Business Strategy: Malaysia Banking Update Business Strategies and Investment Priorities

IDC Financial Insights: Asia/Pacific Banking Advisory Service

BUSINESS STRATEGY S h a wn Y i p #FIN229453

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IDC FINANCIAL INSIGHTS OPINION This IDC Financial Insights report provides an update on the banking industry in Malaysia the nuances, challenges, and opportunities that exist. The report considers business strategies being deployed, and technology investment priorities, for an indication of how Malaysian banks are positioning themselves to stay ahead of the competition. We also draw upon a series of discussions undertaken over the past year with chief information officers (CIOs) and senior operations and technology executives from Malaysian banks. The discussions covered top-of-mind executive concerns, key initiatives being undertaken, and opinions on emerging trends in banking. In summary: Given the intensifying competition in Malaysia's banking sector, it comes as no surprise that some of its leading local banks have started articulating well-crafted regional strategies. At the same time, significant opportunities do exist for these banks in their own backyards, most notably in Islamic banking, remittances, trade finance, and corporate and consumer payments. Cognizant of the fact that electronic transaction volumes in Malaysia are set to grow exponentially, it is unsurprising that local banks have placed considerable focus on their echannel propositions, as they look not only to grow the size of the ebanking customer base but to increase utilization rates in a meaningful manner. "Transformation" has become a major theme in Malaysia. Strategic and tactical initiatives are being undertaken with the primary goal of "transforming" the nature of customer engagement, business or operational processes, and technology infrastructures. The symbiotic relationship of the risk and technology functions is clearly evident in the plethora of transformational projects currently being undertaken by Malaysian banks. Risk has become an important consideration in project portfolio management,
July 2011, IDC Financial Insights #FIN229453 IDC Financial Insights: Asia/Pacific Banking Advisory Service: Business Strategy

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especially as each individual project requires standardization of risk controls and processes in line with regulatory mandates and operating frameworks.

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TABLE OF CONTENTS
P In This Study S i t u a t i o n O ve r vi ew 1 1

Malaysia ................................................................................................................................................... 1 T h e Ap p r o a c h 5

Risk Management and Compliance .......................................................................................................... 5 Customer Centricity and Service Channels .............................................................................................. 6 Business Transformation and Core Modernization ................................................................................... 7 Traditional and Emerging Business Areas Shaping Investment Focus..................................................... 11 Future Outlook 14

Outlook for Technology Spending............................................................................................................. 14 Emerging Themes in Malaysian Banking.................................................................................................. 16 Essential Guidance 21

Actions to Consider................................................................................................................................... 21 Learn More 22

Related Research ..................................................................................................................................... 22

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LIST OF TABLES
P 1 2 3 4 5 Individual Bank Performance Highlights....................................................................................... 3 Cross-Border Regional Strategy .................................................................................................. 4 Customer-Centric and Channel Initiatives .................................................................................... 7 Transforming Core Systems and Business Processes ................................................................ 10 Selective Approach to Outsourcing .............................................................................................. 17

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LIST OF FIGURES
P 1 2 3 Strategic Focus Areas in the Next 12 Months .............................................................................. 15 Estimated Spending on Technology in 20102011 ...................................................................... 16 Change in Size of IT Budgets in the Following 12 Months ........................................................... 16

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IN THIS STUDY This IDC Financial Insights report draws upon a series of discussions undertaken with senior-level executives from Malaysian banks. The report examines their viewpoints and experiences, and strategic initiatives planned and already under way, as operational transformation increasingly becomes recognized as key to business competitiveness. SITUATION OVERVIEW With a massive hangover threatening to set in following the unprecedented cyclical rebound, private sector deleveraging, and major balance sheet adjustments in the West, and with worldwide economies struggling to adjust to a poststimulus environment, the paradigm shift to "the new normal" has increasingly been factored in by the markets, as well as in economic statistics. We are keeping our eyes peeled as to what extent the emerging markets (and especially Asia) are able to carry the global economy. Here in Malaysia too, concerns persist around asset bubbles and consumer price inflation, long-term employment growth outlook and sustainability of domestic demand, and a looming uptrend in NPLs.
Malaysia

According to the Malaysian Institute of Economic Research, Malaysia's economic resilience continues, recording 4.6% year-onyear GDP growth in 1Q11, contributing to an expected 5.2% growth in overall GDP by year-end. There are signs that the recovery can be sustained, underpinned by its vibrant manufacturing and service sectors, as well as an emerging affluent segment constituting 7% of the population, and which is seeing 17% year-on-year compound growth. Under its New Economic Model (NEM) an economic transformation program released in March 2010 Malaysia has set lofty ambitions: to triple GNP from US$188 billion to US$523 billion, to create 3.3 million new jobs, and to realize GDP growth per capita of US$15,000 (from US$7,000 currently), all to be achieved in 10 years. NEM is instrumental in providing the framework necessary for Malaysia to achieve the "developed nation" status.

