First Private Bank will become the fourth firm to list on the Yangon Stock Exchange this month. The lender, which claims the oldest banking licence in Myanmar, has published its finances, expansion plans and fears ahead of the listing – offering a window into the challenges facing the country’s smaller banks at the start of 2017.
The YSX will welcome FPB – its second listed bank – on January 20, taking the total number of listed firms to four. Like all companies preparing to offer shares on the bourse, FPB has had to adopt a new level of disclosure, laying out the bank’s financial results for the last few years, the risks it faces and its plans for the future.
At least one of FPB’s concerns is related to issue of moving its shares onto the exchange. The lender’s senior management is worried that once they are publically listed the shares – of which there were 2.47 million outstanding as of August 2016 – will become exposed to “speculators and illegal black money.”
During previous years the bank has been able to check the background of people buy shares, requiring proof of tax payments and a guarantee the money being used to buy shares is “clean”, it said. The par value of FPB shares sold by the bank is K10,000, but lender’s board of directors raised the purchase price from K25,000 to K30,000 in May 2016, the bank said.
Once it lists it will lose control over vetting its prospective shareholders, and its share price will at the mercy of market demand.
FPB is clearly growing in terms of assets, however, and has ambitions to build out its branch network. Total assets have grown from K160 billion in 2013-14 to K1207 billion at the end of the 2015-16 financial year, and liabilities from K123.8 billion to K155.4 billion. Deposits stood at K151 billion at the end of 2015-16, up from K136 billion at the end of the previous financial year.
In an effort to attract more depositors the bank is planning a 20 percent increase in its branch network, “a key determinant” of deposit growth, it said. Since receiving its licence back in 1992 the lender has opened 32 branches, and plans to open another seven across the Ayeyarwady, Magwe and Sagaing divisions, and locations in Kayinn State, Chin State and Kachin State before the end of March this year.
“We are planning to open branches in smaller towns and villages to provide access to financial services to low income groups,” the lender said.
Yearly revenue, meanwhile, has increased from K18.3 billion to K22.6 billion between the 2013-14 and 2015-16 financial years, but total profits have remained largely flat. FPB reported net profit of K6 billion in 2013-4, K6.5 billion the following year and K6 billion for the financial year 2015-16.
By comparison, Myanmar Citizens Bank (MCB) – the first lender to list on the YSX – has seen net profit more than double across the last three financial years, from K2.51 billion in 2013-14 to K5.3 billion in 2015-16.
Competition is a key issue for Myanmar banks, and FPB raises the problem several times in its disclosure document. Banks across the world make money from the interest on loans and overdrafts, but also from non-interest sources – typically fees relating to transactions, services charges and check and deposit slip fees.
In Myanmar, “non-interest income is not yet significant, due to fierce competition among private banks and rapid growth in the number of private banks and branches,” said FPB. As a result, banks like FPB rely overwhelmingly on income from loans overdrafts for revenue. But competition is also cutting into profitability, especially for smaller banks, from lending too,
according to FPB.
“Big banks with wide branch net-work are unilaterally cutting down remittance rates, hiking interest rates on deposits and cutting lending rates,” it said. The government imposed floor on deposit rates is 8 percent, although recently banks have begun offering higher rates to attract deposits, with some term deposits around 10pc.
CB Bank offers a 10pc interest rate for term deposits of more than 1 year, as do KBZ and AYA Bank. Together those three banks account for more than half of all domestic private bank branches and more than 60pc of private banking sector assets as of May 2016, according to Roland Berger.
FPB and MCB each account for around 1pc of total domestic banking sector assets, according to a GIZ report published late last year. There are 15 private banks that represent 3pc or less of total sector assets, the report said.
KBZ also began offering a deposit saving scheme in November, where depositors can agree a monthly savings plan over a set period time. People that meet an agreed savings plan over three years will receive 10pc interest on their savings over the period, while the rates for two and one year plans are 9.5pc and 9.25pc respectively. Anyone withdrawing money before their plan ends will receive only the 8.25pc interest rate applied to normal savings accounts.
FPB is not alone in its concerns about higher deposit rates in a system where lending rates are capped at 13pc. Analyst U Soe Thein said although they are good news for savers, it mean banks are unable to lower interest rates on loans, which will make raising capital more onerous for Myanmar firms.
“It’s a central problem in Myanmar,” he said. “All the banks are depending on [deposit] saving. But if banks increase [deposit] interest rates it will make it more difficult to reduce loan interest rates to businesses. It’s a vicious cycle.”
U Soe Tin Maung Zaw said in November that KBZ’s lending rate would remain at 13pc, but could not be reached for comment yesterday.
AYA Bank managing director U Phyo Aung said his firm had left their deposit and interest rates unchanged for at least the last year, and disagreed with the idea that larger banks are pushing down remittance and lending rates, and raising deposit rates across the banking sector. A CB Bank official, who asked to remain anonymous, also disagreed with the FPB complaint.
FPB could not be reached to discuss their disclosure document.
Incoming Central Bank rules are also going to eat into profits, according to the lender, which expects the Central Bank to issue new regulations to accompany the Financial Institutions Law that was passed last year.
FPB is expecting new rules concerning, among others, capital requirement, reserve requirement and the provision and classification of non-performing loans. The law stipulates that lenders must keep 5pc of customer deposits as cash with the Central Bank. Banks were previously required to hold 10pc, but 75pc of that could be made up of Treasury bonds.
This new reserve requirement will “definitely affect the profits of FPB as [the Central Bank] does not pay interest on required reserves,” FPB said.