0

Farisan Mokhtar

Associate Director, NKEA Financial Services

National Key Economic Area

Financial Services (FS)

1

Overview of NKEA

Entry Points Projects

2012 Looking Forward

2

The financial services sector is the bedrock of the high income economy

The Financial Services Sector is both:

An enabler of

other sectors of

the economy...

... as well as a

growth engine in

its own right

Above all, our desired transformation from a middle-income to a high-income economy will not

be possible unless we ensure that there is an abundance of debt and equity financing options

to invest in new and expanding businesses envisaged under our New Economic Model.

Introduction

3

NKEA Overview

131

125

121

108

67

59

53

36

35

34

29

Oil, Gas & Energy

Palm Oil & Rubber

Financial Services

Wholesale & Retail

Tourism

Greater KL/KV 1 392

Agriculture

Education

Healthcare

CCI

E&E

Business Services

Incremental GNI (2020) RM billions

1 Other NKEA GNI impact that directly contributes to Greater KL/KV’s GNI

4

Financial Services are one of the largest

and fastest growing sectors in Malaysia.

It is currently the 2nd highest contributing sector.

The AMBITION:

To grow the sector by 2020.

The TARGET: Incremental GNI impact of RM121bn by 2020, and Creation of 363k jobs by 2020

3x

5

Financial services encompass full range of solutions catering to different financial needs

Retail banking

Business banking

Islamic banking Capital market

Insurance & Takaful

Investment mgmt (asset & wealth

mgmt)

Venture Capital & Private Equity

Financial services sub-

sectors

Micro finance / Development

Finance Inst (DFIs)

6

The financial services sector is crucial to Malaysia's economy

GNI per capita (RM) 6,7322,171

206224272276374

375537583

5981,116

Tota

l

Oth

ers

Agriculture

Telc

o

Auto

motive

Education

Ele

ctr

onic

s

Tourism

Palm

oil

Whole

sale

reta

il

Fin

ance

serv

ices

Oil

&

gas

2000 – 2009 Historical GDP growth rate (%)

Strong, well-regulated industry with

proven resilience to external shocks High level of financial inclusion

Baseline Gross National Income of RMXbillion in 2009

#2 sector in GNI contribution today Robust growth over the past decade

Developed clear areas of strength

Starting position

-0.80.1

1.41.5

3.43.5

4.34.5

4.54.5

4.86.06.2

6.36.87.1

7.87.9

8.8

-2 0 2 4 6 8 10

%

Construction

Electrical & electronics Forestry & related products

Oil & gas, energy & petroleum Rubber & plastic products

1.9 Metal products & heavy equipment Transport & storage

Utilities Livestock & fisheries

Real estate Automotive & assembly

Agriculture Palm oil & related products

Wholesale & retail Tourism

Education Financial Services

Telecommunications Business services

Health services & products

Leadership position in some niches

• #1 largest sukuk issuance

• #3 largest Islamic finance

market globally

• World's first e2e Syariah-

compliant trading platform

• Largest no. of Islamic

fund mgrs in the world

• World's largest derivative

exchange dealing in crude

palm oil contracts

Islamic finance

Commodities

• More than 80% banking penetration

• In 2009, the penetration of deposit

accounts and loan accounts in Malaysia

are 3,300 deposit accounts per 1,000

adults and 1,100 loan accounts per

1,000 adults, respectively.

• Ranked #1 for 3 years in a row from for

access to credit by the World Bank

• Post the Asian Financial Crisis,

Malaysia has enhanced institutional

capacity and strengthened the

regulatory and supervisory framework

• Malaysian banks emerged relatively

unscathed from global crisis

– Strong capital base

– Credit quality remained strong

– Long growth holding up

7

However, the Malaysian domestic market is maturing Going forward, need to look externally and develop new engines of growth to become developed nation

Case for change

• Low GDP growth

• High political/economic instability

• Limited accessibility

• State own FS assets

• Banking penetration >10%

• High GDP growth

• High growth (2-3x GDP growth)

• Industry opening up to foreign

competition

• Banking penetration ~10-30%

• GDP growth ~3-5%

• Most FS sectors growing in line

with GDP

• Players fight for share to grow

• Banking penetration >80% • GDP growth ~4-7%

• FS sectors growing slightly

above GDP

• Industry consolidation beginning

• Competition heats up

• Banking penetration ~30-80%

Source: BCG Analysis

Nascent / Early Fast emerging Maturing Developed

Micro banking

Retail banking

Corporate banking

Payments

Capital markets

Insurance

Wealth mgmt / asset mgmt

Key

characteris-

tics

Opportuni-

ties

Stage of

country

develop-

ment

8

The financial services sector faces a few challenges in pursuing growth Case for change

Lack of scale Lack of liquidity

and diversity in

capital markets

Competition from

other financial

centers

Low levels of

financial literacy

• Some segments e.g.

investment banking

and brokerages

remain highly

fragmented

• Lack of scale means

that many players

lack the resources

and expertise to

scale-up in domestic

markets, let alone to

establish a

meaningful position

in regional markets.

