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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Haegin who wrote (3593)	5/14/1998 6:27:00 PM
From: Stitch	Read Replies (2) \| Respond to of 9980

Thread, This was passed on to me by a friend from another thread. Very interesting observations on Malaysian banking. Actually not as bad as I expected if accurate. Best, Stitch Malaysia Banking Sector Report Published By Fitch IBCA FITCH IBCA FINANCIAL WIRE (FFW)--NY--5/7/98: In order to recapitalize its banking sector, it is stimated that it would cost Malaysia between 1.3% and 4% of its annual gross domestic product (GDP) over the next two years, according to the Fitch IBCA special report, "Malaysia: The Cost Of Recapitalizing The Banking Sector," published today. The Malaysian economy's spectacular growth over nine successive years has come to an end and the banking sector will be severely tested by asset quality problems. Nonetheless, the cost of recapitalizing Malaysian banks is substantially below the 15% of GDP estimated by the International Monetary Fund for recapitalizing the Indonesian banking sector. Although Malaysia's external debt is less of an issue, domestic indebtedness is very high and the corporate sector is facing both slower cash flows and sharply increased debt servicing costs. With an average lending rate of 13.3% at the end of March 1998, interest rates are at their highest levels since rates were deregulated in 1989. Several large conglomerates and their politically well connected owners are on the brink of insolvency due to the structure of their business empires that were built largely through bank borrowings and collateralized by shares. The precipitous decline of the stock market has not only wiped out the equity of holding companies and their owners, but loans are sufficiently under-collateralized that banks have started to call them in and initiate legal action. Malaysia's government has already indirectly intervened to support several indigenous Malay conglomerates, because their failure threatens the New Development Policy, the country's attempt to redress the economic imbalances between different racial groups that has maintained social stability since the bloody racial riots of 1969. The collapse of conglomerates may negatively effect the ringgit and cause a further decline of the stock market. Furthermore, banking sector risks are steadily increasing in the overbuilt real estate sector, which is facing both a glut in supply and shrinking demand. Fitch IBCA expects real estate sector defaults to escalate significantly over the next few months. Nonperforming loans(NPLs) are unlikely to rise to the levels of the previous recession, due to better lending controls and more stringent supervision by the central bank. Fitch IBCA estimates that NPLs of the banking sector, which are rising rapidly, will reach 15% of loans by year-end and peak at about 20% in 1999. Based on this, it estimates that the banking sector's pretax losses will amount to about MYR10 billion between 1998 and 1999. The banking sector's average capital adequacy ratio would thus fall to an average of 7.1% and MYR4 billion, or just about 1.3% of GDP, would be required to restore the sector's average capital adequacy ratio to 8%. In a worst case scenario, Fitch IBCA estimates that NPLs would rise to over 25% of loans and recapitalization costs would reach MYR11 billion or just under 4% of GDP.