Improving standards in Brunei Darussalam's banking sector

The Sultanate’s small but solid banking sector has been going through some significant changes in recent times. Consolidation has led to fewer lenders, a process that is likely to continue, while at the same time those banks that do remain are some of the best resourced in the region. Indeed, Brunei Darussalam’s banks have high levels of liquidity, good capital adequacy ratios (CAR) and well-managed levels of non-performing loans (NPLs). The sector includes both Islamic and conventional banks, with the former being dominant – a distinguishing feature that makes the Sultanate unique in Asian banking.

Naturally, however, the current global economic slowdown and the state’s budget cutbacks are having an effect, as projects get put on hold and uncertainty affects both retail and commercial banking behaviour. But for now the sector remains a healthy one, able to deal with any foreseeable external and domestic shocks in the year ahead.

The Regulators

The central authority for the banking sector is the Monetary Authority of Brunei Darussalam (AMBD). The regulator is a relatively new institution, commencing operations at the start of 2011 following the issue of a decree by His Majesty Sultan Haji Hassanal Bolkiah in 2010. The AMBD Order set out the functions, powers and duties of the authority alongside its role as the Sultanate’s central bank. This mandate gives the AMBD wide-ranging regulatory and supervisory powers over the sector, with the authority being a statutory corporate body. It now includes four departments previously under the Ministry of Finance (MoF): the Financial Institutions Division, the Brunei Currency and Monetary Board (BCMB), the Brunei International Financial Centre, and the Research and International Division.

Thus, in addition to overseeing the banking sector, the AMBD also manages the Sultanate’s monetary policy, including the inter-changeability agreement with Singapore, under which the Bruneian dollar is inter-changeable with the Singapore dollar. This is a unique feature of the Sultanate’s banking sector, with the currency effectively managed by the Monetary Authority of Singapore, alongside its local currency.

Singapore dollars are accepted as currency in Brunei Darussalam and vice-versa, with the AMBD charged with maintaining parity between the two currencies. The Sultanate does not impose any exchange controls and there is also no forward market for foreign exchange in the country.

Other Key Bodies

The key department for banking within the AMBD is the Banking and Specialised Markets Supervision Division, with insurance, takaful (sharia-compliant insurance) and capital markets coming under a separate supervisory division of the AMBD (see Insurance chapter).

Since 2006 Brunei Darussalam has also had a Sharia Financial Supervisory Board to look at issues of sharia compliance across the country’s Islamic financial institutions. Another body in this vein that has been of growing importance is the Centre for Islamic Banking, Finance and Management (CIBFM), an education and training arm of the AMBD that seeks to raise the standards of professionalism and innovation in the Sultanate’s Islamic financial sector (see IFS chapter).

In recent times the AMBD has also established a credit bureau to collate information in a centralised fashion on the credit-worthiness of loan applicants. The credit bureau’s services have been available to banks since 2012, while the bureau also generates statistics that enable the AMBD to have a more comprehensive picture of the sector’s health and the amount of credit being extended.

The AMBD is governed by a board that is currently headed by HRH Prince Haji Al Muhtadee Billah, the crown prince and senior minister at the Prime Minister’s Office. Other AMBD board members include senior ministers from the MoF, the Prime Minister’s Office and other prominent government departments. Yusof bin Haji Abd Rahman is the current managing director of the AMBD.

The Banks

As of mid-2016 the Bruneian banking sector consisted of nine licensed financial institutions. In addition to the Islamic trust fund, Tabung Amanah Islam Brunei (TAIB), two of the institutions are domestic, namely, Bank Islam Brunei Darussalam (BIBD) and Baiduri Bank. Two more are international, HSBC and Standard Chartered, and the remainder are regional, including Malaysia’s Maybank, RHB Bank and Singapore’s United Overseas Bank (UOB). Other banks maintain offices for asset management and corporate banking purposes only, such as Malaysia’s CIMB, France’s BNP and Singapore’s UOB Asset Management. In addition, in April 2016 the Bank of China (Hong Kong) received regulatory approval to become the first Chinese bank to open a branch in the Sultanate in line with the former’s strategy to improve its presence in South-east Asia. Brunei Darussalam also has an offshore banking sector, which operates within the framework of the Sultanate’s International Banking Order 2000 and is now also under AMBD supervision. The authority’s website states that the offshore sector currently consists of two banks. Privacy laws covering this segment are strict. Meanwhile, the onshore banking sector’s main professional body is the Brunei Association of Banks (BAB). This is currently headed by Pierre Imhoff, CEO of Baiduri Bank.

