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January 8, 2008

Cards still gaining credit

With an improving economic climate, healthy asset quality, a growing segment of card-friendly young consumers and new Islamic products entering the market, Malaysias credit card issuers are bullish about the future, despite competitive pressures. Titien Ahmad reports. Ten years since the Asian crisis of 199798, Malaysias retail customers are cautiously optimistic. The economy is growing steadily, with GDP growth of 6.7 percent in the fourth quarter of 2007. The Kuala Lumpur Composite Index an aggregate of local blue chip stocks reached a 13-year high in that same quarter. The countrys healthy economic growth, a stronger ringgit (the local currency), recent salary increases for civil servants and the removal of real property gains tax have boosted consumer confidence. However, people are still fretting over the pending national elections, low real growth in disposable income for the average Malaysian and the recent bubbling-over of racial tension. These factors seem to temper any optimism built up from the positive economic environment. This scenario is played out in the cards business in the peninsula. The number of card transactions nearly doubled from 126.85 million in 2002 to 215.14 million in the first 11 months of 2007. By comparison, the growth rate for average transaction values is only 22 percent (from MYR208.31 ($63.40) to MYR253.95) over the same period, reflecting Malaysians cautious economic outlook.

By Verdict Staff

 With an improving economic climate, healthy asset quality, a growing segment of card-friendly young consumers and new Islamic products entering the market, Malaysia’s credit card issuers are bullish about the future, despite competitive pressures. Titien Ahmad reports.

Ten years since the Asian crisis of 1997/98, Malaysia’s retail customers are cautiously optimistic. The economy is growing steadily, with GDP growth of 6.7 percent in the fourth quarter of 2007. The Kuala Lumpur Composite Index – an aggregate of local blue chip stocks – reached a 13-year high in that same quarter.

The country’s healthy economic growth, a stronger ringgit (the local currency), recent salary increases for civil servants and the removal of real property gains tax have boosted consumer confidence. However, people are still fretting over the pending national elections, low real growth in disposable income for the average Malaysian and the recent bubbling-over of racial tension. These factors seem to temper any optimism built up from the positive economic environment.

This scenario is played out in the cards business in the peninsula. The number of card transactions nearly doubled from 126.85 million in 2002 to 215.14 million in the first 11 months of 2007. By comparison, the growth rate for average transaction values is only 22 percent (from MYR208.31 ($63.40) to MYR253.95) over the same period, reflecting Malaysians’ cautious economic outlook.

This has not stopped card issuers from putting credit cards into the hands of the customers. There were 9.8 million cards in circulation as of November 2007 compared to 2.82 cards in 2000. The card issuers are optimistic that the younger market – Malaysia has one of the largest youth population in the region – will appreciate the benefits of having a credit card. Issuers such as CIMB and OCBC are offering fee-free-for-life credit cards to graduates and tying the card to a broader lifestyle proposition involving the issuer, such as low initial repayment mortgages and youth-oriented benefits and rewards.

According to Perry Ong, general manager of credit cards for financial services group AmBank: “Credit cards will remain the most important driver of growth, generating interest earnings for banks, but we are already facing diminishing fee income, as more and more free-for-life cards are proliferated by local and foreign banks alike. “

Ong sees huge potential in the local cards market. He said: “The market consists of approximately 18 players, including two non-banks, generating MYR47.6 billion in payment card transaction value against a 2006 GDP of MYR546 billion (out of which 45 percent is attributable to private consumption). Cash and cheques still dominate the market. There are only fewer than 10 million cards generating nearly MYR20 billion in receivables outstanding and this makes up only 5.9 percent of total household loans.”

The pole position for cards in circulation was hotly contested in 2007. Citibank Malaysia was the market leader in terms of card issuance for a number of years, but was trumped recently by Maybank, which purchased American Express’s cards portfolio. Maybank is the largest bank in Malaysia, with over 360 domestic and 88 international banks, but had always trailed Citibank in terms of card issuance, which had been able to capture the market lead with only three branches. HSBC is the third-largest issuer with more than 950,000 cards in circulation.

Vipin Agrawal, cards business director for Citibank, told CI: “For us it’s not just the number of plastics but how loyal our customers are, which reflects in the card usage share of the industry. We are number one with approximately 20 percent market share. Holding leadership in market share is an enormous challenge as customers are looking for the best value. There is not one competitor to single out but there are number of local and foreign banks that are aggressive. We are focusing on how we can continue to differentiate ourselves in customers’ minds.”

