Showing posts with label ICBC. Show all posts
Showing posts with label ICBC. Show all posts

Tuesday 24 November 2009

Welcoming a banking giant: ICBC’s entry into our domestic banking space

Welcoming a banking giant

Tags: Banking | OSK Research

Written by The Edge Financial Daily
Tuesday, 24 November 2009 10:47

Banking sector
Maintain overweight: Industrial Commercial Bank (ICBC), China’s biggest bank, has been awarded a commercial banking licence to operate in Malaysia. The announcement followed a bilateral agreement this month between the China Banking Regulatory Commission (CBRC) and Bank Negara Malaysia (BNM).

ICBC’s entry into our domestic banking space has been widely anticipated. The move is also in line with Phase 3 of the Financial Sector Master Plan, which essentially entails the introduction of new foreign competition that can either offer specialised services or world-class banks that can bring value proposition.

In our view, ICBC’s scale and the potential to boost investments by China companies in Malaysia were the main reasons for this decision. The weakened state of most western global financial institutions in addition to the deleveraging these banks are undergoing may have played a role in limiting the possibility of interested and suitable foreign candidates getting access to large scale and well capitalised Asian banks.

ICBC ranks among China’s “Big 4” state-owned commercial banks (the other three are Bank of China, Agriculture Bank of China and China CONSTRUCTION [] Bank). It is the largest bank in the world in terms of market value and also by deposits, and the most profitable bank globally (net profit: US$16.5 billion or RM55.77 billion). As of 2009, it had assets of US$1.6 trillion and more than 18,000 outlets, including 106 overseas branches and a US$1.3 trillion deposit base.

This is the first banking licence under the bilateral agreement. The licence awarded to ICBC is an extension of a bilateral agreement between CBRC and BNM that was announced earlier this month. This is separate from the five new foreign commercial banking licences to be awarded from 2010 to 2011 as part of BNM’s financial liberalisation measures announced in April this year.

However, given that most major global financial banks are still in the process of recapitalising and deleveraging, we think that the near-term impact of greater competition is likely to be muted. Malaysia’s relatively saturated banking market coupled with the prevailing global uncertainties could pose a setback to efforts to promote foreign participation, at least over the immediate to medium term.

Although the entry of new foreign players will increase the intensity of competition in the industry, we believe that BNM would have taken cognisance of the strength and capacity of our domestic banking institutions to compete in an environment of measured and gradual liberalisation.

More importantly, we believe that BNM will continue to favour gradual liberalisation as it continues to impose operational restrictions on the foreign banks, which would mute any short-term competitive impact on our domestic banking institutions.

Under the liberalisation measures announced in April this year, locally-incorporated foreign commercial banks will be allowed to establish up to four new branches in 2010 based on a distribution ratio of one urban/market centre, two semi-urban and one non-urban.

The more intense competitive landscape over the longer term is expected to enhance the industry’s efficiency and competitiveness. This could, however, have negative implications on margins and the smaller banks that do not have the benefit of scale and niche expertise, and which may see their profits and growth compromised over the longer term.

Of the total of 22 commercial banks in Malaysia, 13 are foreign locally-incorporated and nine are local banks (excluding Islamic and investment banks).

However, of the 13 foreign commercial banks, only five — Citibank, HSBC, OCBC, UOB and Stanchart — are active in Malaysia at the retail level.

This could be attributed to the fact that Malaysia’s banking sector is relatively saturated, and that returns on investment (ROIs) are a more crucial investment criteria instead of absolute asset growth, which may have resulted in many of the foreign banks deciding to be less aggressive on expansion.

Note that ICBC only has an estimated 106 foreign branches out of the group’s 18,000-strong branch network, which further reaffirms our view that the intensity of competition arising from its maiden entry into Malaysia is likely to be gradual and relatively subdued over the medium term.

Based on our assessment of the loan market share of the seven domestic banks under our coverage versus that of the five active foreign banks, it is estimated that the combined market share of loans for the seven domestic banks expanded from 72.5% in 3Q08 to 76.5% in 1Q09. Meanwhile the combined market share of the five major foreign banks actually declined from 18.4% to 17.6% over the same period. The notable gainers of market share were Public Bank and CIMB, while Maybank’s market share edged up slightly by 0.2 percentage points. In terms of deposit growth, again the major domestic banks grew faster than their foreign peers. — OSK Research, Nov 23





This article appeared in The Edge Financial Daily, November 24, 2009.