Sector Statistics

The most recent AMBD figures for the sector from December 2015 show total assets of BN$17bn ($12.1bn), down from BN$18.7bn ($13.3bn) in December 2014. This conforms with the long-term pattern of asset decline, with the figure standing at BN$21.17bn ($15.1bn) in 2011, BN$19.69bn ($14bn) in 2012 and BN$19.35bn ($13.8bn) in 2013. The AMBD stated in February 2016 that this decline in assets was largely due to a 24% reduction in placements with banks and other financial institutions abroad. According to AMBD, total non-bank customer deposits stood at BN$13.96bn ($9.9bn) by the end of December 2015, down from BN$15.62bn ($11.1bn) a year earlier and also down on 2013, 2012 and 2011 totals, with 2011 year-end stats showing BN$18.36bn ($13.1bn) in total deposits.

Loans extended totalled BN$6.1bn ($4.3bn) by the end of the fourth quarter of 2015, with this breaking down into BN$5.9bn ($4.2bn) for domestic lending and the remainder international. Domestic loans comprised BN$3.09bn ($2.2bn) for the household segment and BN$2.85bn ($2.1bn) for non-household, with personal loans the largest household category at BN$1.66bn ($1.2bn) and loans to the services sector the largest non-household category at BN$798m ($567.8m). Total sector deposits fells from $11.1bn in 2014 to $9.9bn in 2015, while loans totalled $4.3bn in 2015, with domestic lending accounting for the majority of this at $4.2bn.

Most categories of loans showed stable performance over the preceding years, although the overall total loans extended has been increasing from BN$5.09bn ($3.6bn) in 2011 to BN$5.2bn ($3.7bn) in 2012, BN$5.62bn ($4bn) in 2013 and BN$5.71bn ($4.04bn) in 2014. Nevertheless, the loans-to-deposits ratio remains relatively low, indicating a high degree of liquidity in the system.

In terms of NPLs the AMBD’s December 2015 figures show a ratio of 4.6%, considerably down from the 5% recorded in fourth quarter 2014 and 5.7% recorded for the same period in 2013.

Segment Shift

The division between conventional and Islamic banking has been shifting towards the latter in recent years. In the AMBD’s 2015 review of financial assets in the Sultanate, BN$8.9bn ($6.3bn) was held in Islamic banks including TAIB, while BN$8.1bn ($5.8bn) was held in conventional banks, and BN$2.2bn ($1.6bn) was placed with other finance companies. As of the first quarter of 2016, 53.3% of total banking assets where held by Islamic banks .

The banking sector is expected to shrink further in 2016 and 2017 as a number of major international players continue to decrease their balance sheets and wind down international operations.

Market Movements

Recent times have seen some banks exiting the Bruneian market, with Citibank leaving in March 2014 and UOB selling its retail assets to Baiduri Bank in October 2015. The sector may shrink further in the years ahead with the widely expected departure of HSBC, which announced in spring 2016 that it would be winding down its operations in the country in line with its global strategy. Several of the investment and advisory outfits previously operating in the Sultanate have also left, including AmCapital and Amundi Asset Management.

The reasons for these departures are various. In some instances the move comes as part of a worldwide consolidation, with recent years seeing many international banks in particular shrinking their balance sheets and unwinding many local positions, including Citigroup, HSBC, Barclays and GE Capital, among others. In other instances, the concern was that of the size of the market itself.

While Brunei Darussalam is a small country compared many of its neighbours, with a population of 417,390 in 2014, it has the second-highest GDP per capita income in ASEAN at $40,979 in 2014, according to the World Bank. This compares to $11,307 in neighbouring Malaysia and $3491 in Indonesia. Indeed, within ASEAN only Singapore’s per capita GDP was higher at $56,284. This produces a small yet highly liquid market. Another feature of the country is that while seven banks are licensed, creating a first impression of overbanking given the population, three of the seven are not significantly engaged in retail business, being largely local managers for overseas residents and investments. Of the four that remain, two have been dominant. One is international, HSBC, and the other is local, BIBD.

