Malaysia Series: Banking and Real Estate 0 comments

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One of the reasons why Malaysia is viewed with renewed optimism these days is the strength of its domestic economy. All around Asia, domestic reflation is THE theme for the next few years, with the trend of US consumption slowdown finally becoming mainstream thinking meaning that exports are expected to stagnate at best. Prime beneficiaries of rising domestic consumption has always been the suppliers of domestic capital, and the main consumers of it --- the banking sector and the real estate sector, respectively.

With capital markets becoming globally integrated and capital becoming mobile nowadays, governments all over the world have been liberalising controls and opening up their markets in competition for the same capital pool, and Malaysia is no exception. This is a recurring theme for the abovesaid two sectors as well, and below I highlight some dominant themes and pervasive trends likely to propel growth in these two sectors for the next few years.

Banking

Key banking stocks: Malayan Banking Bhd, Bumiputra Commerce, Public Bank Bhd, AMMB Holdings Bhd, RHB Capital Bhd, EON Capital Bhd, Affin Holdings Bhd, Hong Leong Bank Bhd, Alliance Bank Bhd.

Industry consolidation
In 2002, the Malaysian banking industry was spruced from 54 banks (which included finance companies, merchant banks and discount houses) to just 10, in-line with the Malaysian government's 10-year Financial Sector Masterplan (FSMP) in 2001 to fully liberalise the banking industry by 2010.

The second round of consolidation was apparently sparked in 2006 with the takeover of Southern Bank by Commerce-Asset Holding (now known as Bumiputra-Commerce under which CIMB is a subsidiary). Since then, AMMB sold a 25% stake to a foreign bank (an Australian banking group), Utama's RHB Capital stake became the subject of a tussle which included Kuwait Finance House and EON Capital and which eventually ended up in the state pension fund's hands (which is now seeking buyers for the RHB stake again!), and recently Affin sold a 25% stake to Hong Kong's Bank of East Asia. Analysts are speculating on another merger of two or three banks in 2007, probably with government/central bank intervention.

The plan according to the FSMP is for Malaysia to have six to eight domestic banks operating by 2010 — three to four large banks providing a full range of financial operations and another three to four medium-sized banks offering more specialised services. Many believe Maybank, CIMB Bank and Public Bank could easily withstand competition in a liberalised banking environment, but the smaller banks may have to consolidate to survive (similar to Singapore). Operating restrictions are already being lifted on fully-owned foreign banks, including allowing them to open more branches and ATM networks for customers.

As usual, when consolidation takes place, there are opportunities for good speculative gains for investors of the acquired banks, going by Singapore investors' experiences in Keppel-Tat Lee, UOB-OUB, OCBC-Keppel etc. The recent experience of RHB points to strong interest by reputable foreign investors which means it is likely to be a demand-driven consolidation process.

Islamic finance
Islamic finance was highlighted as one of the global banking sector's growth drivers in my article on Finance and Investments in the Middle East. Globally, this sector is growing at a rate of 15-20 percent a year and is estimated to be worth up to US$400B, from only US$70B a decade ago. It is effectively a beneficiary of the resurgence of Muslim capital, which is in turn fuelled by petrodollars.

Malaysia is acknowledged as the leading Islamic financial centre, with its banks having operated in this niche for years by virtue of its cultural roots. International financial groups are rushing to tap this market but it is not easy when barriers to entry are tied to cultural and religious roots! That's why Singapore is eyeing this pie hungrily but by governmental admission, the local banks' progress have been less than satisfactory. Muslim money with strict syariah principles to be handled by banks with Muslim traditions and with compliance departments that understand what these principles are all about --- one would expect that to be the case for years to come.

Islamic banking has been growing at ~20 percent annually over the past five years in Malaysia, which also accounts for 70 percent of total global Islamic bonds in issue and 40 percent of global Islamic unit trust assets. The critical mass is there, and Malaysian banks with a good grasp of this market are bound to outperform (I'm not sure yet which ones these are).

Real estate

High-end housing segment
Key stocks: KLCC Properties, IOI Properties, SP Setia, IGB, Sunway, Sunrise, United Malayan Land, Mah Sing

Two big reasons. Firstly, property stocks have historically outperformed the KLCI in bullish market conditions. Secondly, the wealth effect of a rising market typically spills over to physical properties.

