aggregate. - Of the deposit base, an average of around 60 percent is retail. - Soundness indicators are generally solid for overseas operations, though NPLs in one Thai operation are elevated. - Loan-to-deposit ratios have been creeping up and are close to or above 1 for a number of overseas operations. - International comparisons: - Austrian banks: in 2006 total assets of the six largest Austrian banks in CESE were equivalent to over 60 percent of home nation GDP and generated about 40 percent of bank profits. - Japanese banks: 60 percent of foreign claims on the U.S., U.K., Germany, and France; share of foreign claims on Asia nearly doubled to 16 percent during 2004–11. - Singaporean banks: over the last 5 years, the share of loans located outside Singapore increased to over 50 percent for DBS and OCBC; for UOB about 40 percent. - Spanish banks: overseas exposures of around 100 percent of home nation GDP; international businesses contribute around 75 percent of profits for BBVA and BSCH. - U.K. banks: just below 50 percent of loans outside the U.K.; around 400 percent of home nation GDP of assets held abroad; HSBC and SCB have greater than 80 percent of assets abroad. ### Lessons, vulnerabilities, and supervisory implications - Benefits and risks of overseas expansion: - Diversification benefit: helps maintain profitability and reduce exposure to domestic economy. - Common shocks risk: regional expansion concentrated in ASEAN could expose banks to regional shocks despite heterogeneity across countries. - Operational risk: unfamiliarity with local markets, cultures, and administrative processes. - Supervisory monitoring and preparedness: - BNM obtains detailed monthly information on main overseas operations and has held supervisory colleges for three banks with significant regional exposures. - BNM conducts annual overseas inspections of key operations. - Exposures are expected to increase with ASEAN Economic Integration by 2015 and opportunities from European banks deleveraging. - International experience suggests reviewing internal risk management and supervisory responses when the share of overseas assets passes around one third of total assets. ### Policy recommendations - Monitoring and risk assessment: - Monitor developments closely, with emphasis on ratings downgrades of UK banks with systemic presence in Malaysia. - Continue close monitoring of Malaysian banks’ overseas operations, focusing on rising loan-to-deposit ratios in overseas units (including by currency) and concentration levels in big ASEAN countries. - Supervisory coordination and capacity: - Enhance coordination with host supervisors for Malaysian banks’ overseas operations. - Strengthen risk management and supervisory monitoring to keep pace with rapid expansion into new markets, particularly within ASEAN. - Preparedness and strategic planning: - Recognize that exposures currently appear manageable (around 30 percent of GDP and of operating income) but are likely to grow; supervisory frameworks should anticipate this growth. - Deepen home-host cooperation in supervision and crisis prevention, consistent with the Financial Sector Blueprint, particularly as overseas assets grow. *Source: IMF staff analysis in _cr1495 (selected chapter).* ### References ............................................................................................................. ### _cr1495 - References ............................................................................................................. ### Introduction and key findings - Focus: inward spillovers to the Malaysian financial system through (a) presence of foreign banks and potential spillovers from problems abroad, and (b) overseas operations of Malaysian banks. - Main findings: - BIS-reported foreign bank claims are over 50 percent of GDP. - Deleveraging pressures associated with eurozone troubles do not appear as big a vulnerability for Malaysia as for some other countries given past crisis experience, large local-currency content, and the importance of UK and Singapore banks. - Prudence warranted: continue monitoring developments closely, especially any ratings downgrades of UK banks with a systemic presence in Malaysia. - Malaysian banks’ overseas exposures appear manageable by international standards, at around 30 percent of both GDP and of operating income currently. - Likely growth in overseas exposures given ASEAN Economic Integration and opportunities arising from European bank deleveraging. - International experience: rapid bank expansion in new markets can pose challenges if bank risk management