• Malaysia lacks the

critical mass to

attract significant

levels of investment.

Rise of

India

and

China

Regional

compe-

tition

• Malaysia's capital

markets suffers from

lack of liquidity

– Malaysia’s

liquidity ranking

in Asia has

dropped from

3rd in 1996 to

14th in 2010.

• Also, high degree of

concentration in the

market, in terms of

investors, products

or currency.

36

60678490

0

100

SET SGX HKEX

Turnover velocity%

Bursa IDX

• Low level of financial

awareness ...

– Highest level of

household

debt/GDP in Asia

– Lack of

preparedness for

retirement

– Low penetration

of some key

financial services

(e.g. insurance, e-

payment)

• .... while increasing

complexity/sophistica

tion of products

• Recent scandals

eroded trust in the

financial sector

9

Strengthen the core

Serve high-income population

Seed new growth Go on the offensive

• Revitalize equity markets

• Deepen and broaden bond markets

• Transform DFIs

• Create integrated payment eco-system

1

2

3

4

• Insure our population

•Develop private pension industry

• Spur growth of wealth management

5

6

•Accelerate asset management industry

7

8

Robust, market-oriented legal and regulatory framework with efficient and effective enforcement

• Create regional champions

•Become the undisputable global Islamic Finance Hub

9

10

Competitive tax environment

Government-industry co-operation to drive financial sector strategy

World class business and financial infrastructure

Compelling branding and promotion

Human capital

ENABLER in a high income economy

ENGINE OF GROWTH contributing to GNI of RM192B

Commercial Banking

Insurance and Takaful

Islamic Banking

Investment Banking

Asset/ wealth mgmt

Other FS sub-sectors

Business Opportunities

Enablers

Entry point projects

Financial literacy

10 high impact projects across 4 themes

10

Entry Point

Projects

Business

Opportunities

Revitalize equity markets 1

2

3

4

5

6

7

8

1

2

3

Deepen and broaden bond markets

Transform DFIs

Create integrated payment ecosystem

Insure our population

Develop private pension industry

Spur growth of wealth management

Accelerate asset management industry

Regional champions

Undisputed global Islamic Finance Hub

Commercial banking

Insurance and Takaful

Islamic Banking

Investment Banking

Asset / wealth management

9

10

Other FS sub-sectors

4

5

6

GNI (2020)

RM billions

Jobs

‘000s

Investments

RM billions

Private

Investments

%

35.8

5.8

0.3

2.1

2.8

1.7

4.1

2.4

2.8

5.8

7.9

50

13

1

-

8

9

2

6

7

-9

13

71.67

1.55

0.48

0.79

0.72

0.07

0.07

0.55

0.72

28.39

38.33

87%

100%

100%

100%

71%

50%

50%

100%

100%

100%

97%

85.3

31.6

16.2

15.5

6.5

1.7

13.8

313

71

53

52

18

7

112

183.78

69.78

20.97

75.63

13.75

1.48

2.17

88%

88%

90%

87%

85%

86%

90%

Overview of Financial Services EPPs and BOs GNI RM 121bn, Jobs 363k, Funding RM 255bn

11

In total, Financial Services can potentially deliver beyond original target by RM 31bn

57.4 5.8 0.3 2.1 2.8 1.7

4.1 2.4 2.8 5.8 7.9

85.3

13.8

192.2

161.6

0

50

100

150

200

250 G

NI 2009

Capital M

ark

ets

Bond M

ark

ets

DF

Is

E-p

aym

ent

Insura

nce

Private

pensio

n

Wealth m

gm

t

Asset m

gt

Regio

naliz

ation

Isla

mic

fin

an

ce

Busin

ess o

pps a

nd

BA

U

Multip

lier

GN

I 2020

GN

I T

arg

et

2020

(RM

bn

)

