Banking sector growth has accelerated as authorities have eased up somewhat on restrictive regulations, and banks are looking forward to an improved climate as overall economic growth revives. Rapid growth in lending to domestic business, albeit from a low base, gives some cause for hope that the sector is beginning to work through the limitations of an economy dominated by energy multinationals that require no domestic financing. There is also strong demand for consumer credit, and authorities are allowing renewed expansion after years of reining in household borrowing. Government-linked firms are being encouraged to raise funds domestically as a means of tapping excess liquidity that has traditionally been invested abroad. However, growth is occurring among deteriorating profitability, as authorities have responded to high loan failures rates, with caps on interest rates and consumer credit lines.
Brunei Darussalam’s banking sector has a unique set of features shaped by the country’s unique financial and social environment. As a relatively religious Muslim society with strong business ties to Singapore and the West, the Sultanate has taken a pragmatic approach to combining Islamic and Western banking. Local conventional banks, local Islamic banks, and units of international and regional conventional banking groups all go head-to-head with each other in a small and competitive market.
Domestic demand for credit is relatively limited, mainly because the economy is dominated by multinational energy companies that finance themselves internationally. The next biggest player in the economy, the government, runs large fiscal surpluses. The energy sector and government, however, keep substantial cash deposits, and servicing those deposit accounts is one of the banking system’s main functions.
The banking sector provides credit mainly to households and non-energy business sectors. Their demand for credit is far less than the supply of deposits, leaving banks with cash surpluses. Thus, Bruneian banks tend to invest about half their assets abroad, mainly in Singapore, due to the long-standing one-for-one convertibility of the Bruneian and Singaporean dollars.
Bank lending accounts for virtually all domestic corporate finance, as the country’s small size and low fundraising demands make it impractical to develop equity or corporate bonds. However, the Sultanate is promoting development of a market in sukuk (Islamic bonds), through government and government-linked issues. Officials from the Autoriti Monetari Brunei Darussalam (AMBD) told OBG a proposal to create an equity market through initial public offerings of minority stakes of larger state-owned firms is under discussion.
Size & Structure
Consolidated banking sector assets came to BN$20.4bn ($16.3bn) at the end of 2013, according to the AMBD, the central bank. That was equal to 101% of annual GDP, a relatively low figure for a high-income economy, which reflects the large portion of national savings held outside banks. Bank credit to the domestic economy came to BN$8bn ($6.4bn) or 39% of bank assets at the end of 2013, while foreign assets came to BN$10.2bn ($8.1bn) or 50% of assets. Domestic cash (notes, coins and reserve deposits at the AMBD) totalled BN$2bn ($1.6bn) or 11% of banking sector assets. Credit to the domestic private sector was BN$7.2bn ($5.8bn) at the end of 2013, including BN$4.9bn ($3.9bn) to households and BN$2.3bn ($1.9bn) to private business, according to AMBD data. That data again is for the consolidated banking sector, including finance companies, which are bank subsidiaries that specialise in consumer car loans and raise funds from parent banks or by accepting deposits.
Banks also extended BN$320m ($256m) of credit to public enterprises and BN$500m ($400m) to the government through holdings of government-issued sukuk, which are issued for benchmarking and money-supply management purposes. Overall the government is a major creditor to banks, with BN$3.1bn ($2.5bn) of net claims on the sector at the end of 2013, according the AMBD. Separate from the banking sector, Brunei Darussalam’s 13 licensed investment advisers had BN$7.3bn ($5.8bn) of assets under management (AUM) at the end of 2012, according to AMBD data. The majority of those assets are invested. Also not included in banking sector data is a small offshore banking industry, serving mainly Europeans, comprised of four banks with a total of BN$97m ($78m) of assets at the end of 2012.
Conventional Vs Islamic
Brunei Darussalam’s dual banking system is relatively seamless. Conventional and Islamic banks offer similar current and savings accounts, home mortgages, car loans, credit cards and other consumer credit products, usually at identical interest rates. Conventional finance is larger and more established, with six conventional banks accounting for BN$12bn ($9.6bn) or 61% of bank assets at the end of 2012, while two Islamic banks accounted forBN$7.bn ($6.2bn) or 39%, according to the latest available AMBD data. That data is for banks only, not including the assets of finance companies. Of the three finance companies, two are conventional and one is Islamic.
However, Islamic finance enjoys government support and has been increasing its market share. Islamic banks have increased their share of bank assets from 37% in 2010, while Islamic mutual funds have increased their share of domestic mutual fund assets from 17% in 2009 to 26% in 2012, according to the AMBD.
