http://www.bday.net/nov16/p05-161.htm#053

Malaysian banks being pushed towards mergers

KUALA LUMPUR Ð A weakening economy is putting pressure on Malaysian banks' earnings as bad debts swell, turning investors off the sector and sparking talk of further mergers.

With a slowdown in exports expected to brake economic growth to 0.5 percent this year after a blistering 8.3 percent in 2000, non-performing loans (NPLs) are on the rise.

"Despite efforts to accelerate the cleaning up of past defaulted debt, the performing loan base system will be under stress due to deteriorating economic conditions," said Devendran Mahendran, a fixed-income analyst at HSBC.

Malaysia's bad loans, including those pending restructuring by national asset management company Danaharta and defaulted loans, amount to 85.5 billion ringgit ($22.51 billion), or 23.4 percent of its gross domestic product.

By the narrower measure of banks' gross NPLs, bad debts have jumped to 17.9 percent of all loans at the end of September from 15.4 percent at the turn of the year.

International rating agency Fitch expects that ratio to jump to over 20 percent.

"This will affect the whole system, with substantial losses possible for the weaker players," it said in a review two weeks ago. "Further consolidation in the bank sector is probable."

Analysts poring over the latest quarterly results for top Malaysian banks do not like what they see. Most have cut their investment recommendations from "buy" to "sell" or "hold."

Malayan Banking (Maybank), Malaysia's largest bank, is bracing for zero growth in loans and a margin squeeze for the financial year ending next June, analysts said. Even Public Bank , the best-managed domestic bank, faces a bumpy road.

"From our recent company visit, management expects operating conditions to deteriorate in financial year 2002 and is only bracing for an earnings recovery in 2003," Lim Beng Leong, research chief at brokerage UOB Kay Hian, said of Public Bank.

For now, profits at the bank, Malaysia's fourth largest, are still rising. It said last week its net profit grew 1.6 percent quarter-on-quarter to 169.2 million ringgit for the three months to September 30, within market expectations.

But earnings per share for calendar 2002 are forecast to fall to 14 cents a share from an expected 20 this year, said Lim, who rates the bank a sell.

Things may be worse than the NPL figures suggest. Although the total NPL figure of 85.5 billion ringgit is lower than the nearly 100 billion ringgit seen in 1999, after the Asian financial crisis, analysts say the current figure could be understated.