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The Banking Landscape

Competition is intense in the banking sector, and this is set to intensify further. Since the start of 2011, we counted 23 commercial banks of which 9 are local and 14 are foreign players competing in a market of 27 million people. It is worth pointing out that the central bank Bank Negara Malaysia (BNM) has displayed an appetite for further liberalization. For example, while the foreign shareholding of Malaysian commercial banks remains capped at 30%, foreign ownership rules for insurers and investment banks have been relaxed from 49% to 70%. BNM has continued to award new commercial banking licenses to foreign lenders in a bid to boost competition and international links and to facilitate cross-border trade and investment flow, with the likes of Bank Mandiri, BNP Paribas, Mizuho Corporate Bank, National Bank of Abu Dhabi, and Sumitomo Mitsui Banking Corporation recently receiving commercial banking licenses. One important driver for this move to financial deregulation is to enhance the country's attractiveness as a regional financial hub for foreign lenders. Momentum is clearly gathering in this regard, with the likes of CIMB, Standard Chartered Bank, and Citi choosing to hub certain operations (and locate centers of excellence) locally. It is also worth noting that these are operations higher up the value chain such as trade finance processing and not just basic data processing and customer service centers.
Industry Performance

In line with improved economic and financial market conditions, Malaysian banks have generally posted strong earnings results when measured across net interest and financing income, cost-to-income ratios, and return on equity (ROE). The rapid expansion of the lending portfolio witnessed in 2010 is expected to continue through 2011, with robust demand for household loans and working capital financing contributing to projected nominal loans growth of 1215%. Domestic core customer deposits also look to be bouncing back, especially for leading local players such as CIMB, Maybank, and Public Bank. At the same time, capital adequacy ratios have generally improved, although there exists lingering concerns that lenders will face pressure to raise capital to meet Basel III requirements. With loans expansion (13%) continuing to outpace deposits growth (7%) by some distance, 2010 has been marked by an industrywide race for retail deposits as Malaysian banks look to rebalance a seven-year high loans-deposits ratio of 81.3%. We detail some 1H10 highlights of selected individual bank performances in Table 1.

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TABLE 1
Individual Bank Performance Highlights
Bank Maybank Performance Highlights (1H10) Maybank's record net profits were announced (higher revenue across all key business segments, including insurance and Takaful, investment banking, and Islamic banking), especially compared against last year's impairment charges on the acquisitions of Bank Internasional Indonesia (BII) and MCB Bank. Locally, Maybank registered impressive growth in its loans portfolio and deposits base (above 10% for each) while improving net interest margins and reducing loan loss provisions. It also successfully strengthened its capital base through fund raising. Its overseas operations (led by its Singapore business) also supported earnings strength. The bank's development of a single regional franchise has enabled it to realize internal synergies and deliver regionwide product propositions, resulting in record first-half profits in 2010. Apart from strong contributions from corporate and investment banking, the bank has seen earnings surge in its Indonesia business, as well as a drop in loan-loss provisions. The bank has successfully strengthened its local consumer banking business; it is now the second-largest local mortgage lender and the third-largest player locally in retail deposits, credit cards, and SME loans. Public Bank retains the title of most profitable local bank in Malaysia. This is largely attributed to improvements in net interest margins (supported by growth in retail lending), noninterest income (especially unit trust management fees, foreign exchange income, and brokerage commissions), and lower loan impairment allowances (through an improvement in already-impressive asset quality, particularly of overseas operations). Securing its position as most profitable foreign bank, Citi holds leading positions in cards, foreign exchange and risk management, and wealth management impressive considering it has only 11 branches. The bank also saw gradual increases in mortgage, checking accounts, and investments during this period.

CIMB

Public Bank

Citi

Source: IDC Financial Insights, 2011

Given the intensifying competition in the banking sector, it comes as no surprise that some of Malaysia's leading domestic banks are looking for regional growth opportunities. While CIMB and Maybank have hogged the headlines for their recent overseas acquisitions, the likes of RHB, Hong Leong Bank, and Affin Bank have also been refining their cross-border strategies, as detailed in Table 2. Locally too, while the banking sector continues to welcome new (and niche) entrants, there is clearly consolidation under way, especially among the more established local banks. Hong Leong Bank's acquisition of Eon Capital (parent of Eon Bank) saw the creation of the nation's fourth-largest banking entity by banking assets and second largest in terms of branch network. Meanwhile, interest continues to swirl around the likes of RHB Bank, Affin Bank, and Asian Finance Bank Berhad.