Over target RM 30.6bn

EPPs RM 35.8bn

BOs & BAU RM 85.3bn

12

Overview of NKEA

Entry Points Projects

2012 Looking Forward

13

Case for change

Aspirations

90 84 67 60 36

0

100

Turnover velocity%

Bursa IDX SGX HKEX SET

0

50

0.0

2.5

Growth% Market cap (USD T)

SET IDX Bursa SGX HKEX

Relatively low liquidity

...as well as scale and growth

10,000

0

2020

5,471

2009

960

Market cap (RM B)

31

60

50

2009

100

0

2020

Trading velocity %

Vibrant capital markets that attracts quality listings and investors

Improve attractiveness of Bursa

Liquidity Improvement • GLICs to further diversify

portfolio • Increase free float of GLCs • List more GLCs

Allow volatility • Liberalise number of

Proprietary Day Traders • Allow intraday short selling

Product offerings • List more ETFs • Create REIT from selected

GLIC/GLC property assets

Integrate with leading exchanges

Strategic alliance with leading regional exchanges • SGX • HKEX • ASEAN

Continue to pursue agreements to increase linkage with buy side and intermediary base • Cross-listing • Cross membership • Remote access • Mutual recognition

Enhance intermediary

Liberalisation of stock broking industry • Phase I (2010-

2012): complete consolidation, standardise approved activities

• Phase II (2013-2015): Fully liberalise brokerages by opening up licensing

• Phase III (2016-2020): Move to principle-based supervision

5.8bn ~13k 0 1.5bn

Strengthening the core EPP # 1: Revitalize equity markets

14

Case for change

Aspirations

Supply

Demand

• Low participation by foreign issuers/investors .

• Enhance positioning of Malaysia as a regional Sukuk hub

• Narrow investor base and focused on AAA/AA.

• Minimal retail participation in the bond market

Deep and broad fixed-income market with active secondary market

Total outstanding bond (RM B)

2,000

1,000

2020

883

2009

268 64

Total value of bond traded (RM B)

618

Widen the credit

spectrum

Increase participation

of foreign issuers

Increase retail

participation

• Encourage major GLICs/institutional

investors to further diversify their

investment to lower rated bonds

• Intensify promotional efforts to attract

foreign investors to :

invest in Malaysian bond markets

Issue Non RM Sukuk

• Develop retail fixed income

market

0.3bn ~ 1.4k 0 0.48bn

Strengthening the core EPP # 2: Deepen and broaden bond markets

2020 2009

2,000

1,000

15

EPP # 3: Transform DFIs

Aspirations

Effective and accountable DFIs to support developmental needs

Clear mandates

Providing value- added support

Efficient operations

Sustainable

6.8 6.0

0

5

10

NPL (%)

2020 2009

2.3 2.5

1

2

3

ROA (%)

2020 2009

Improve operations &

promote self-

sustainability of DFIs

•Revisit mandate and align operations

of each DFIs

Revisit DFI

mandates

•Refine detailed policy for board composition

and expertise requirement

•Strengthen performance based and

sustainability culture

•Improve overall productivity level

•Enhance risk management

Value add services

Emphasis on Islamic finance

•Extend offerings to include advisory and

value add service for all DFIS

•For all new financing starting in 2011,

do "Islamic first" for financing that

is feasible to be done in Islamic way

Italic = already championed by regulators

Case for change

Evolution of DFIs and FIs resulting in some degree of overlap

Varying degree on emphasis towards business sustainability

Select DFIs have relatively small economies of scale

Only few DFIs provide value add service to customer

2.1bn Limited 0 0.79bn

Strengthening the core

16 Italic = already championed by regulators

Lower cost

2.0 0.9 0.5 0.1

0

5 Cost per trn (RM)

Cheque Cash ATM Internet/ mobile

Migration at modest

pace

100

0

Cash

Cheque

E-pmt

2009

91

1 8

2005

93

2 5

Chequeless society

Centralized Malaysia Analytics

Frequency of transactions (%)

37

0

100

Cash

Cheque

E-pmt

2020

63

0

2009

91

1 8

M'sia Analytics

Switch RENTAS

Tax system

Other systems

1 – 5 years 1 – 7 years 1 – 10 years

1 Create integrated domestic switch

3

Expand merchant acceptance on domestic switch

4

Charge customer actual cost of cheque transaction.