Foreign Vs. Domestic
Arguably the more important dividing line within the Bruneian banking system is between foreign-owned and locally owned banks. All three locally owned banks are government-linked, including both Islamic banks, Bank Islam Brunei Darussalam (BIBD) and Perbadanan Tabung Amanah Islam Brunei (TAIB), and the one locally owned conventional bank, Baiduri Bank. BIBD’s largest shareholders are the Ministry of Finance and the Sultan Haji Hassanal Bolkiah Foundation. TAIB, fully government-owned, is technically an Islamic trust fund, but is functionally equivalent to a bank. Baiduri’s largest shareholders are Baiduri Holdings, Royal Brunei Airlines and Royal Brunei Technical Services. France’s BNP Paribas owns a 15% stake in Baiduri Bank as well.
The five foreign-owned banks are conventional banks and include subsidiaries of Britain’s HSBC and Standard Chartered Bank, Malaysia’s Maybank and RHB Bank, and Singapore’s UOB Bank. Citibank recently withdrew from Brunei Darussalam as part of a global restructuring, ending operations in March 2014. The three local banks had BN$10.2 ($8.2bn) or 52% of bank assets at the end of 2012, while the five foreign-owned banks had BN$9.4 ($7.6bn) or 48%, according to OBG’s calculations based on data provided by AMBD and Baiduri Bank. However, the local share would be larger if the assets of finance companies were included.
Well-Capitalised & Liquid
Bruneian banks have extraordinarily high capital adequacy ratios, well beyond what the AMBD’s relatively conservative regulatory regime requires. For example, the AMBD requires banks to maintain a minimum 5% ratio of Tier 1 capital to risk-weighted assets, but as of September 2013 the banking sector’s average ratio was 19.6%, according to data provided by the AMBD to the IMF. Conventional banks had a slightly lower average Tier 1 ratio of 17.6%, while Islamic banks had a slightly higher ratio of 21.5%. By comparison, the international Basel III accord adopted in the wake of the 2008 global financial crisis calls for minimum Tier 1 ratios to be raised from the current international standard minimum of 4% to 7.5% by 2019.
Bruneian banks are also extraordinarily liquid, especially foreign-owned banks, whose liquid assets made up 68% of total assets, according to September 2013 IMF data, compared to local banks’ average of 48%. However, foreign banks are also much more dependent on demand deposits, which were equal to 58% of assets as of September 2013 compared to 38% for local banks. Thus foreign and local banks’ ratios of liquid assets to demand deposits are similar, at 117% and 125%, respectively. High liquidity is partly a necessity for Bruneian banks as the government’s large deposits fluctuate unpredictably, often by more than 5% of banking sector assets from month to month.
Foreign exchange risk is limited, as the sector had less than BN$150m ($120m) of foreign liabilities at the end of 2013, according to the AMBD. The majority of foreign assets are denominated in Singaporean dollars, which are considered to bear no foreign exchange (FX) risk, due to the government’s commitment to maintaining one-for-one convertibility.
Islamic banks are more exposed to currency risk, as much of their foreign assets are denominated in US dollars. Islamic banks had an average net open FX position of 22% of capital, according to September 2014 IMF data, while for conventional banks it was just 1.1%.
Business Lending Drives Growth
Credit to domestic business and households, the segment most crucial to banks’ bottom lines, increased at a healthy pace of 9.9% in 2013 to BN$7.5bn ($6bn), according to AMBD data. The growth was led by a rapid expansion of corporate lending, which grew by 19% in 2013 to BN$2.3bn ($1.9bn). Corporate lending is growing from a very low base, and was still at just 11% of GDP at the end of 2013. Lending is fairly evenly spread across all major economic sectors except energy.
Car loans are another important area of growth, up by 14% in 2013 to BN$2bn ($1.6bn). Demand for housing loans is relatively low, due to intergenerational households and government no-interest housing loans for public employees, but the segment is seeing strong growth, with land-purchase, house-purchase and house-construction loans growing by 10% in 2013 to BN$1bn ($0.8bn). Home improvement loans are growing rapidly and were up by 94% in 2013 to BN$525m ($420m). Growth continued in housing loans despite a move by the government in 2012 to declare invalid power of attorney or trust deeds, which had been used to circumvent restrictions on foreign land ownership. AMBD officials told OBG that such deeds had never been authorised, but bank executives expressed that they were surprised that foreigners’ purchases of land were retroactively converted into long-term leases.
Joan de Zilva Moonesinghe, a regulatory consultant for AMBD, told OBG the decision was made in February 2014 to raise the maximum size of consumer lending portfolios from 30% to 40% of assets, encouraging banks to utilise excess liquidity. “The thinking was to use the excess liquidity that has been going to offshore deposits. If people want it, they can have it.”
Debt & Rate Caps
However, general consumer loans, including credit cards and personal loans, continued to contract as a result of a strict clamp-down under way since 2010. Reacting to a rise in non-performing loans (NPLs), the government capped credit card debt at two months’ salary for people earning less than BN$10,000 ($8000) per month or one month’s salary for those earning less than BN$1000 ($800) per month.