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TABLE 2
Cross-Border Regional Strategy
Bank Maybank Regional Strategy Maybank has ramped up its regional strategy over the past two years, especially following its recent acquisitions of BII in Indonesia and MCB Bank in Pakistan. Overseas operations currently contribute around 21% of earnings, and Maybank has targeted this to reach 40% by 2015. Its operations in Indonesia (where it appears to have adopted an aggressive expansionary approach) and Singapore (with a strategy of more selective and moderate expansion) are crucial to realizing its targets. Recently, Maybank has significantly expanded its regional capital markets footprint through the high-profile acquisition of Kim Eng Securities in a deal that would catapult Maybank to a top 3 brokerage position. With a spate of high-profile acquisitions in Indonesia (of Bank Niaga) and Thailand (of BankThai) building upon CIMB's recent consumer banking growth momentum in Singapore, CIMB certainly looks poised for growth in accordance with its Malaysia, Indonesia, Singapore, and Thailand (MIST) strategy. Already, its non-Malaysian business has jumped to an all-time profit high of 44% in 1H10 (from 20% in 1H09), underpinned by a 170% year-on-year growth in Indonesia and a return to profitability of its operations in Singapore and Thailand. In 2006, RHB boldly announced ambitions to become one of the three largest banks in Southeast Asia by 2020, with plans to double profitability and market capitalization by 2010. However, expansion has been relatively slow; the bank kicked off its regional growth strategy by acquiring Bank Mestika (a small, unlisted bank in Indonesia with 50 branches) to complement small-scale commercial banking operations in Brunei, Singapore, Thailand, and Vietnam. While attention has been on Hong Leong Bank's acquisition of Eon Capital Berhad, it has also formulated a strategic plan of "Embedding Hong Leong Bank in the Region." Besides an existing strong consumer finance franchise in Singapore (Hong Leong Finance), the bank has secured a commercial banking license in Vietnam. China has also become a major focus area: since securing a 20% equity stake in Bank of Chengdu, Hong Leong Bank has transformed its branch operations, expanded its loans book (and quality), established a consumer finance joint venture (Sichuan Jincheng Consumer Finance), and initiated partnerships with China Development Bank (crossborder financing and funding opportunities) and ICBC (trade settlement services). Following in the footsteps of its larger local rivals, Affin Bank has signaled its intent for cross-border expansion by initiating a partnership with Hong Kong's Bank of East Asia (BEA), exploring cooperation in business areas (such as asset management, transaction banking and treasury, investment banking, Islamic banking, corporate and investor services, corporate business referrals), as well as in risk management and staff training. The bank has also acquired an Indonesian bank (Bank Ina Perdana) to complement its regional Islamic banking push.

CIMB

RHB

Hong Leong Bank

Affin Bank

Source: IDC Financial Insights, 2011

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THE APPROACH This section examines some of the initiatives planned and currently under way in support of the growth strategies previously described.
Risk Management and Compliance

The symbiotic relationship of the risk and technology functions is clearly evident in the plethora of transformational projects currently being undertaken by Malaysian banks. Risk has become an important consideration in project portfolio management, especially as each individual project requires standardization of risk controls and processes in line with regulatory mandates and operating frameworks. This in turn warrants significant management attention and resources in the areas of project and operational risk management, governance, and compliance. Indeed, it is estimated that up to 35% of overall operational and technology-related spending is allocated to risk management and compliance. Although risk management is an industrywide priority, approaches vary between established players (both local and foreign) and newer entrants when it comes to managing business and operational risks. For established local players such as Alliance Bank and Bank Islam, the regulatory spotlight on capital risk management and Basel compliance has provided the impetus for them to strengthen existing end-to-end processes and controls: scoring models are being refined, investments in advanced analytics and reporting capabilities have been undertaken, and process improvements are being made across loans origination and approval, collateral and limits management, and recovery and collections. In comparison, newer entrants into the Malaysian banking scene such as Al Rajhi Bank and Asian Finance Bank have chosen to invest in end-to-end risk capabilities as part of the strategic focus on achieving rapid yet sustainable business growth. The feedback loop from risk management has clearly become fundamental in supporting business objectives, particularly for the more established banks. For example, one large local bank shared how "know your customer" (KYC) has taken on a new dimension in managing customer asset quality right from the point of origination, with the risk function assuming a more active role in defining targeted market segments.

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Customer Centricity and Service Channels

The emergence of the Asian consumer has provided a strong impetus for banks operating in the Asia/Pacific region to invest heavily in their delivery channel capabilities, with the goal of enhancing the customer engagement process. Foreign players such as Citi and Standard Chartered Bank have hogged the headlines for their recent efforts in branch transformation and mobile enablement as they look to leverage the strengths of their global franchise and operations. In response to intensifying competition in the retail and commercial banking space, Malaysian banks too have been active in refining their channel- and customer-centric strategies. Table 3 lists some recent noteworthy initiatives being undertaken by Malaysian banks. Cognizant of the fact that electronic transaction volumes in Malaysia are set to grow exponentially, it is unsurprising that local banks have placed considerable focus on their echannel propositions, as they look not only to grow the size of the ebanking customer base but to increase utilization rates in a meaningful manner. Meanwhile, newer entrants with limited physical footprints have also sought new avenues of distribution through tie-ups with ATM network providers and nonbanking entities such as POS Malaysia. It has become increasingly evident that while risk, compliance, security, and operational efficiency have understandably occupied the minds of the C-suite, this has come with a tangible, industrywide shift in focus onto the customer on how banks can better manage customer loyalty and experience. The proliferation of consumer devices presents a double-edged sword for banks to identify and capitalize on engagement opportunities offered by a myriad of customer touch points that have rapidly grown in importance while managing the customer experience across emerging and varying forms of communication.

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TABLE 3
Customer-Centric and Channel Initiatives
Bank Maybank Key Initiatives Regional expansion of Internet banking offering across Philippines, Singapore, and Vietnam by Maybank following a recent MYR5 million upgrade of its Maybank2u platform. Driving contactless (NFC) mobile payments in partnership with Maxis, Nokia, and Visa. Building an international-class wholesale banking proposition. CIMB's targeted 15% growth in retail deposits in 2010 was supported by campaigns such as 2 Good 2 Be True. Regional expansion of Web-based corporate banking platform (BizChannel), consolidating and strengthening cash management and trade finance capabilities. Launch of RHB-POS Malaysia Shared Banking Services, significantly increasing channel footprint. Introduction of Easy by RHB targeted at transforming (mass market) customer experience. MYR40 million branch transformation program to expand and upgrade branch network, which is seen as the "bedrock of our franchise." Known to be exploring upgrades to Internet banking platform and the introduction of mobile banking. Investments in CRM, wealth management, asset allocation, and financial planning systems. Customer segmentation efforts focused around optimizing channel infrastructure and services across different customer sets. Aggressive expansion of branch network. Known to be exploring distribution opportunities (subject to BNM regulations) via strategic partnerships.