6 Develop centralized Malaysia analytics

7 Expand partnership with other countries

2

Drive consumer adoption through selective forced mandating

8

Create pan-ASEAN consortium for payment switch

5

Implement intensive education and awareness program

9

Immobilize large denomination ringgit notes

1. Exclude impact from creation of centralized analytics, whereby the benefit will be towards economy at large and not specific to FS sector

Case for change

Aspirations

Integrated payment backbone (switch)

Centralized analytics Pan-ASEAN regional payment backbone

Conduct study to enable people perform payment transactions using universal identifier

2.8bn1 ~ 8k 0.1bn 0.62bn

EPP # 4: Create integrated payment eco-system

Strengthening the core

17

EPP # 5: Insuring our population

Case for change

Aspirations

•Life insurance penetration in Malaysia of 2.8% below world average

•Only 40% pop. with disposable inc. >RM3K can afford life insurance

•RM6K relief for EPF contributions and life insurance insufficient

Adequately insured population with peace of mind knowing their protection

needs are met

0

5

10

15

RM'000

6

3

6

6

Employee Insurance

Scheme

Term life insurance

• Basic coverage, low premium

• For death/permanent

disability

Hospitalization benefits

(Optional)

• Daily cash hospital benefits

in the event of

hospitalization

Critical illnesses (Optional)

• Basic coverage for C.I. (e.g.,

kidney failure, terminal

illness)

3

4

0

5

Life insurance penetration (% GDP)

2020 2009

47

75

Total life policies over population (%)

50

100

0

2020 2009

1.7bn ~ 9k 0.03bn 0.04bn

Serving a high-income population

Improve Tax Treatment

• Segregate EPF & insurance

contribution

• Additional RM2K tax relief for

insurance

EPF & life insurance

Medical & education

Current

10

EPF

Insurance

Proposed 12

18

EPP # 6: Accelerate private pensions

Case for change

Aspirations

2 million self-employed not covered by EPF

Most EPF members exhaust their lump sums within 3-5

years

Aging population increases strain on the system

Model pension system with vibrant private pension industry

Fund assets USD 38B

Fund participants ~3 M people

Zero pillar

Non-contributo-ry benefits

First pillar

Mandatory contributions

linked to earnings

Strong multi-pillar pension framework

Second pillar

Mandatory defined

contribution

Third pillar

Voluntary contributions

Fourth pillar Informal

sources of support

– Awareness

campaigns

– Online retirement

planning tool

– Training/seminar

Active EPF contributors

EPF retirees

Self-employed

Target segment

Customiz-ed features

to suit target

segments

Regulatory framework to govern PPF ops.

4.1bn ~ 2k 0.03bn 0.04bn

Revise EPF contribution

policy to promote

investment in PPFs

Voluntary shift of contributions above 12%

into PPFs

Enhance tax system for

PPFs

Voluntary withdrawal of EPF savings

from Acc. I & II

Option to withdraw EPF savings for PPFs if >RM1

Mn in Acc. I

Introduce PPFs as alternative option to unit

trusts

New RM6K relief for PPF contributions

Extend tax exemption for pension inc. to PPFs

Serving a high-income population

Develop Private

Pension Funds

Retirement Planning

Education Provide Incentives

19

EPP # 7: Spur growth of wealth management

Italic = already championed by regulators 1. Exclude impact from creation of centralized analytics, whereby the benefit will be towards economy at large and not specific to FS sector

Case for change

Aspirations

Sizable amount of Malaysian liquid wealth

2009

47%

27%

10%

15%

Significant offshore wealth

Onshore

Offshore

2009

87%

13%

Attractive wealth management destination and bringing back offshore Malaysian

wealth

17

355

0

200

400

600

WM AuM (RM B)

2020 2009

Increase

products

available

Encourage

withdraw

EPF amount

>RM1M

Attract

expertise

Carve a

niche in

Islamic

• Review definition of HNWI and allow for marketing

of products without approval

• Streamline approval process for retail products

• Encourage local players to compete with new

products

• Implement a "tiered returns" model for EPF amount

>RM1M to encourage withdrawal

– Proceeds from investment using withdrawn

amount to be tax-exempted

• Attract top 10 wealth management houses to be

located in Malaysia by providing tax break for the

first 10 years on income

• Increase number of Shariah financial planners

through training and education

• Exploit synergies with Islamic asset management

firms to leverage on the growing products pool

2.4bn ~ 6k 0 0.55bn

Serving a high-income population

- RM100k to

RM 1mil

- RM 1 mil to

RM 5 mil

- RM 5 mil & above

20

EPP # 8: Accelerate asset management

Italic = already championed by regulators 1. Exclude impact from creation of centralized analytics, whereby the benefit will be towards economy at large and not specific to FS sector