This is what Singapore has found itself in from 2005 onwards, as the property sector has outperformed, and we can apply this hindsight in broadstrokes to the Malaysian property sector. And indeed, the general demand-supply dynamics might be applied to both countries, with abundant supply in the mass-market housing segment putting a drag on prices while surging foreign demand as a result of relaxation of governmental requirements on purchases by foreigners leads to an outperforming luxury segment (see "Singapore high-end residential property boom").

The abolition of the 30% RPGT (real property gains tax) in March is seen as the most significant measure aimed at attracting foreign property buyers and will have reverberating effects for years to come, much like how Singapore's package of asset measures announced to improve housing affordability in July 2005 (together with the IRs) served as the catalyst to propel the property segment to a boom till today. Naturally, rising residential property sales and higher selling prices will flow through to the bottom lines of developers, justifying further rises in their share prices.

Going by the current argument that Singapore property still has some way to go towards the astronomical psf heights in global cities like Hong Kong, London and Tokyo (an argument which is arguable), prime properties in Kuala Lumpur would surely look attractive for Singapore and global investors, selling for peak RM1,500 psf (more typical prime rates would be RM1,000 psf) or thereabouts. In a market driven by the wealth effect, you can't go wrong with prime areas (akin to our District 9/10/11) such as the Golden Triangle (KLCC), Mont'Kiara/Sri Hartamas, Bangsar/Damansara Heights.

It is worth noting, however, that outside of Kuala Lumpur, the market is more focussed on landed property and the demand for condominiums and apartments are more subdued. This is a clear sign of a two-tiered market: local demand in the suburbs/satellites vs foreign demand in the city centre.

The emergence of REITs in Bursa might also help to support the growth of industrial and commercial properties. Key regional players like Capitaland, via its Quill REIT, are already taking foothold. Other significant Singapore players are also re-emerging in the area, such as Wing Tai (via DNP) and UOL.

Iskandar Development Region
Key stocks: UEM World, Tebrau Teguh, Mulpha, Ekovest

The Iskandar Development Region (IDR), formerly known as the South Johor Economic Region (SJER), is the primary development focus of the 9th Malaysian Plan into which the state government is pouring billions of infrastructure investments in the hope of attracting tens of billions more of foreign investments. The speculation over the property stocks linked to the IDR reached fever pitch in early 2007 over what is essentially a concept without actual profitable implementation, but there is general recognition of its potential.

There is unabashed proclamation of the aim of the IDR: to tap on Singapore's strong economy in the way that Shenzhen serves as a hinterland to adjoining financial centre Hong Kong. That this development is a prime focus of Badawi's government means there is strong governmental support and indeed there are already many incentives to promote foreign investments and property ownership.












Development will be initially focused in concentric circles in the waterfront areas around Johor Bahru (A) and Nusajaya (B), and the logistics centres of Port of Tanjung Pelepas (C), Pasir Gudang (D) and Senai Airport (E) (refer to map above). Key developments include the Danga Bay Waterfront City development facing the entire western coast of Singapore, a planned petroleum storage hub at Tanjung Pelepas (West Gate) and a biodiesel hub at Tanjung Langsat (East Gate). Nusajaya and Johor City Centre are expected to house the services hubs including education, healthcare, creative industries etc.

There is anticipation that foreign investors, in particular those from the Middle East, would soon enter the scene at much higher prices, after the moratorium on land transactions in Johor was lifted recently. Large landlords at the southern tip of the IDR and adjoining the waterfront facing Singapore will be prime beneficiaries if the IDR takes off, and as such the "key stocks" listed above have already soared.

Although speculative fervour might have abated a bit with the withdrawal of the "free access zones" proposals for the IDR, this is the second region in Malaysia to watch closely for property reratings in the future, as THE major focus of the Badawi government.

References:
(1) New Straits Times report Apr 2007: Banking on Consolidation
(2) Price Waterhouse: Malaysia: Leading Islamic Finance
(3) The Edge Daily report Mar 2007: Property back in limelight
(4) The Edge Malaysia Apr 2007: Boost for KL luxury condo market
(5) The Edge Daily report Feb 2007: Shares in South Johor linked firms rise
(6) Media statement Mar 2007: Iskandar Development Region: Initial incentive and support package
(7) Skyscraper city forum: The South Johor Economic Region
(8) The Star Online report Jul 2006: Danga Bay to spur south Johor growth