CIMB

RHB

Hong Leong Bank

Alliance Bank Bank Islam

Al Rajhi Bank

Source: IDC Financial Insights, 2011

Business Transformation and Core Modernization

Transformation has become a major theme in Malaysia. It is striking how the term "business transformation" has been repeatedly cited across practically all meaningful conversations we have had. Strategic and tactical initiatives are being undertaken with the primary goal of "transforming" the nature of customer engagement, business or operational processes, and technology infrastructures. Given the plethora of multiple projects currently under way, project portfolio management and governance have unsurprisingly emerged as a major issue, particularly for the larger banks. This it appears is something the industry is still coming to terms with and relates to the pressing need to carefully define and structure project management processes through the establishment of centralized program management units.
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CIMB Transforming in the "MIST"

Centralization is a theme associated closely with CIMB's superregional growth strategy. Having formulated a strategy of building a single, consistent IT and operations framework that underpins its regional business model, CIMB has indicated a desire to standardize skill sets and derive operational synergies across the Group. The intent is to create a regional, multichannel platform that facilitates product development and distribution, client servicing, and knowledge management. The largest component of CIMB's blueprint of transforming its crossborder operations (an initiative expected to cost MYR2.1 billion) is its core banking engine, dubbed "1Platform." It was announced in 2010 that Silverlake Axis has been commissioned to build a MYR1.1-billion regional core banking platform for the bank. Such a large-scale project naturally involves multiple parties: Silverlake will provide the core engine, IDS Scheer will supply business process management solutions, IBM will provide and maintain the IT infrastructure, and Accenture will provide consultancy services from a program management standpoint. The bank has chosen a phased approach to migration (starting with Thailand and then Malaysia, Indonesia, and Singapore, respectively); it is an undertaking estimated to last the next five years. In parallel with the work done around its core banking system, CIMB has also embarked on a comprehensive reengineering of its operations and back-end processes by re-laying the entire architecture supporting its front-end customer touch points. The bank has also actively sought opportunities for enterprise collaboration to shorten decision-making processes, to respond more effectively to business opportunities, and to scale back on operational costs. Cisco TelePresence suites have been deployed across CIMB's MIST operations, marking it as the first lender in Malaysia to harness the power of video (via simulation of inperson presence) and virtual meetings (seen as having an edge over conventional videoconferencing) to drive internal collaboration across geographically disparate locations. To address the inevitable challenges in managing such a broad portfolio of projects, CIMB has established a dedicated transformation office with around 300 full-time staff. While the bank is cognizant of the challenges of operating across multiple regulatory environments, there is a sense that regulatory convergence may eventually occur, possibly with regulators looking at Southeast Asia as a totality (akin to Europe). When that time comes, a common, cross-border banking platform will demonstrate its true value in differentiating the bank, as it reacts to changing market conditions and formulates evolving strategies.

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Modernizing Operations, Industrywide

For CIMB, the digestion of recent purchases and satiation of regional ambitions have seen it bear the flag for business and operational transformation. Our discussions have found other like-minded banks in Malaysia pursuing similar approaches, as described in Table 4.

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TABLE 4
Transforming Core Systems and Business Processes
Bank Maybank Transformation Agenda Building upon its market-leading position at home, and fast-growing operations in Indonesia, Pakistan, and Singapore, Maybank has ambitions of becoming a regional financial services leader by 2015. It has embarked on a "massive transformation exercise," which includes a much-protracted enhancement of its core banking system capabilities, significant branch expansion in Indonesia, and embedding performance improvement initiatives within each key earning segment. The bank has earmarked US$500 million for five major projects over the next five years, with core banking being heavily prioritized. RHB has invested in a document imaging and workflow system, which saw seven back-office trade centers centralized into a single processing center. The bank's regional strategy (Malaysia, China, Singapore, and Vietnam) is driving a focus on operational centralization and systems modernization. One such initiative relates to transforming various front-end systems: for instance, streamlining loans origination processes and integrating these with analytics, with risk-based pricing as a long-term goal. The bank has also recently consolidated its regional IT and datacenter operations into a purpose-built twin tower office development in Malaysia, streamlined its communications network architecture, and sought to improve the availability and resiliency of its core banking system. The bank has just emerged from a three-year enterprise transformation program, covering both business process and technology. The bank has initiated a business transformation project titled "Project Quantum" three years ago, but unlike the strategies of its larger peers that had a regional undercurrent, the bank had a distinct (but equally challenging) mandate: domestic integration of distinct business lines across investment banking, Islamic banking, SME, and retail banking, alongside its core strengths in hire purchase. In 2009, the bank invested MYR20 million to upgrade its core banking and disaster recovery capabilities, with an aim to improving customer transactions fourfold. It has also looked to improve enterprise collaboration and productivity via a suite of office automation tools. The bank has recently completed its IT Infrastructure Revamp (the second pillar of its operational turnaround plan). Because of enhancements already made to support its core Islamic banking business, and due to related regulatory considerations, the bank decided to upgrade its existing core banking system capabilities, rather than a replacement of its core engine. There are indications that the bank will focus on improving the efficacy of certain front-end processes (e.g., loans origination) at a country level. The organization's head office is understood to be strategizing on a five-year MasterPlan, in support of geographic and functional business expansion. This includes plans to renew its 10-year-old legacy core banking system.

