Some are planning to increase their Tier-1 capital
CAPITAL adequacy ratios in the domestic banking system will remain “healthy” in 2009 as some Malaysian banks are planning to increase their Tier-1 capital, analysts said.
Tier-1 capital, a key measure of a bank’s financial strength, consists primarily of equity capital and cash reserves but may include preferred stocks and retained earnings.
“We believe the capital adequacy ratios in the domestic banking system would remain healthy throughout 2009 as several banks have plans to raise either the hybrid Tier-1 capital or subordinated debts to boost their risk weighted capital ratios (RWCRs),” said AmResearch deputy head of research Fiona Leong. “Tier-1 capital ratio is a balance between safety and taking on more business.”
Leong noted that following the huge write-offs of investment instruments, banks around the world have been aggressively raising fresh capital to restore their impaired balance sheets.
“This move by banks to bolster their capital to combat the credit crunch would no doubt see Bank Negara also paying more attention to local banks’ Tier-1 capital ratio,” she reckoned.
According to AmResearch’s data, the banking system had a core Tier-1 capital ratio of 10.5% and a RWCR of 12.6% as at end-2008.
An industry source at a foreign bank said a financial institution with Tier-1 capital ratio of 6% to 8% was considered well-capitalised, but many Malaysian banks had ratios above 10%.
As for the RWCR, Bank Negara has set a minimum level of 8%, in line with most central banks that conform with the Basel accord.
Alliance Bank Malaysia Bhd group chief executive officer Datuk Bridget Lai said in a statement that “arising from the global turmoil and economic crisis, globally there appears to be a strong preference for higher Tier-1 capital.”
Many global banks were now under pressure because of low capitalisation, she noted.
Lai said Alliance Bank’s emphasis during this period was to ensure that its business fundamentals were further strengthened, by raising the bar on risk management, ensuring prudential provisioning and preserving credit quality.
“In addition, we also have instituted stringent loans underwriting standards with the new business models and the credit quality of our loans portfolio has been improving consistently quarter-on-quarter for the last three years, with the net non-performing loan (NPL) ratio at 2.3% and loan loss coverage at 91%, both being above the industry average,” she said.
“Our strategy in investment securities portfolio has also been biased towards maintaining strong liquidity.
“As such, we do not foresee any issues because we have successfully diversified our assets and liabilities in the last three years during our transformation process,” she added.
As at Dec 31, 2008 Alliance Bank had a Tier-1 capital of 12.6% and RWCR of 13.1%.
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