Central bank raises defence; weak currency

 

Malaysia banks told to set minimum CA ratio at 1.2% of total loans

PETALING JAYA: Banks have been told to have a minimum collective assessment (CA) ratio of 1.2% by the end of next year, sending a strong signal to the industry to improve its standards of prudence.

According to a circular from Bank Negara to financial institutions early last week, all banks are required to set aside a minimum of 1.2% of total loans effective Dec 31, 2015.

The requirement, effectively, will put a stop to the present situation where banks are left to set aside their CA ratio based on their own risk assessment of their asset profile.

“Most banks have maintained a CA ratio of lower than 1.2% because there is no minimum set by Bank Negara. This circular effectively sets the standard for a minimum requirement,” said a banker.

The CA ratio was previously known as the general provisions that all banks were required to adopt. The general provisions requirement was a minimum of 1.5% of total loans, a ratio set by the central bank.

However, after the introduction of the new accounting standards three years ago, the general provisions requirement was replaced with a CA ratio, with banks free to set their own ratio.

The central bank no longer set the minimum requirement for banks to comply with in regards to the provisions.

According to a research report by CIMB, banks that had a CA ratio of less than 1.2% as of September last year were Malayan Banking Bhd, Public Bank Bhd, Affin Bank Bhd and Alliance Bank Malaysia Bhd.

Bankers, when contacted, were divided on the impact that the requirement would have on their bottom lines.

According to one banker, the move to comply with the ruling will not impact profitability because the additional amount required to be set aside can be transferred from retained earnings.

“Funds out of retained earnings will not impact the profit and loss (P&L) account of banks. It’s not a P&L item,” he said.

However, it would affect the dividend payout ability of banks, added the banker.

Another banker said the financial institution was seeking clarification from Bank Negara on whether to set aside the provisions from its profits.

“If that were the case, then it would impact profitability,” said the banker.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said the background to the new requirement was that Bank Negara wanted to ensure that impairment provisions could keep pace with strong credit growth.

“In addition, the regulator would like to promote consistency in practices in ensuring adequate rigour and data quality in arriving at the appropriate level of collective impairment and the factors that are considered by banking institutions.

“Adequate impairment provisions serve as necessary buffers against potential credit losses; hence, they can reduce the likelihood of systemic risk for the banking sector,” he said in an e-mail response to StarBiz.

He said the sector might witness an increase in the overall level of impairment provisions at the industry level.

“Nevertheless, this should be seen positively, as the higher credit buffers would now render the sector stronger,” he noted.

CIMB Research in a report stated that the proposed new guideline could have a negative impact on banks based on its theoretical analysis.

It pointed out that several banks would have to increase their CA provisions under the new ruling and this would lead to a rise in the banks’ overall credit costs.

“Those which do not meet the requirements would have to increase their CA (and ultimately credit cost) in 2014-2015, even if their asset quality is improving. For banks with a CA ratio of above 1.2%, the new ruling would limit the room for them to further reduce their CA ratios,” CIMB Research explained.

According to CIMB Research’s estimates, banks’ net profits could be lowered by around 0.5% (for Hong Leong Bank Bhd) to 11% (for Public Bank) in 2014 to 2015 if a minimum requirement of 1.2% for the CA ratio were implemented.

Another analyst, however, is of the view that the new requirement from Bank Negara would have a negligible impact on the operations and earnings of banks.

“We think it is not a major concern for most banks because, firstly, the grace period for the implementation of the new guideline is long. Secondly, the minimum ratio of 1.2% will not comprise of only the CA component alone, but is also a combination of the CA and the statutory or regulatory reserve.

“In general, we see the new guideline as a measure to standardise the way banks gauged their capital buffers.
“The bottom line is, we think the new guideline will only serve to further strengthen banks’ capital buffers,” the analyst added.

By Cecilia Kok and Daljit Dhesi StarBiz, Asia News Network

Silver lining in weak currency

Weaker currencies are a boon for Malaysia and Indonesia, helping to tip the balance of trade back in their favour, as exporters benefit from rising demand for goods and commodities from advanced economies, coupled with steady growth in China.

The favourable trade surplus, economists said, would ease the pressure on these emerging countries’ deteriorating external accounts, which is a major sore point for foreign investors.

They added that rising exports would provide the much-needed tailwind for Asian economies to sustain growth even as domestic demand moderated.

Malaysia on Friday reported a 2.4% growth in exports in 2013, backed by a 14.4% jump in December that exceeded the market’s expectation by a wide margin.