RHB

Hong Leong Bank

Alliance Bank

Eon Bank

Bank Islam

Standard Chartered Bank

ICB Global Management

Source: IDC Financial Insights, 2011

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Traditional and Emerging Business Areas Shaping Investment Focus

The increasing regional prominence of a number of homegrown names such as CIMB, Maybank, Hong Leong Bank, and RHB is a testament to the impressive strides made by Malaysian banks. Crossborder ambitions aside, significant opportunities exist for these players in their own backyards. Indeed, the vibrancy of Malaysia's banking space is reflected in the arrival of new entrants keen to carve out niches for themselves. It is worth considering where some of these opportunities lie, and how these are shaping investment priorities of banks.
Islamic Banking

Islamic banking in Asia/Pacific is still very much in its nascency. Following Malaysia's lead, Hong Kong, Indonesia, Japan, Korea, and Singapore have all sought to develop and promote Islamic banking in their turfs. As is often the case in development-stage businesses, where there remains significant scope for growth, there lie equally significant uncertainties. In the context of Islamic banking, the mini-debt crisis faced by the Middle East drew questions over the legal treatment of bankruptcy. Similar questions were also raised over mainstream adoption of this alternative (Islamic) approach to financing, as well as over unequal interpretations of "shariah" law in finance. The region's robust recovery from the economic downturn has since addressed some of these questions. Malaysia has demonstrated a clear intent to consolidate its regional leadership in this space, putting in place a clear operating framework and favorable regulatory environment (with streamlined licensing processes and tax incentives). Meanwhile, Islamic (or shariah) financing has continued to gain mainstream acceptance as a viable funding avenue locally. Malaysia has since hosted its largest-ever "sukuk" (or bond), and the first foreign currency "sukuk". Malaysian banks have largely converted their Islamic banking "windows" into full banking subsidiaries. The world's first "shariah"-compliant electronic commodity trading platform launched by Bursa Malaysia (the stock exchange) has continued to gain traction. And perhaps most importantly, there has been renewed regulatory clarity on procedural and authoritative resolution of conflicts over the "shariah" interpretation of financing structures, widely acknowledged to be a major challenge to deeper market development.

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Market leader Maybank Islamic (with 17% share of "shariah"compliant assets) is targeting 2030% growth in loans and deposits, with a view to having its Islamic loans portfolio constitute 33% of overall loans portfolio by 2015. Foreign niche players such as Al Rajhi Bank and Kuwait Finance House with largely independent management structures and autonomy over regulatory compliance, reporting, and procurement decisions at a local level are looking to expand market share despite limited distribution networks, with an eye on partnership or acquisition opportunities with other specialist Malaysian Islamic lenders. HSBC Amanah the Islamic insurance arm of HSBC Malaysia registered a stunning 200% growth in new business in 2010, driven by the success of its retirement products. To capitalize on this strong interest, the vendor community has been quick to put forward Islamic banking solution modules across core, trade, and treasury with the likes of Avaloq, Fiserv, Misys, Temenos, and SunGard, competing for a foothold.
Trade Finance and Payments

The Malaysian government's Economic Transformation Program (ETP) continues to be a driving force through 2011 and beyond. One immediate area where loans growth is expected to spike is in project financing although a perceived lack of maturity in credit structuring has been flagged. Trade financing is also expected to gain ground as Malaysian banks rethink their propositions to in response to deeper interregional trade flows and local nuances. This has resulted in a sharpened focus on integrated trade solutions catering to both conventional and Islamic financing requirements. Among these: Maybank the market leader with its 28% market share of the local trade finance business has strengthened its enterprise cash management offering (Maybank2e.net) with an online Misys trade solution, which now forms part of the bank's integrated cash management trade finance proposition. AmBank has recently deployed an integrated trade solution (also on Misys). Alliance Bank has rolled out "TradeSpring" a browser-based trade finance solution from eBworX, with an imaging and fully automated workflow process that tracks the efficiency of the bank's trade finance processing. The government has similarly taken a proactive stance in developing the national payments system in Malaysia. This has been borne out most recently in the capital markets business: the eDividend initiative (launched in April 2010) and eShare payment (introduced in August 2010).