Competition from all sides

The competition is now not just between the foreign and local banks but also from the new entrants. Foreign banks compete on their “capability to adopt ‘ready-for-use’ regional programme roll-out”, Ong pointed out, while aggressive non-banks compete on speed to market in system and product innovation.

One such entrant is Tune Money, a subsidiary of budget airline Air Asia. While focusing on the prepaid card segment, Tune Money looks to target people whom card issuers have missed. “At the moment, a significant proportion of the Malaysian working population do not carry a credit card, either because they earn less than MYR1,500 a month and do not qualify for one or because they are afraid of the credit card debt spiral,” said Tengku Zafrul Aziz, chief executive officer for Tune Money, at the launch of the prepaid Tune Card.

Cardholders can apply for the card and pick it up for an initial load of MYR50 from post office branches throughout Malaysia. They are charged an annual fee of MYR9.99 and need to maintain a minimum balance of MYR10 on the card at all times. They can reload their cards through online and offline payment facilities provided by MayBank, CIMB Bank, Pos Malaysia and Bank Simpanan Nasional.

There are plans to add features to the Tune Card such as international money transfer, transportation payment, fund transfer between cardholders, bill payments, mobile reloads and a loyalty programme, which will make it attractive to credit-wary customers.

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Islamic credit cards no longer an anomaly

The market will also see an increased number of launches of Islamic credit cards – an anomaly in most Islamic markets other than those in South-East Asia. Although Islamic credit card loans still make up only 1 percent of total loans, market pressure has driven a number of launches of Islamic cards that are not very different from the average card, other than the underlying Sharia-compliant processes and principles.

Bank Islam’s credit card offers a three-year contract between the bank and cardholder with a fixed profit margin. It can be used only at merchants selling halal items (ie, permissible under Islamic law) – this excludes establishments selling pork and alcohol, for example. Another card offering comes from Al Rajhi Bank of Saudi Arabia, whose Charge Card-i offers 55 days of cost-free funds and no compounding interest. It is also Visa payWave-enabled for transactions below MYR100.

Ong believes there will be increased competition from the new holders of the Islamic banking licence. There will be a “proliferation of Islamic banks – Al Rajhi, KFH, AFB and DIG – leading to more Islamic credit and debit players”, he pointed out.

To drive Islamic banking development in Malaysia, Bank Negara Malaysia, the central bank, has been handing out Islamic banking licences that essentially allow the licence-holders to offer full banking services as long as they are Sharia-compliant. Banks from the Middle East have snapped up these licences and are actively expanding their base, posing a new threat to the local banks. Al-Rajhi Bank is targeting up to 50 branches in five years, which would make it potentially as large as established foreign banks such as Standard Chartered, Citibank and HSBC.

According to Wilson Ng, an analyst with Affin Securities, the stockbroking arm of Malaysia’s Affin Investment Bank: “We are cognizant of competitive pressure exerted by the swift expansion of foreign Islamic banking groups on the local banks. In fact, the impact could be more enormous than the threats from the 13 incumbent foreign banks, which are only allowed to open another four branches under the blanket approval.

“The strong growth in Islamic loans is, in fact, subtly cannibalising the conventional loan segment. The Islamic banking products, albeit different in structure, can be considered a close substitute for the conventional ones by fulfilling the same financial needs of the clients, as long as the related activities are halal in nature. This is applicable in the areas of housing loans, hire purchase, credit cards as well as business loans. Any gain in market share by foreign Islamic banks will leave less credit opportunities for the conventional banks to tap into. This would be a double whammy for our local banks as they will be affected in both areas.”

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Asset quality

With the increase in cards circulating in the market, there are concerns among the card issuers over a pending credit crunch but asset quality is generally healthy. Credit card non-performing loans constituted around 3.5 percent of gross non-performing loans for the banking industry as of June 2007.

A new tiered interest rate structure was introduced by the central bank to reward good payers.

Citibank’s Agrawal said: “At this stage, we don’t believe there is a concern in the Malaysian market regarding credit quality. At our end, our selection processes are robust, and we are quite selective as to whom we issue our cards.”

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