“We still maintain our long-term view of impending growth momentum in the coming quarters,” Alliance Research economists Manokaran Mottain and Khairul Anwar Md Nor said in a report.

They predicted exports in 2014 to grow at a faster pace of 5%, backed by steady but improving export demand from advanced economies.

While imports grew at a faster pace than exports in 2013, Malaysia continued to enjoy a strong trade surplus.

The favourable trade surplus combined with an anticipated smaller services deficit and transfer outflows would translate into a larger current account surplus of RM16.7bil or 6.6% of gross domestic product (GDP) in the last quarter of 2013.

“The cumulative current account surplus is estimated to reach RM37.8bil or 3.9% of GDP in 2013, helping to assuage fears of a current account deficit,’’ CIMB Research economist Lee Heng Guie said.

This, he said, was positive for the ringgit and the capital market.

The ringgit, along with other emerging Asian currencies, have been under pressure since June last year after the US Federal Reserve began talking and later started to reduce its quantitative easing (QE).

The US Fed first pared its monthly bond purchases programme from the original US$85 billion a month to $75 billion in January. This was cut further by $10 billion starting from February.

“Capital outflows from emerging markets are likely to continue in the months ahead as the Federal Reserve winds down its QE3 programme,” said Macquarie Bank Ltd’s Singapore-based head of strategy for fixed income and currencies Nizam Idris.

Fears about the US Fed tapering down the supply of cheap money to the market first surfaced in May last year and it triggered a huge sell-off on emerging market assets.

Countries such as Indonesia and India had seen their currencies depreciate the most in 2013, Both economies had wide current account deficits.

Last year, the Indian rupee plummeted the most in two decades, while rupiah depreciated by about 20% against the US dollar over the past 12 months.

Not helping emerging market currencies is the recovery in advanced economies, such as a rebound in economic growth in the US which rose by 3.2% in the fourth quarter of last year.

But if economic recovery in the US and eurozone were to stay on course, so would demand for cheaper emerging market exports. This, in turn, would help shrink the huge current account deficits that had hobbled countries such as Indonesia, India and Turkey.

For many emerging economies, 2014 had gotten off to a grim start.

Concern over the Chinese economy’s marked slowdown and the Argentine peso’s steep slide in January has brought upon renewed pressure on the currency market.

But the current market volatility does not portend weaker growth.

CIMB Research in Indonesia observed that the strains in the financial markets did not translate into a significant slowdown in the economy as the country’s real GDP growth accelerated to 5.7% in the last quarter of 2013.

Its exports surged in December, while imports slowed on the weaker rupiah. This helped to widen its trade surplus to $1.52 billion, the largest since November 2011.

The favourable trade numbers narrowed its current account deficit of $4.06 billion.

CIMB Research expects growth in Indonesia “to trough” in the first half of 2014 as the lagged effect of the rupiah depreciation and Bank Indonesia’s aggressive policy-tightening cycle in June-November 2013 works through the economy.

“Pre-election bounce in consumption should offset the weakness, allowing Indonesia to post 5.6% GDP growth in 2014,’’ it said.

Malaysia, too, is on track for sustained growth. CIMB Research projected GDP growth in the third quarter would probably expand by 5.3%, taking the full year growth rate to 4.7% for 2013. - The Star/ANN

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Challenging times for central banks all over the world to rejuvenate global economy

Banks must find balance between continuing to support activity without sowing seeds of another asset bubble

The decade and a half after the tearing down of the Berlin Wall was a golden age for central banks. It was a time of strong growth and low inflation presided over by committees of technocrats charged with taking the politics out of the messy business of setting interest rates.

The European Central Bank (ECB) was created, the Bank of England was granted operational independence and Alan Greenspan ruled the US Federal Reserve.

Mervyn King, who retired last year after a 10-year stint in charge at Threadneedle Street, described the period from the mid-1990s to the mid-2000s as the Nice decade. That stood for non-inflationary continual expansion and in the west was primarily the result of cheap imports flooding in from China, which kept the cost of living low and enabled central bankers to hit their inflation targets while keeping borrowing costs down.

Times have changed. The six and a half years since the financial markets froze in August 2007 have been anything but nice. Greenspan is no longer called the Maestro – the title of a hagiography by Bob Woodward before the sky fell in – and is instead vilified as a serial bubble blower.

Central banks found that their traditional policy instruments were ineffective as the banks tottered in the autumn of 2008. They resorted to more potent weapons: dramatic cuts in interest rates, the creation of money through the process known as quantitative easing; inducements to persuade banks to lend; forward guidance on the expected path of interest rates to reassure individuals and companies that the cost of borrowing would stay low.

