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Friday, May 1, 2009

Financial Services Liberalisation

Competition in financial sector to intensify gradually. Following the
liberalization of equity ownership requirements in 27 non-financial
services areas last week, the Government announced liberalization
measures for the financial sector yesterday. The ‘gradualist’ approach
does not come as a surprise, as we enter the final phase of the
Financial Sector Master Plan which has laid out a road map for greater
foreign participation by 2010.
Up to seven more foreign owned commercial/Islamic banks. The
liberalization measures encompass three areas, namely:
 up to seven new licenses for foreign commercial and Islamic banks
– four in 2009 and three in 2011, which may be 100% foreign
owned, and two more takaful operators;
 increase in foreign equity limits in domestic insurance/takaful,
investment banks and Islamic banks to 70% (from 49% previously);
 greater operational flexibility for locally-incorporated foreign
commercial banks, mainly in branch openings.
Existing domestic commercial banks’ foreign ownership limit of 30% is
unchanged. Details of the measures are summarized in page 2.
Generally, in line with the “managed” approach in the past, as
opposed to the “Big-Bang” approach. This fits in with the national
development agenda of enhancing contribution of the services sector
as a source of growth, employment, investment and trade, as well as
laying the foundations for the domestic financial services sector to take
advantage of the eventual recovery in the global economy and
investment flows.
Gives local banks “some time” before the “crunch” in 2011. On the
outset, the moves imply increased competition for the domestic
commercial banks. But this will not come immediately as the two new
commercial banking licenses in 2009 to foreign players are for
"specialized expertise", relating to “industry-specific financing” like for
shipping, technology, infrastructure and agro-based. Also, greater
operational flexibility for foreign commercial banks for micro-financing
should not have an immediate material impact on the domestic banks.
In essence, the domestic commercial banks have a 1½ year time frame
to raise their competitiveness and efficiency before the opening of the
banking sector to three world-class commercial banks in 2011.
The liberalisation measures are LT positive in raising Malaysia’s
competitiveness in the financial services sector. We however,
maintain Underweight on the Banking sector. The immediate issues
are on asset quality, as the global and domestic economy head for a
slowdown. We stay concerned over rising NPLs and equity cash calls
to boost core capital (although not needed for now). The main risk is a
more severe and protracted economic downturn, with spikes in
unemployment (3.7% @ end-2008), and asset deflation.

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