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On the retail banking front, BNM in 2009 had mandated the implementation of a national check truncation and conversion system (CTCS), which seeks to reduce turnaround time and mitigate risks across the check processing cycle through image capture, transmission, verification (branchwide), reconciliation, and clearing. This mandate resulted in a spike in related technology investments by Malaysian banks to integrate check deposit mechanisms with CTCS clearing systems and interfaces with back-office modules. In a more recent move, BNM has also mandated a wholesale shift toward chip-and-pin payment cards, which is expected to trigger a new wave of related spending. Meanwhile, Malaysia's central payments switch provider Malaysian Electronic Payment System (MEPS) which already has links with 95% of banks in Malaysia, has continued to bring on board new players into its platform, thus further broadening access to its network of electronic touch points.
Remittances

Asia, with its large migrant population, is estimated to represent over 20% of the US$320 billion market in global remittances. The region itself is experiencing a spike in intraregional outbound transfers as people cross borders for work, education, and travel, a situation that will surely be provided fresh impetus by initiatives such as the ASEAN Economic Community. Malaysia home to a large population of Indonesians, Vietnamese, and Bangladeshis represents the largest "sending" market in Asia, and it comes as no surprise that this segment has attracted renewed competition from banks (pitching low- to no-cost online transfer services), international and local money transfer agencies (targeting unbanked segments in remote regions), and informal (or some might term "illegal") channels such as Hawala. The remittance business has established itself as a strategic piece of the Malaysian consumer banking pie, and international and local banks alike will continue to invest in distribution and servicing capabilities and tie-ups in an effort to fend off encroaching competition and position for potential explosive growth.

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FUTURE OUTLOOK
Outlook for Technology Spending

Figure 1 illustrates the strategic importance of each of the following areas, according to bankers who attended a Malaysia banking roundtable discussion we held in June 2010. Readers should note that a separate, upcoming research report will provide further executive (user) insights based on a more recent roundtable discussion that was held in June 2011. Figure 2 illustrates the USD value of estimated technology spending in 20102011, with future projections on IT budgets in the next 12 months shown in Figure 3. The findings illustrated how a majority of Malaysian banks and their foreign equivalents are looking to maintain (25% of respondents) or increase (66.6% of respondents) their local technology budgets through 2011. It is worth pointing out how larger-than-average local budget increments were expected by newer entrants (very much in growth mode) and those involved in enterprise transformation initiatives. One such bank revealed how budgets were split across "run the bank" and "change the bank" initiatives; it is estimated that up to 90% of technology budgets were being allocated to "run the bank" projects, although the bank expects this will gradually shift toward a 30% budgetary benchmark for the "change the bank" activity. Core banking, risk management, and data-related initiatives (especially when it comes to the segmentation, storage, and management of data) continue to dictate the nature of spending. At the front end, a number of banks also pointed to investments in improving CRM capabilities, loans management, share trading, transaction banking, and payments, a clear reflection of how they are looking to enhance their value proposition to customers. The banks that attended the roundtable were also asked about their top criteria when it comes to technology procurement and purchasing decisions. No surprise that cost considerations was cited by almost all banks, measured against the returns on their investments. Service response time, resource availability, and local references were also prioritized, along with functional fit and scalability (of the solution), especially for banks with a cross-geographic focus. It is notable how a number of CIOs are also starting to take into account the R&D capabilities of their solution partners.

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Participating bankers also revealed the top pain points they face. With the various transformation programs currently under way in Malaysian banks, change management emerged as a major challenge, especially as it related to project prioritization, management of implementation scope creep, and the need to balance short-term tactical needs against strategic long-term fit.

FIGURE 1
Strategic Focus Areas in the Next 12 Months
Q. How important are the following to your organization's strategy in the next 12 months?

n = 12 Note: Mean scores are based on a scale of 15, where 1 = not at all important and 5 = extremely important.
Source: IDC Financial Insights' Malaysia Executive Outlook Survey, June 2010

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FIGURE 2
Estimated Spending on Technology in 20102011

Source: IDC Financial Insights' Malaysia Executive Outlook Survey, June 2010

FIGURE 3
Change in Size of IT Budgets in the Following 12 Months

Source: IDC Financial Insights' Malaysia Executive Outlook Survey, June 2010

Emerging Themes in Malaysian Banking

Some emerging themes that have started to garner increased attention in Malaysia's banking space are examined in the sections that follow.

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Alternative Models of Technology Provisioning

Technology provisioning models are clearly a topic that remains close to the hearts of Malaysian banking CIOs, especially as one considers the recent outsourcing deals of note, as well as the "transformation" theme that has marked the landscape. It is worth noting how a number of large Malaysian banks appear to be shifting away from comprehensive outsourcing agreements covering application development and maintenance (ADM) and IT infrastructure management toward a more selective approach to outsourcing. This suggests extensive outsourcing agreements such as that previously undertaken by Maybank (with CSC), CIMB (with HP-EDS), and Affin Bank (with IBM) that have been a feature of the Malaysian banking landscape may eventually be sidelined in favor of a more selective, best-of-breed approach, as indicated in Table 5.

TABLE 5
Selective Approach to Outsourcing
Bank Maybank Known Coverage of Outsourcing IT infrastructure. The bank is open to exploring alternative outsourcing models as it revisits the CSC outsourcing arrangement. ADM and IT infrastructure. Postcore implementation, the bank will consider bringing ADM in-house. IT infrastructure (desktop management). IT infrastructure and datacenter operations. The bank is considering a selective approach to outsourcing. Credit card operations. The bank has adopted a selective approach to outsourcing.

CIMB RHB Bank Affin Bank Eon Bank

Source: IDC Financial Insights, 2011

Cloud The Verdict Is Still Out

It has been documented to the point of tedium how cloud computing (and its variants) continues to split opinions in this part of the world. While the supply-side (vendor) community has spared no efforts in defining (and redefining) its value proposition and articulating its business case, there are suggestions that a conclusive regulatory stance remains in the works. As a result, when it comes to actual adoption by banks in Asia/Pacific, caution remains the watchword.