and supervisory monitoring lag; uneven supervisory quality in host markets can mask vulnerabilities. - Policy recommendations: BNM should continue to monitor overseas operations closely (especially rising loan-to-deposit ratios) and enhance coordination with host supervisors. ### Foreign banks’ presence and domestic footprint - Historical presence: - Foreign banks have been in Malaysia for over a century; all commercial banks must be locally incorporated. - Longest established: U.K. banks HSBC and Standard Chartered. - Singaporean banks with extensive branch networks: OCBC and UOB. - Citibank: significant presence focused on credit cards and foreign-exchange market participation. - Local incorporation mandatory under the 1989 Banking and Financial Institutions Act; foreign parents allowed to keep 100 percent of the equity. - Market shares: - Foreign banks hold around 20 percent of the assets and deposits of the Malaysian banking system. - Since 2000, total foreign claims have hovered above 50 percent of GDP, with U.K. claims at around 15 percent of GDP. - Singaporean bank claims (not published by BIS but included in totals) are about 20 percent of GDP. - Liberalization and new entrants: - Since late 2009, BNM liberalized entry: seven new entrants joined the existing 14 foreign banks. - Industrial and Commercial Bank of China (ICBC) awarded a commercial bank license in November 2009. - A consortium (Bank of Baroda, Indian Overseas Bank, Andhra Bank) jointly established Indian International Bank (M) Bhd awarded a commercial bank license in April 2010. - Mid-2010 licenses issued to five other foreign bank institutions, including two Japanese banks (Mizuho Corporate Bank and Sumitomo Mitsui Banking Corp) and BNP Paribas. - In 2011, all foreign banks allowed to open up to eight new branches. ### Historical evolution of foreign bank claims on Malaysia and region - Long-term trends: - Japanese banks expanded claims on Malaysia up to a peak of around 20 percent of GDP in the mid-1980s. - From the early 1990s, Eurozone banks and U.S. banks expanded credit provision until the AFC. - After the AFC, exposure of Eurozone and U.S. banks generally diminished; UK and Singaporean banks retained preeminence in the 2000s. - Comparative regional patterns: - Emerging Asia: foreign bank claims on Emerging Asia have been on a secular decline since the mid-1990s; Japanese claims on Emerging Asia reached nearly 16 percent of destination country GDP in 1995. - Latin America: foreign bank claims halved after the Latin American debt crisis, reaching a trough below 15 percent of destination country GDP in the mid-1990s, then rose as Eurozone banks (particularly Spanish ones) expanded. - Overall, foreign bank claims on Emerging Asia and Latin America as shares of destination country GDP are around half of those on Malaysia. ### Currency composition of foreign claims - De-dollarization trend: - Share of local currency claims in foreign bank exposures to Malaysia increased from around 20 percent to over 60 percent since the AFC. - Malaysia has a much higher share of local currency lending by foreign banks than the norm in Asia or Emerging Europe (where the share is around 40 percent). - Likely driver: increasing role of local subsidiaries in local currency lending given sizable Ringgit deposit bases replacing cross-border U.S. dollar lending. ### Likelihood and impact of foreign bank deleveraging - Historical precedents: - Latin American debt crisis: U.S. bank claims on Latin America fell from around 15 percent of Latin American GDP at the peak in 1983 to less than 5 percent of GDP by 1990. - Japanese banking crisis (1990s): dramatic withdrawal from East Asia; Japanese claims on financial centers and East Asian countries fell precipitously. - Malaysia-specific deleveraging observations: - Following the AFC and the GFC, foreign banks (including eurozone and U.K. banks) delevered more from Malaysia than from many other emerging markets. - Deleveraging from Malaysia was particularly evident among eurozone banks during the GFC. - Most eurozone bank claims on Malaysia are likely holdings of government bonds and BNM bills (consistent with increased nonresident share of official fixed-income paper over the 2000s), since only one eurozone bank historically had a subsidiary in Malaysia and cross-border direct lending to corporates is perceived to be small. - Implications: - Deleveraging risks exist but are mitigated by high local-currency content of foreign claims and the significant presence of UK and Singapore banks. - Continued monitoring of foreign bank