There was no 1930s-style slump and the global economy bottomed out around six months after the collapse of Lehman Brothers in September 2008. But recovery was slow by historical standards and the global economy has displayed signs of being addicted to the stimulants provided by central banks.

All of them will be under scrutiny in 2014 as the world's central bankers seek a way of getting the balance right in continuing to support activity without sowing the seeds of another asset bubble.

Get it right and the reputation of the Fed, the ECB, the Bank of England, the Bank of Japan (BoJ) and the People's Bank of China (PBoC) will be burnished. Get it wrong and the history books will look back on the crisis and its aftermath as the years when central banks lost the plot and saw their credibility shattered.

The Federal Reserve (US)

The Fed made its intentions clear last month when it announced it was scaling back its quantitative easing programme from $85bn a month to $75bn, with further tapering due to take place during 2014. At the same time, the US central bank softened its stance on interest rates and said unemployment will have to fall to 6.5% – and probably lower – before the cost of borrowing is raised.

The low level of inflation means that policy can remain stimulative under its new chairman, Janet Yellen, but with growth strengthening, the Fed has to beware repeating Greenspan's mistake in the early 2000s when he left rates too low for too long.

Dhaval Joshi of research house BCA said: "From January the Fed is going to reduce the pace of its asset purchases and shift the policy onus to its forward guidance on interest rates, relying on the credibility of its words and promises. As we are in uncharted territory, the eventual market reaction is unclear, and there is certainly the possibility of disruption."

The European Central Bank (ECB)

After a quiet 2013, the ECB has a number of big calls to make in the coming year. Not only is the recovery from a long double-dip recession tepid but the euro area as a whole is perilously close to deflation. Greece and Cyprus are already seeing the annual cost of living fall. So the first question for ECB president Mario Draghi is whether to seek to stimulate the euro area economy through quantitative easing – QE – just at the moment the Fed is tapering away its programme.

A second, linked issue is the strength of the euro, which threatens to choke off exports. David Owen of Jefferies says the ECB has two possible policy options: QE or co-ordinated intervention to weaken the currency. Markets will also pay close attention to the ECB's asset quality review of European banks, when it has to decide whether to come clean about the capital shortfalls many are believed to face.
If Draghi is too opaque he will be accused of a cover-up; equally, he will get the blame if a fully transparent approach leads to a run on banks and – because they are large holders of euro-area government debt – drives up sovereign bond yields.

The People's Bank of China(PBoC)

The challenge for the PBoC is simple: remove the credit excesses of the world's second biggest economy without causing a hard landing. November's third plenum of the Communist party in Beijing set the Chinese economy on a liberalisation course, a move welcomed by most analysts in the west as likely to ensure the long-term sustainability of growth.

In the short term, though, there is the little matter of easing growth back from the 10% per annum of recent years to 6.5% to 7%. On the plus side, China still has a battery of credit controls that will provide protection against mass capital flight if things start to get sticky; on the debit side, the vast quantity of credit pumped into the economy in 2008–09 has led to an overheated commercial property market, heavily indebted local government and industrial overcapacity.

An indication of the challenge facing the PBoC was provided by the spike in interbank rates to almost 10% last month – raising fears that a tightening of policy is causing a credit crunch for the banks.

The Bank of Japan (BoJ)

Japan is a warning to the ECB of what can happen if deflation is allowed to set in. Just over a year ago, Japan's prime minister, Shinzo Abe, announced a "three-arrow" strategy that became known as Abenomics: radical monetary easing from the BoJ, a Keynesian programme of public works, and structural reform.

In the early stages of the programme, the BoJ is doing the heavy lifting, using negative interest rates and quantitative easing to drive down the value of the yen, raise import prices and push inflation up towards its official target of 2%.

Japan is especially vulnerable to a slowdown in the global economy which, on past form, would attract speculative money into the yen, drive down prices and force the BoJ into even more unconventional measures.

The Bank of England (BoE)

Mark Carney's big innovation at Threadneedle Street has been forward guidance, which he used when governor of the Bank of Canada. This involves a commitment not to consider raising interest rates until unemployment falls to 7%, unless there is the risk either of inflation getting out of control or of a housing bubble that can't be tackled using measures specifically targeted on the property market. But the Bank has underestimated both the speed of the fall in the jobless rate and the pickup in the mortgage market. Carney's fear is that premature tightening of policy will kill off recovery in its early stages, but markets are starting to question whether he can hold the line until the next general election in May 2015.

Contributed by Larry Elliott The Guardian