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Securing Buy- In

When it comes to service-based, shared models in IT (of which cloud computing is commonly associated with), security remains cited as an ever-present consideration, particularly when it comes to customer data. Our discussions with Malaysian banks reaffirm how several longstanding issues persist: Data segregation within shared services models Data ownership and liability within externally managed models Regulatory restrictions around cross-border data residency Where financial or customer data is involved, regulatory restrictions and confidentiality issues inevitably loom large, particularly when data is managed externally (i.e., within the vendor environment). One foreign bank operating in Malaysia pointed out that in such situations, buy-in should ideally be sought across business and IT functions, as well as at the board level. Data governance issues (i.e., accountability and liability for ownership of data) would also have to be clearly defined and agreed upon by all involved parties. Furthermore, the reactive enforcement of service-level agreements (SLAs) often undermines its effectiveness as a preventive measure for any lapses. The situation is exacerbated when data crosses borders. A leading Malaysian bank, recounting its attempts to move customer contact data to a software application sitting within an overseas-hosted private cloud, revealed how BNM was concerned about the residency (rather than the transit) of data. Along the same lines, Bank Indonesia (the neighboring local regulator) is understood to have requested a number of foreign-domiciled players to "repatriate" datacenter operations in yet another indication of waning regulatory appetite for such activity. This is particularly relevant to the Malaysian banks with regional aspirations that may find themselves operationally constrained on a local basis. One solution that may be considered relates to having the bank retain customer information files (CIFs) on-premise while routing transactions through the cloud; indeed this is similar to the Internet banking model where transactional data is sometimes routed worldwide. Ultimately, it is likely the fog would only begin to clear when consensus is achieved at a regulator level, for instance around the definition of data elements and the concept of data management.

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U t i l i t y Models

The concept of utility processing is an equally resonant theme in Malaysian banking. The benefits of accounting for costs incurred of "running the bank" as an operating expense are clear; however (as regulators would attest), the data assets of individual banks would have to be properly segmented and protected within the utility, thus putting paid to the idea of bank-run utilities. At a national level, the Malaysian Electronic Payment System represents an obvious example of how utility-based processing can work, although it is worth recognizing that in this instance, data resides within a financial institution's private "cloud" environment.
Information and Data Management

Data quality is a continuous and constant challenge faced by the banking industry, and the situation is no different in Malaysia. The introduction of MyKad the chip-enabled national identification card has proved valuable in ensuring the validity of customer identification data, with a number of Malaysian banks equipped to automatically capture (a reported 16 out of 30 banks) specific customer fields just by swiping the customer ID card. However, the challenge is to ensure that the relevant data fields are accurately and consistently captured at the source systems at the bank's front end and that the captured data is current and updated, particularly when it comes to customer contact information. For instance, a number of Malaysian banks have admitted that the effectiveness of their outbound campaigns, client servicing efforts, and application of analytics has been undermined by the capture of multiple email addresses for the same client. This process of ensuring data remains of high quality (i.e., current, updated, and accurate) is an expensive and continuous challenge. At the same time, Malaysian banks do recognize that the benefits of optimizing the end-to-end data management process from capture to reconciliation, storage, and analytics can also translate to significant cost savings and, more importantly, customer benefits (for instance consolidating various product holdings into a single consolidated billing statement). A lingering question relates to whether data cleansing should be done in a "big bang" approach (e.g., during core replacement) or in a piecemeal approach. It is worth considering some of the varying approaches and initiatives deployed by specific local and foreign banks in Malaysia when it comes to managing the quality, access, and use of their data assets.

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CIMB

Being the product of multiple mergers, data quality has been cited as a significant challenge for CIMB. To address this, the bank initiated a revamp of its data collection processes by streamlining the number (and ensuring the consistency) of required fields. This was achieved by first putting the onus on business and product owners to frame the required data fields that were to be collected at the front end and reconfiguring its systems to ensure all critical fields are captured at each stage. While the business lines were involved in defining the required data, this change process was overseen by "data councils" chaired by the CIO. To minimize business impact, the bank adopted a piecemeal approach, prioritizing its 500,000 "priority" customers rather than its entire retail customer base all at once. This exercise has also seen the creation of an index that reflects the improved accuracy of "cleaned" versus legacy data, according to the specific business requirements for that data. Upon ensuring the quality of data captured, decision engines and data mining and analytics tools are used to run targeted needs-based or segment-based campaigns, or for reporting purposes.
Standard Chartered Bank

Standard Chartered Bank is known to have introduced some structural changes when it comes to the question of data ownership. The bank's cost-revenue focus has translated to a change in the reporting line, which cascades downstream from the CFO function. Here too, the key takeaway appears to be that data ownership has to be business driven. However, the bank admits that because of its diverse ecosystem of systems, challenges do remain. With multiple disparate systems within its vast footprint, the bank is challenged in building a 360 view of its SME and corporate banking customer sets, let alone retail.
RHB

From the standpoint of a large local bank, RHB views data quality as a continuous process, best undertaken through continuous data cleansing exercises. The bank concedes that data capture at the front end (i.e., source systems) is critical, with its data cleansing exercises revealing how many important data fields are not accurately and consistently captured, which in turn undermine reporting, compliance, and operational risk management. This means that the bank's source systems have to be carefully designed and structured to enable it to accurately and automatically capture the required data in its data warehouse, necessary for ensuring the effectiveness of analytics-driven campaigns.

