[Malaysia] Hong Leong Bank Rebuts

The Star, Kuala Lumpur
9 June 2005

Hong Leong Bank rebuts claims on stock list
BY IZWAN IDRIS

HONG LEONG Bank Bhd rebutted claims made by stockbrokers and news reports alleging that it has over 400 counters listed as “non-marginable” for the purpose of share margin financing.

“There have been a number of inaccuracies in some articles published in recent weeks. The bank does not have a list of over 400 non-marginable stocks,'' it said in statement yesterday.

On Tuesday, Prime Minister Datuk Seri Abdullah Ahmad Badawi told reporters that he had instructed Bank Negara to ask Hong Leong Bank to explain why the latter was not offering financing for certain shares. Abdullah, who is also Finance Minister, said that Hong Leong Bank's action was unacceptable and irresponsible.

“The bank wishes to reiterate its firm commitment to its share margin financing business and will continue to play a role as a responsible bank,'' the statement said.

The bank said that over the past few weeks it had continued to approve many new applications for share margin financing, which it said reflected its firm commitment to that business.

Hong Leong Bank said on May 31 that it had circulated a list of 184 stocks as designated counters.

“The 184 designated stocks were given full value for customers' existing holdings; however, branches must refer further financing to head office for consideration on issues such as concentration, price, liquidity and compliance,'' it said.

Shares in Hong Leong Bank and parent company Hong Leong Credit Bhd are also on the list of designated stocks for compliance reasons. “Regrettably, such internally classified designated stocks have been misconstrued by some to be non-marginable stocks,'' the bank said.

It added that some of the stocks reported to be non-marginable, such as RHB Capital Bhd, Malaysian International Shipping Corp Bhd and Sime Darby Bhd were in fact on its marginable list.

Hong Leong Bank said that in respect of the list of acceptable counters it operated like all other banks and had list of marginable counters for which it gave value. “The list is reviewed from time to time,'' it said.

In May, some 29 counters were de-margined in line with the bank's review of counters. “The bank has taken steps to pro-actively manage the position with its
customers in order to minimise any adverse impact on them and the market generally,'' it said.

“Market volatility can be the result of a host of factors, including actions by unscrupulous market manipulators,'' the bank added.

Commenting on the issue, an analyst said the Hong Leong statement referred only to the bank. He pointed out that it was unclear at this stage whether HLG Securities Sdn Bhd or HLG Capital Bhd, both members of the Hong Leong Group, have the same list of 184 designated stocks of Hong Leong Bank, or whether HLG Securities and HLG Capital have
their own lists, and whether those lists are more extensive or less extensive than that of the bank.

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The Star, Kuala Lumpur
09 June 2005

How share margin financing affects banking sector

With controversy still raging over the share margin financing issue, AmResearch executive director GAN KIM KHOON offers a perspective on how the overall margin financing segment affects the banking sector. Banks have turned cautious, he says and explains, to some detail, how margin financing works.

Controversy boils over: Although several major local banks denied last week they were responsible for the sharp fall of stocks on Bursa Malaysia in the last few weeks (and instead placed the blame on speculators and stock market syndicates), the controversy over share margin financing facilities offered by banks continues.

From the very top: This time around, no less than the Prime Minister himself has asked one of the local banks, Hong Leong Bank, to explain why it is not offering margin financing for certain shares.

(In a circular to stockbroking companies a few weeks ago, Hong Leong Bank had provided an updated list of stocks permissible for financing and those non-permissible for financing. Apparently, around 50% of the stocks listed on Bursa Malaysia were deemed as “non-marginable” and the list include some big-cap main board companies.)

Untrue that banks have stopped lending: To the best of our knowledge, no local bank has stopped offering share margin financing facilities to interested customers, nor have they withdrawn credit lines that have already been extended. But what happened in the stock market in the last few weeks, where a number of stocks were sold down aggressively, had prompted some banks to introduce stricter guidelines on share margin financing.

But it is true that banks have turned more cautious: The stricter guidelines typically involved the imposition of price caps on certain shares (i.e. where the value of a share is capped at a certain percentage of its market price), or the lowering of existing price
caps on some shares, or disqualifying certain shares altogether from the list of stocks acceptable for financing purposes.

There was some forced-selling but this was done to protect banks’ interests: As a result of the stricter guidelines by some banks, some existing borrowers were required to “top up” their margin accounts, either with cash or additional “marginable shares”. Those that were not able to do so would be forced to sell down some of the shares pledged to the bank as collateral to reduce their borrowings to the permitted level (permitted margin of finance). The latter had led to the impression that banks are withdrawing their share margin financing facilities.

Safety features in place: To be sure, share margin financing has higher credit risks, but most banks have a three-level check-and-control mechanism in place to minimise their credit risks on share margin financing. These are the imposition of price caps on
certain shares, the imposition of limits on financing for purchases of shares and the exclusion of certain shares from their list of shares that are permissible or acceptable for financing by the bank.

Banks typically do not give full value: The first measure means that for certain shares, the bank ascribes a lower value than the stock’s market price. This is typically known as the “bank value” and is usually calculated based on a pre-determined and arbitrary percentage of the stock’s market price. Price caps are typically imposed on so-called “speculative counters”, “illiquid counters”, “designated stocks” or stocks that are classified under PN4 conditions.

... Nor do they finance entirely: The second-level control is that typically, banks would only finance up to a maximum margin of 50% of the “bank value” of the underlying shares. This concept of margin of financing is no different from the margin of financing for the
purchase of a passenger car or a residential house by an individual, where the bank is willing to finance only up to a certain amount or percentage of the market value or acquisition cost of the underlying asset.

And there are some that banks would not even think of it: The third measure, of course, is to unilaterally declare certain counters or stocks as not permissible or not acceptable for financing. This is akin to a bank saying that they are not interested to finance cars that are more than 10 years old under a hire purchase financing scenario.

There is no fail-safe methodology: These three-level safety nets, while not fool-proof, would help minimise the risks and mitigate the losses that a bank could potentially face in the event of a stock market meltdown.

We believe most share margin financing facilities are adequately secured: Owing to these “safety nets”, it would not be presumptuous for us to believe that the market values of the underlying assets (shares) held as collateral for share margin financing facilities are higher than the total amounts outstanding. In other words, the overall
collateral cover is more than 100% (although at the individual account level, there may be some cases where there is a shortfall between the collateral value and the amount outstanding).

The majority of banks are not overly exposed to this risk: Most local banks in Malaysia do not have substantial exposure to loans for the purposes of purchase of shares (see chart). Public Bank has the lowest percentage exposure with only 0.9% of its total loans (or RM535mil in absolute terms), while Affin Holdings has the highest at 9.2% of its total loans (or RM335mil), followed by Malayan Banking (5.7% or RM7bil) and Commerce Asset-Holding (4.7% or RM3.2bil). The industry average ratio of loans for purchase of shares as a percentage of total loans is 3.8% or RM19.4bil.

But the high rate of default among share margin financing accounts is worrying: That said, the gross non-performing loans (NPL) ratio for share margin financing accounts in the banking system was very high at 14.9% as at end-December 04. This is also significantly higher than the all-segments industry-average gross NPL ratio of 9.8% as at
end-December 04.

Finance companies carry the highest risks: Among the different types of financial institutions, finance companies have the highest level of gross NPL ratio for share margin financing at 54.8% at end-December 04, followed by merchant banks with a share margin financing gross NPL ratio of 20.6%. The commercial banks’ gross NPL ratio for share margin financing was only 12.8%.