Rip-roaring Malaysia, home of high growth, big capital markets and buildings tall enough to break records, has now decided that big is beautiful for banks, too. Merger and takeover fever has swept the stock market and the rumour mill is working overtime.
Already new financial supermarkets are taking shape, involving some of the biggest names in Malaysian business. The buzz words are global competition and regional expansion. But there's also an emphasis on prudent management, capital adequacy and grasping the concept of risk.
There are good reasons for caution. Malaysians remember only too well what happened the last time the banking sector got carried away. In 1983, the so-called Carrian affair, involving $1 billion in fraud losses at the Hong Kong subsidiary of Bank Bumiputra, Malaysia's second-largest bank, besmirched the country's reputation abroad. Two years later a severe local recession left banks with a massive overhang of property-related bad debt that almost felled the whole sector.
Bank Negara, Malaysia's central bank, is determined that nothing like it will ever happen again. But it is also keen that the reconstructed banking sector, now recovered from the 1980s' debacle, will become big enough to compete when foreign banks are allowed to expand domestically under new global free trade rules.
A financial supermarket, Malaysian style, contains not only a traditional grocery section a commercial bank but also a delicatessen offering other services broking, investment banking, insurance, leasing, property trust management, industrial and housing finance, consumer loans and credit cards.
Malayan Banking (Maybank) is the only existing institution already sufficiently large, multifunctional and well equipped to expand regionally. Officials at Bank Negara are eyeing a range of other financial companies from which to construct the new financial supermarkets that regional ambitions and foreign competition demand.
Pawnbroker banks
Two mergers and reconstructions are already under way, one involving the Sime Darby Group and the other a merger of Rashid Hussain Berhad, Malaysia's top broker, and DCB Holdings, Malaysia's fifth-largest commercial bank. A third group, Public Bank, already provides an array of financial services and with development is probably big enough to go it alone.
At least two other financial supermarkets may yet emerge as Malaysia's government tries to follow neighbouring Singapore's big four banks into regional markets such as Indochina, Indonesia and the Philippines.
Moves to reorganize the sector started when Bank Negara introduced new rules in 1994 establishing two tiers of banks. Those in tier one were required to have a minimum capital base of M$500 million (US$197 million) and were given the go-ahead to expand. Those in tier two banks with less capital were restricted in their operations. A revision to the formula for calculating lending rates issued in late 1995 also benefited big, efficient, well-managed banks and penalized small ones.
The government view was clear: consolidation and rationalization was the way to go and mergers of smaller banks were strongly encouraged. But few took the hint. Until late in 1995, an economy 20% the size of Australia's still had 24 local banks compared with Australia's four.
"Many are very small family-run Chinese concerns, not much above pawnbroker level," says John Carruthers, the Barclays representative in Malaysia. "The banking sector doesn't measure up to the progress made in other parts of the Malaysian economy."
Fragmentation and uncompetitiveness has meant that 24% of outstanding loans are on the books of big foreign banks such as HSBC, Standard Chartered, Citibank and the Development Bank of Singapore, all licensed since the days of colonial rule. Malaysian officials believe that when more are admitted under global free-trade liberalization, domestic banks could be rapidly overwhelmed by foreign competitors unless the local sector is strengthened.
The first to respond to the government's nurturing of bigger banks was Sime Darby, the largest Malaysian conglomerate, with sales of more than M$9 billion a year. It has interests in plantations and tyre-making, heavy equipment and vehicle sales, property and insurance. It is active in Australia, Hong Kong, the Philippines and Singapore as well as Malaysia.
In late 1995 Sime Darby paid M$1.3 billion for a 60% stake in United Malaysian Banking Corp (UMBC), Malaysia's fourth-largest bank with a capital base of M$333 million. It has several foreign branches, a successful brokerage in Kuala Lumpur and a finance company. The conglomerate quickly wooed Ismail Zakaria, a former star banker at DCB and Maybank, to run a renamed operation.
Relaunched by finance minister Anwar Ibrahim last December, the newly named Sime Bank announced plans to upgrade its capital base to M$500 million, make an initial public offer of shares next year, open 20 more branches and expand into regional business, where it will be helped by the conglomerate's clients and connections. By 1998, Sime Bank is expected to contribute almost 30% of Sime Darby's total profit.
The group has just started talks about a further merger: with Oriental Bank, currently controlled by Malaysian Industrial Development Finance (MIDF), the largest industrial financing company in Malaysia. Oriental Bank is Malaysia's thirteenth-largest commercial bank. It is active in the small and medium-sized business sector, earned M$139 million in 1995 and has been valued at M$1 billion.
Investors loved Sime Darby's strategy; its stock has jumped 55% since it purchased the bank 15 months ago. But they were even more impressed when one of the biggest names in Malaysian finance, Rashid Hussain, strode onto the merger stage last November to set up a deal involving Kwong Yik Bank and DCB Bank.
Quietly spoken, fast-talking, energetic and professional, Hussain is the whizz kid of the Malaysian financial sector, boasting some of the best connections in the country. He is close to former finance minister and prime ministerial adviser Daim Zainuddin and is married to Sue Kuok, daughter of Robert Kuok, Malaysia's richest industrialist.
He is also chairman of the executive committee at Khazanah, a two-year old state-owned body that invests up to M$40 billion of Malaysia's assets. Competitors view this appointment with envy, assuming that Hussain is privy to advance information on government strategies, such as privatizations, which could put him a step ahead of the market.