behavior, especially in stress episodes and any systemic problems in parent jurisdictions, is important for financial stability. ### Policy recommendations and supervisory priorities - Monitoring and risk assessment: - Monitor developments closely, with emphasis on ratings downgrades of UK banks with systemic presence in Malaysia. - Continue close monitoring of Malaysian banks’ overseas operations, focusing on rising loan-to-deposit ratios in overseas units. - Supervisory coordination and capacity: - Enhance coordination with host supervisors for Malaysian banks’ overseas operations. - Strengthen risk management and supervisory monitoring to keep pace with rapid expansion into new markets, particularly within ASEAN. - Preparedness: - Recognize that exposures currently appear manageable (around 30 percent of GDP and of operating income) but are likely to grow; supervisory frameworks should anticipate this growth. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1495.pdf* ### 13. While eurozone banks do not have particularly large claims on Asia or Malaysia ### _cr1495 - 13. While eurozone banks do not have particularly large claims on Asia or Malaysia ### Eurozone spillover risks and bank interconnectedness - Fund staff analysis suggests strong spillovers from eurozone G-SIBs to U.K. and U.S. G-SIBs, with limited spillovers to Asian G-SIBs (IMF 2012a). - U.K. banks and U.S. banks could experience spillovers from eurozone troubles; direct deleveraging pressures on Malaysia are likely to be contained. - The Singaporean and U.K. banks have by far the biggest claims on Malaysia (U.K. banks hold around ¾ of the European bank claims). - HSBC and Standard Chartered—individual banks with a systemic presence in Malaysia—have the lion’s share of their assets outside of Europe, the U.K, and the U.S.; as of end-2010, over 90 percent of Standard Chartered’s assets and around 70 percent of HSBC’s assets were outside of these three zones. - Singaporean banks are well capitalized, with core tier 1 capital adequacy ratios of around 11-12 percent at end-2011. ### Foreign banks’ performance in Malaysia and mitigating factors - Foreign commercial bank subsidiaries show strong performance and high return on equity; foreign banks generally have strong soundness indicators. - For the five banks with an important presence in Malaysia, assets and profits of Malaysian subsidiaries make up significantly less than 10 percent of consolidated group figures (except for the Singaporean banks). - Malaysia has one of the highest shares amongst emerging economies of foreign bank claims in local currency (around 60 percent). - These factors (strong subsidiary performance, regional profitability dynamics, and a high share of foreign claims in local currency) should mitigate pressures for banks to deleverage from Malaysia. ### Foreign bank share of Malaysian banking system and international comparisons - Over the last decade, the foreign bank share of banking system deposits and loans has increased marginally to just above 20 percent; around ¾ of these are with the U.K. and Singaporean banks. - BIS-reported foreign bank claims on Malaysia are over 50 percent of GDP. - Comparative metrics: - In CESE, foreign banks control on average 64 percent of domestic banking system assets (around 35 percent in Russia, Turkey, and Slovenia, and greater than 80 percent in Bosnia, the Czech Republic, Croatia, and Slovakia). - The ratio of foreign liabilities of deposit taking banks to domestic claims in Malaysia has always been lower than 12 percent. - Foreign bank claims in Malaysia are much lower than ratios seen in Emerging Europe and MENA. ### Historical evidence on deleveraging and domestic credit resilience - Two past periods with significantly negative growth rates of foreign claims: the AFC and the GFC. - During the AFC, banking system loans growth turned negative; during the GFC, banking system loan growth stayed significantly above 5 percent. - During the GFC the growth rate of loans by foreign banks fell significantly while that of domestic banks remained robust—reflecting stronger fundamentals of Malaysian banks heading into the GFC relative to the AFC. - Conclusion: It would take a sizable and protracted retrenchment to materially affect domestic credit provision. ### Overseas operations of Malaysian banks: expansion, performance, and risks - Over the last decade, Malaysian banks have expanded abroad significantly, led by CIMB and Maybank; the 6 biggest banking groups in Malaysia all have an overseas presence (Maybank, CIMB, Public Bank, Hong Leong, RHB Capital, and