Still a place for niche banking

The banking sector seems to be caught in a merger mania these days.

Just as Hong Leong Bank Bhd’s protracted acquisition of EON Capital Bhd drew to a conclusion, we saw the race between Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd for RHB Capital Bhd.

And as that race came to a premature end, another new surprise sprang last Friday.

If the news reports are true, the target has now become the predator instead, with the much smaller RHB Capital rumoured to be eyeing CIMB.

We should all perhaps take a breather to think. Should we rush into this urge to merge? No pun intended.

While size and scale do matter in most cases, there are times when they are not really all that great.

Sometimes, big doesn’t necessarily mean better. Sometimes, big is akin to being overweight and sluggish. Sometimes, it’s better to be lean and to have a niche that will bring about an edge.

The “big is always better” mantra has been laid bare by the collapse of Lehman Brothers and near failure of Citigroup and AIG in the US.

Ironically, many of the past high-profile banking problems in Malaysia involved big banks, rather than the smaller ones. Remember Bank Bumiputra and Sime Bank?

Locally, the 1998-2000 central bank-mandated banking consolidation exercise had closed off customer access to smaller niche banks that were later subsumed into much larger entities.

Banks such as Hock Hua Bank and Ban Hin Lee Bank, for instance, had their niche and were highly successful in what they were doing.

Hock Hua Bank found its niche in serving the Foochow community of Sarawak, while Ban Hin Lee had a strong loyal following in Penang.

PhileoAllied Bank was another player noted for its technology and innovation.

Even the smallest bank in the country, Wah Tat Bank, found a niche in focusing on small businesses in Sarawak.

These banks have all disappeared, subsumed into far larger entities.

The finance companies (since merged into commercial banks) also played an important role.

They did not only dish out car loans, but also provided higher risk higher priced credit to consumers and smaller companies that had no access to bank borrowings.

The industry consolidation exercise driven by the central bank after the 1997/98 financial crisis has since created a vacuum for individuals and small businesses who are deemed either too small, or not credit-worthy enough to obtain bank funding.

As such, some ordinary folks are now making a beeline towards non-banking organisations like RCE Capital Bhd and Malaysia Building Society Bhd (MBSB).
This trend towards the non-bank lenders is evident from rising profits and loan books of RCE Capital and MBSB.

It is indeed difficult to ignore the growing profits of MBSB that at one time had been loss making for years.

In 2004, the company turned around with a profit after years (1998-2003) in the red. And it has not looked back since.

In the recent financial year ended Dec 31, 2010, MBSB’s net profit soared 156% to RM146 million compared with RM57 million a year ago. The group’s bottom line had expanded 78% to RM57 million in 2009 from RM32 million in 2008.

Its loan book surged from RM3.79 billion in 2004 to RM10.71 billion in 2010. It rose a further 12.8% to RM12.08 billion in the first three months of 2011 alone.

Interestingly, it was MBSB’s strategy to focus on its niche and target market that propelled the group. It is no secret that the group was bogged down with huge losses between 1998 and 2003 but has since then managed to stay in the black and grow its bottom line.

In an exclusive interview with The Edge back in 2008, MBSB’s then CEO Ahmad Farid Omar said the reason MBSB is seeing better results is because it is starting to reap the benefits it sowed in 2004 and 2005.

“In 2004 to 2005, when most of the banks were busy with mergers and acquisitions, we told our people to focus on our target market. When shareholders talk about mergers, it will distract the staff. We figured we should go all out and pick out the market. Loans growth started then, and now the loans are generating income,” Farid told The Edge.

MBSB has indeed carved a niche for itself as it helps fill the vacuum left by the absence of small niche financial services.

Incorporated in 1950 to help Malaysians finance their homes, the company has evolved in its role from being the first property financier to a financial provider. On top of property financing, MBSB is also in the personal loans segment as well as bridging loans for properties.

Also banking on its niche is RCE Capital, a non-financial institution in the credit cooperative market.

Its robust financial performance in the past few years was driven by strong demand for its products and services.

For the quarter ended March 31, RCE Capital’s net profit grew 28.6% to RM104.3 million from RM81.1 million a year ago. It had a loan book totalling RM973.16 million.

Prior to this, its bottom line grew 22.8% to RM81.1 million in 2010 from RM66 million in 2009. Net profit increased 30.4% to RM66 million in 2009 from RM50.6 million in 2008.

RCE Capital has cornered the civil servants market. It allows its borrowers to repay via the government-initiated Salary Deduction Scheme, administered by Angkatan Koperasi Kebangsaan Malaysia Bhd (Angkasa), the country’s centralised collection agency for participating cooperatives.

Both MBSB and RCE Capital have proven that there is still demand for niche financial services and there is a vacuum not presently served by the big banks.

Perhaps the breakdown in talks to acquire RHB Capital to create a mega bank in the region was a blessing in disguise.

Maybank, CIMB Group and RHB Capital are all doing well on their own.

While RHB Capital is much smaller, the banking group can focus on building its brand name in the retail banking space that it has craved out for itself.

Once a dominant investment banking player in the 1990s, the fifth largest banking group has today instead created a niche in the retail banking segment.

Just two years ago, it launched the EASY banking concept to further strengthen its grip in this segment. EASY by RHB Capital grew to over 130 outlets in March this year from just 14 EASY outlets in 2009 and it generated assets in excess of RM1.2 billion in just one year.

While size may matter in an industry that needs the financial muscle, it does not mean that there is no room for the smaller niche players to make their mark.