Banks were required to convert outstanding credit card debts in excess of those limits into personal loans to be repaid within three years. As a result, credit card debt is small at BN$142m ($114m) at the end of 2013, and personal loans have been steadily shrinking, from BN$1.9bn ($1.5bn) in March 2011 to BN$1.3bn ($1bn) at the end of 2013, according to AMBD data.
At the same time, banks were restricted from making consumer loans to people who receive their primary income into an account at a different bank. On the positive side for banks, the AMBD launched a credit database in 2012 with histories from all lenders, which has made it much easier to judge credit risks.
Lai Pei-Si, the CEO of Standard Chartered Brunei Darussalam, told OBG the deleveraging of consumer credit was dramatic, but clients had weathered it quite well. “We expected to see a lot of bankruptcies, but that has not happened. Retail businesses suffered from the cut-back in consumption, but now that those three years have passed, the worst is over and we’re back to growth mode. Though I would say expectations are somewhat muted.” Lai said her bank was held back by the rule against making consumer loans to people who receive their salaries at other banks. “We have to make sure we first get the customer’s salary account, and that can be hard. Now that there’s a credit bureau with all the banks’ credit histories, arguably the rule’s not necessary anymore. So we’re trying to lobby for it to be changed,” she told OBG.
Another important regulation implemented in 2011 guarantees personal deposits up to BN$50,000 ($40,000), but requires banks to hold a high ratio of domestic assets to guaranteed deposits, currently 2.5:1 for foreign banks and 2:1 for local banks. This was done to boost domestic lending, but it also forced banks to move some cash from Singapore banks to reserve deposits at the AMBD, which have more than doubled since 2011 to BN$2bn ($1.6bn) at the end of 2013.
Then in a pair of measures in 2012 and 2013, the AMBD set strict interest rate caps on consumer credit and some business loans. Car loans are capped at 4.25%, home mortgages at 4.5%, most unsecured personal loans at 7.5% and credit cards at 18%. That is expected to put further pressure on profitability, which has slid steadily from an average 13.3% return on equity (ROE) and 1.5% return on assets (ROA) in 2009 to an average 7.6% ROE and 0.8% ROA in 2012, according to AMBD data. Deposit growth, driven by government and the business sector, was slow in 2013, leading to a stall in overall asset growth and a decline in foreign assets. Average month-end assets for the 12 months of 2013, at BN$ 20.5bn ($16.4bn), were up only 0.6% from the corresponding average for 2012, according to OBG’s calculations based on AMBD data. Average month-end foreign assets in 2013, at BN$10.8bn ($8.6bn), were down 4% from the average for 2012. Comparing 12-month averages filters out short-term fluctuations driven by government deposits.
While lending growth has been strong, Brunei Darussalam’s domestic banks continue to face relatively high rates of NPLs. According to AMBD data provided to the IMF, domestic banks had a gross NPL ratio of 9.1% as of September 2013, while foreign banks had a much lower ratio of 2.1%. Those numbers are for banks only, excluding finance companies. As largely state-run institutions, Brunei Darussalam’s local banks play a social role in supporting domestic business, and they are willing to accept much higher risks when lending to projects seen as socially beneficial. That is especially true in lending to small and medium-sized enterprises (SMEs), an area where local banks are under strong pressure from the government to boost lending. Bruneian SMEs pose challenges due to the lack of personal income tax, including for sole proprietors. Although new small corporations are exempt from corporate tax for three years and companies with annual income below BN$250,000 ($200,000) pay reduced corporate tax rates, many SME owners prefer to remain sole proprietors, and many that incorporate structure their business so that profits are directed to a separate sole proprietorship. This makes it difficult for bankers to judge a firm’s creditworthiness.
Sector-wide gross NPL ratios have been coming down steadily, from 11.2% at the end of 2009 to 6.8% as of September 2013, according to AMBD data. However, the reduction appears to be largely due to write-offs. The annual reports of BIBD, Brunei Darussalam’s largest bank with 6.4bn ($5.1bn) of assets at the end of 2013, show that loans newly classified as non-performing grew from BN$20m ($16m) in 2011 to BN$24m ($19m) in 2012 and BN$35m ($28m) in 2013. Meanwhile, BIBD reduced its gross NPL ratio from 8.8% at end-2011 to 5.5% at end-2013 by writing off BN$76m ($61m) of NPLs in 2012-13. It is worth pointing out, however, that BIBD’s profitability has held up, with net income growing from BN$87m ($70m) in 2011 to BN$119m ($95m) in 2012 and dipping slightly to BN$114m ($91m) in 2013.
While the climate for banking in Brunei Darussalam remains competitive and the scale of the market is small, credit growth rates in business lending are expected to remain strong as the government leans on local lenders to support development. Whether the effort succeeds in generating growth will depend on the success of the economy and the energy sector, upon which nearly every business in Brunei Darussalam relies. With investment set to rise in offshore energy, downstream processing and infrastructure, banks could see more business reach their credit portfolios.