AmBank). - Branches, subsidiaries, representative offices, and associate companies in 20 countries form the overseas presence; biggest branches and subsidiaries are in ASEAN (Indonesia, the Philippines, Singapore, and Thailand) and Hong Kong. - As of 2011: - Group B had the largest share of assets abroad (around 40 percent). - Group E had the largest share of profits coming from overseas (around 35 percent). - The main overseas exposures of the top 3 Malaysian banks are just below 30 percent of GDP. - Overseas assets account for 19 percent of banks total assets. - Operating income from abroad comprises 30 percent of total operating income. - Asset composition and funding: - Traditional lending activities account for around ¾ of the assets of overseas operations. - About 90-percent of funding comes from deposits in aggregate. - Of the deposit base, an average of around 60 percent is retail. - Soundness indicators are generally solid for overseas operations, though NPLs in one Thai operation are elevated. - Loan-to-deposit ratios have been creeping up and are close to or above 1 for a number of overseas operations. ### International comparisons of bank overseas expansion - Austrian banks: in 2006 total assets of the six largest Austrian banks in CESE were equivalent to over 60 percent of home nation GDP and generated about 40 percent of bank profits. - Japanese banks: 60 percent of foreign claims on the U.S., U.K., Germany, and France; share of foreign claims on Asia nearly doubled to 16 percent during 2004–11. - Singaporean banks: over the last 5 years, the share of loans located outside Singapore increased to over 50 percent for DBS and OCBC; for UOB about 40 percent. - Spanish banks: overseas exposures of around 100 percent of home nation GDP; international businesses contribute around 75 percent of profits for BBVA and BSCH. - U.K. banks: just below 50 percent of loans outside the U.K.; around 400 percent of home nation GDP of assets held abroad; HSBC and SCB have greater than 80 percent of assets abroad. ### Lessons, vulnerabilities, and supervisory implications - General pros and cons of overseas operations: - Diversification benefit: helps maintain profitability and reduce exposure to domestic economy. - Common shocks risk: regional expansion concentrated in ASEAN could expose banks to regional shocks despite heterogeneity across countries. - Operational risk: unfamiliarity with local markets, cultures, and administrative processes. - Monitoring and supervisory actions: - BNM obtains detailed monthly information on main overseas operations and has held supervisory colleges for three banks with significant regional exposures. - BNM conducts annual overseas inspections of key operations. - Exposures are expected to increase with ASEAN Economic Integration by 2015 and opportunities from European banks deleveraging. - International experience suggests reviewing internal risk management and supervisory responses when the share of overseas assets passes around one third of total assets. ### Conclusions and policy recommendations - Key findings: - Foreign bank claims on Malaysia are relatively large but are mainly with U.K. and Singaporean banks. - BIS-reported foreign bank claims are over 50 percent of GDP. - Longstanding presence of foreign banks; all commercial banks must be locally incorporated. - The longest established banks are the U.K. ones, HSBC and Standard Chartered (claims of around 15 percent of GDP currently). - Two Singaporean banks, OCBC and UOB, have claims of around 20 percent of GDP currently. - Assessment of vulnerability: - Troubles in the eurozone will likely lead to some deleveraging, but the impact appears manageable given: - HSBC and Standard Chartered have the lion’s share of assets outside Europe, the U.K., and the U.S. - Singaporean banks are well capitalized and appear able to withstand major shocks. - A high share of foreign bank claims reside in local affiliates and in local currency. - Historical evidence from previous periods of foreign bank deleveraging. - Policy recommendations: - Continue close monitoring of developments, especially any ratings downgrades of U.K. banks with a systemic presence in Malaysia. - Monitor loan-to-deposit ratios of overseas operations (including by currency) and concentration levels in big ASEAN countries. - Deepen home-host cooperation in supervision and crisis prevention, consistent with the Financial Sector Blueprint, particularly as overseas assets grow. *Source: IMF staff analysis in _cr1495 (selected chapter).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1495.pdf_