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This also relates to the importance of having a solid enterprise customer information file. To the bank, successfully building "true predictive analytics capabilities" for effective cross-sell lies in effecting a shift from the prevailing transactional mindset (where transactional data is being captured) to a sales-and-services mindset (where data can be used for predictive sales efforts across the customer life cycle).
Alliance Bank

Alliance Bank inherited legacy data issues (primarily, un-synchronized data) from past mergers, and the resulting systems integration and conversion. The bank has a dedicated business intelligence function that normalizes customer identification data (i.e., CIF) to be used in campaigns. Where there are discrepancies between internal (i.e., the bank's own assets) and external sources of data (such as Central Credit Reference Information System [CCRIS], this has to be reconciled back into its system. As in the case of CIMB, the bank has adopted a piecemeal approach (the bank calls this top down) to data cleansing: prioritizing the high-net-worth (HNW) segment, followed by the mass affluent and then mass consumer segments in conjunction with ongoing work to enhance its enterprise CRM capabilities.
Hong Leong Bank

Hong Leong Bank has traditionally (and, it claims, successfully) encouraged its customers to proactively update their accounts through multiple touch points. The bank has significantly invested in building up statistical analysis capabilities and has set up management dashboards to track product-level sales at the branch level and even at the account manager level. ESSENTIAL GUIDANCE
Actions to Consider

One conclusion that can be drawn from the discussions on cloud and utility-based models of IT delivery with the banks in Malaysia is that while these may be compelling from a cost standpoint, it necessitates a sea change of proprietary mindsets no easy task in an industry where proprietary data is treated as a key asset and that more rationality must be brought into the thought process (e.g., through the buildup of business case benefits). At the same time, it is difficult to predict how governance, compliance, and security considerations will evolve in this regard.

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 Malaysian banks remain reliant on internal matrices and informal channel sources when assessing cost, utilization, and service-level benchmarks. The industry as a whole will greatly benefit from a systematic and professional aggregation of peer-level benchmarks at a local and regional level. This will facilitate the creation of best-in-class resource allocation strategies in technology enablement, and thus provides an excellent base on which to shape internal investment strategies and budgeting plans. For banks that have explored variable-cost pricing as part of IT cost management, there may be a strong case to adopt user-based cost segmentation as a best practice. While user-based cost segmentation has largely been limited to areas such as telecommunications expense management, cost visibility, budget accountability, and auditability, benefits inherent in this framework merits a broader scope of usage. A number of Malaysian banks have undertaken comprehensive IT outsourcing arrangements, often covering hardware, database, datacenter, computing requirements, and network management, with banks often retaining control of IT strategy, "strategic" projects, and vendor management. In particular, as Malaysian banks are known to be reconsidering their outsourcing strategies, service providers would be wise to pay heed to the common gripes their clients have: These are usually out-of-box propositions (i.e., not customized to specific client requirements). Service providers prioritize resolution of application issues according to their own activities, rather than clients. LEARN MORE
Related Research

Best Practices: Reengineering Loans Origination at CIMB Bank (IDC Financial Insights #FIN222454, May 2010) Business Strategy: Top 10 Strategic IT Initiatives for Asia/Pacific Banks in 2010 Investing for the Comeback (IDC Financial Insights #FIN221571, January 2010) Worldwide Financial Services 2010 Top 10 Predictions: Where to Next? (IDC Financial Insights #FIN221471, January 2010) Worldwide Risk Management 2010 Top 10 Predictions: The Road to Financial Services Recovery Runs Through Improved Risk Management (IDC Financial Insights #FIN221462, January 2010)

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 Best Practices: Malaysia Banking Update, 2009 (IDC Financial Insights #FIN219257, July 2009) Software as a Service, Part 1: Assessing the Demand for On Demand in Asian Banks (IDC Financial Insights #FIN217493, March 2009)
Synopsis

This IDC Financial Insights report examines the opportunities that exist in Malaysia's banking space, the strategies being deployed by the key players, and how these players shape their investment focus in technology and business operations. Based on conversations with senior executives from Malaysian banks over the past year, this IDC Financial Insights report discovers their initiatives planned and under way when it comes to managing risks, servicing customers, and transforming operations. This report also considers other pertinent themes in Malaysian banking, such as alternative models of technology provisioning and data management. Shawn Yip, senior analyst, Asia/Pacific, at IDC Financial Insights notes, "The vibrancy of Malaysia's banking sector is reflected in the broad range of transformative initiatives that are core to the competitive strategies of its banks." Yip continues, "It has become clear that these transformative activities are taking place in a backdrop where the business functions are more involved in defining the nextgeneration technology and operating capabilities for the bank."

Copyright Notice

Copyright 2011 IDC Financial Insights. Reproduction without written permission is completely forbidden. External Publication of IDC Financial Insights Information and Data: Any IDC Financial Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Financial Insights Vice President. A draft of the proposed document should accompany any such request. IDC Financial Insights reserves the right to deny approval of external usage for any reason.

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