Crunch Time For Malaysian Banking

A huge consolidation could finally turn the industry around

It's about time. Malaysia has been talking about restructuring its rickety banks into a few sturdy, competitive ones ever since the Asian financial crisis hit three years ago. But bitter rivalries among bank owners meant that the negotiations were all heat and no light. Last year, Prime Minister Mahathir Mohamad scrapped a plan put forth by Finance Minister Daim Zainuddin after ethnic Chinese bankers complained that it favored indigenous Malays. But on Feb. 14, the central bank, Bank Negara Malaysia, finally announced a breakthrough: The nation's 54 banks, brokerages, and financial institutions have picked their partners, and will merge into 10 banking groups by yearend.

Sound move, right direction. Malaysia is swamped with banks--and desperately needs a viable system. The main street in almost any major town is lined with storefront branches of money-losing institutions too small to make a go of it. The question is whether Bank Negara's plan will do the trick. The Finance Ministry wants to prevent the inevitable layoffs in such a big restructuring. And as many as half the new banks may be too small to compete in a market due to open up to foreign competition in 2003. "That would suggest another round of consolidation would be likely within three to five years," says Terry Chan, banking analyst at Standard & Poor's Corp., like BUSINESS WEEK part of The McGraw-Hill Companies, in Singapore.

TOUGH TARGET. Maybe. But on the surface, at least, Malaysia looks strong. Corporate earnings are expected to rise 25% this year, according to Salomon Smith Barney. The stock market is up 30% since the beginning of December. Emboldened by projections of 5.3% economic growth this year, Bank Negara wants bank loans to grow by 8%.

That could prove a tough target. Even though Danaharta, the government's asset management unit, has taken $8.3 billion in bad loans off the banks' hands, they still carry $18 billion in nonperforming assets on their books. Many companies, jolted out of their profligate pre-crisis borrowing habits, are as reluctant to seek credit as banks are to extend it. "Borrowers are looking to de-leverage themselves," explains a Malaysian merchant banker, "and a lot of them are moving into the bond market." The mechanics of the mergers themselves might also take a toll, says S&P's Chan. "Senior managers already are overstretched," he says. "The mergers might distract them from resolving their residual nonperforming loans."

Then there's the Malaysia Inc. factor. The country's biggest debtor is the Renong Group, which is linked to Daim; it owes 5% of Malaysia's outstanding debt, but has not gone through a government debt restructuring program. At the same time, Danaharta appears reluctant to auction off an estimated $25 billion of seized collateral, mostly real estate. Critics say that's because the sales could crush the market and hurt companies linked to the ruling party. Says one Hong Kong fund manager: "There has been a whitewash on the outside, but the rot's still on the inside."

If any of the 10 new groups is likely to thrive, it is the one led by Malayan Banking. With assets of $28 billion--a fifth of total banking assets in Malaysia--it is probably in the best position to start lending again. All the same, at a Feb. 11 press conference, Managing Director Amirsham Abdul Aziz admitted that "rationalization will have to take place"--despite official policy against layoffs. If the ban stands, it could blow a big hole in the banks' ability to keep costs down.

When Mahathir dropped Daim's plan last year, he faced a tough election in which the ethnic Chinese business community had votes he needed. Investors worry that political factors might again intrude this time. The key to getting reforms through will be a decision by Mahathir that he wants to give Malaysia a strong banking system before he steps down in five years time.

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