Case for change

Aspirations

Concentrated industry – top 5 accounted for 55% of AuM

Strong regional competition – S’pore AuM has been growing

twice as fast

Opportunity to capture growing segments

A thriving regional asset management hub

302

1,740

0

1,000

2,000

2020 2009

AuM (RM B)

Increase GLICs'

outsource mandate

Stimulate retail

market

Carve a nice in Islamic

fund

• Allow EPF member to withdraw up to 50% of account 1 if total amount in account 1 exceeds 120k • Expand list of approved unit trusts managers to include stock brokers and foreign fund managers

• Provide incentives for foreign sourced fund • Leverage on mandate to attract top funds in Islamic finance • Strengthen domestic fund management demand pool via the

growth of wealth management industry • Position Malaysia as Islamic product innovation hub

2.8bn ~7k 0 0.72bn Current vs desired level of

outsourcing AUM (RM Bn)

EPF

KWAP

SOCSO

LTAT

Tabung Haji

371

65

16

7

24

PNB

0% 5% 10% 15% 20%

49

Desired Current

50 Bn Outsourced

Increase GLICs outsourcing portion on average from 5% to 15% of total portfolio • Each mandate must be sufficiently attractive (i.e.

RM1-2M) • Firms must locate at least 6FTEs (including 2

portfolio managers) and bringing additional capital

Seed new growth

21

EPP # 9: Create regional champions

Aspirations

0

100 Foreign

(%)

Domestic 70

30

84

16

Source of net income for M'sian banks

Expand internationally in meaningful

manner

Push integrated

ASEAN banking

framework

Expansion Beyond

ASEAN in attractive markets

•G2G lobby to relax host country restriction

•Support to strong local banks for landscape

changing acquisitions

•Provide additional incentives for banks to

regionalize

•Explore possibility of initiating a more

integrated banking framework for ASEAN

region (esp. for banks licensing requirements)

•GLICs to take up stakes in attractive markets

beyond just following outward FDI/ trade flow

•Explore feasibility of merger among top

financial institutions either within Malaysia or

in ASEAN to create regional champion

Case for change

Domestic growth has

slowed down

Profitability also has come

down

13 10 7

0

10

20

Loan Growth (%)

Nominal GDP '05-

'09

2005-2009

2001-2005

1.4 1.2

0

1

2

ROA (%)

2009 2005

5.8bn ~9k 0 28.39bn

Go on the offensive

Malaysian bank in the top 3 in

ASEAN by market

capitalization

2020 2010

22

EPP # 10: Global Islamic finance hub

Case for change

Aspirations

M'sia already 3rd largest Islamic mkt

Most key countries still underpenetrated

Malaysia has the reputation & competitive advantage

Undisputable Global leader in Islamic Finance

11

0

20

Takaful world mkt share (%)

Domestic

Overseas

2020

20

2009

15

5 8

0

20

Islamic bank world mkt share (%)

2020

13

2009

11

2

M'sian Islamic Bank is among the World's top 5

Islamic Capital Center

Undisputable Global Islamic Hub

Islamic Intellectual Center

•Codify & standardize Shariah guidelines

•Push for global convergence and

mutual recognition

•Become CoE and reference points for Islamic finance research, development

and education

Italic = already championed by regulators

•Create mega i-bank and expand internationally

• Shift DFIs emphasis towards Islamic finance

• Lead creation of global Islamic liquidity mgmt, incl. more FX instruments

•Develop Islamic fund industry • Further develop non-Sukuk

capital market, e.g. i-REIT (Refer to EPP 1)

• Expand Takaful products overseas

• Strengthen Malaysia retakaful capacity

7.9bn ~12k 0.2bn 38.33bn

Go on the offensive

23

Overview of NKEA

Entry Points Projects

2012 Looking Forward

24

Listing of FGVH (FELDA) and Integrated Healthcare (Khazanah);

Increase GLICs sell down and free float in Bursa Malaysia;

Retail investors participation in bonds market;

Private Pension Scheme launched;

Mobile Banking Platform roll-out;

Regional expansion by Malaysian banks;

Islamic Mega Bank fully operational.

What’s in store for 2012 …..

25