BRANCH BANKING | Roxanne Uy, China

Why are Malaysian banks aggressively expanding into China?

An analyst points out 4 reasons behind the expansion despite China's currently troubled banking sector.

Reports say Malaysian banks continue expansion into China while 5 of its “anchor banking groups” are already doing business in China.

So we asked analysts, What could be the reason behind Malaysian banks' aggressive expansion into China amidst the currently troubled banking sector in the country?

Ivan Tan, Director, Financial Services Ratings, Standard & Poor’s
We believe the larger Malaysian banks are diversifying into other countries to (a) position themselves as regional banks and (b) improve their net interest margins. Their expansion into China is part of their broader regional strategy to diversify into faster growing economies, including Indonesia and Thailand.

In our view, Malaysia is a matured banking system, and interest margins have come under pressure due to competition amidst a low interest rate environment. Regional economies offer the prospect of higher loans growth at more attractive margins.

We believe that Malaysian banks will adopt a sensible diversification strategy and continue to pursue regional expansion at a measured pace, taking into account the more risky operating environment in emerging market economies.

Oliver Wyman: Jason Ekberg, Consultant
As you highlight, there are questions about the Chinese banks sector, but where there are issues there are also opportunities! This is particularly true for those market entrants that have unique capabilities and strong liquidity positions to leverage, especially at a time when China is seeking to re-stimulate the economy.

Having said this, I’d highlight four points that are behind the expansion of Malaysian banks into China:
· Leveraging their strong liquidity positions – MY banks LTD ratio was a healthy 76% vs many other regional markets who have 90-100%+ LTDs
· Following their MY clients who are expanding into China as part of the ‘China growth story’
· Building their onshore capabilities to capture cross-border flows b/w MY and CN
· Pursuing opportunities in underserved segments in China such as tier 2 and tier 3 Cities and/or SME/MME clients

Liao Qiang, Director, Financial Services Ratings, Standard & Poor’s
We do not necessarily agree the term of ‘troubled banking sector’ for China. We see relatively high risk in China’s banking sector, as indicated by our economic risk score of ‘6’ on China under our BICRA framework. Credits risks have built up in the recent years along with strong credit growth in the system.

But there are many structural factors supporting the banks’ credit profiles, including still robust economy, strong system-wide liquidity, good net interest margins and sizable credit loss reserves among other things. 

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