Largest Lender

BIBD is the country’s only Islamic bank, as well as the Sultanate’s largest lender. As of mid-2016, the bank had 15 branches, 10 of them in the central Brunei Muara District, along with 58 ATM machines (on-site and off-site), which is the highest number of any bank in the Sultanate.

The bank also has two wholly owned subsidiaries: BIBD Securities, which provides brokerage services and works with sharia-compliant securities on the Kuala Lumpur and Singapore exchanges; and At-Tamwill, which provides consumer product financing, vehicle hire purchase and fixed deposit services.

In addition, BIBD also has stakes in the family takaful business, Syarikat Takaful Brunei Darussalam, fund management service BIBD Al Kauthar Funds DCC and vessel leasing outfit Belait Barakah. The main shareholders in the bank include the MoF, the Sultan Haji Hassanal Bolkiah Foundation, Fajr Capital and around 6000 private Bruneian citizens. BIBD itself dates back to 2005, when it was formed through a merger between the original Islamic Bank of Brunei Darussalam and the Islamic Development Bank of Brunei.

The bank’s latest figures for the year ended December 31, 2015 showed a positive performance. Net profit for the bank, after taxation and zakat, alms giving seen as a religious duty for Muslims, stood at BN$100.62m ($71.6m), which was up on BN$83.92m ($59.7m) in 2014. The BIBD Group overall realised net profits of BN$106.72m ($75.9m), a figure which was down from BN$111.52m ($79.3m) in the previous year. Total assets, meanwhile, dropped slightly from BN$7.27bn ($5.17bn) to BN$7.06bn ($5.02bn) for the bank and BN$7.76bn ($5.52bn) to BN$7.5bn ($5.3bn), for the group between 2014 and 2015.

Total deposits from customers also saw a small dip from BN$5.4bn ($3.84bn) for the bank and BN$5.58bn ($4bn) for the group in 2014 to BN$5.24bn ($3.7bn) and BN$5.38bn ($3.83), respectively, in 2015. Figures from the AMBD show the entire banking sector, including Islamic Trust Fund TAIB, as having total assets of some BN$17bn ($12.1bn) by year-end 2015, meaning that BIBD held around 42% of the banking sector’s total assets that year. Excluding TAIB, the bank’s current market share, in terms of assets, is estimated at around 46.5%.

Enterprising Focus

Currently, BIBD is continuing a process of expanding its services and products which it began some years ago. The bank has transitioned successfully from an initial focus just on consumer lending towards small and medium-sized enterprises (SMEs) and corporate business, as well as into more international liquidity management ventures. In June 2015 Javed Ahmad, the former managing director of BIBD, told The Brunei Times that the bank accounted for around 40% of all SME financing in Brunei Darussalam at BN$800m ($569.2m), a figure that he said placed BIBD among the largest lenders to the sector in the country.

Furthermore, in 2014 the bank relaunched Perdana Privilege Banking, a service aimed at premier, high-net-worth individual customers.

In October 2015 the ratings agency Standard & Poor’s (S&P) gave BIBD an “A-” grade as a long-term issuer and an “A-2” short-term issuer grade, making the bank the highest-rated lender in the Sultanate. S&P also gave the bank “axAA” long-term and “axA-1” short-term ASEAN scale ratings, with a stable outlook on the long-term grade. The achievement of this investment grade was a significant milestone for the bank, which is now in a position to take a much more independent role in international financial markets. While previously, for example, it could only issue letters of credit in cooperation with other international financial institutions, it is now able to issue them itself.

The S&P ratings announcement cited a number of factors behind its decision to upgrade BIBD. These included a solid capital position, strong liquidity, a low financing-to-deposit ratio, which was 51.5% as of 2015, and sound funding capabilities, according to local daily Borneo Bulletin’s October 2015 report. At the time of the grading, the bank had a Tier-1 CAR of 24.9%, the highest in the Sultanate. S&P also highlighted the strong links between the bank and the Bruneian authorities, the latter of which has consistently supported the growth of Islamic finance in the Sultanate for many years now (see IFS chapter).

Second Spot

The second-largest local bank is Baiduri Bank, which was established back in 1994. The bank has a number of shareholders, including Baiduri Holdings, Royal Brunei Airlines, Royal Brunei Technical Services and BNP Paribas. It has two wholly owned subsidiaries: Baiduri Finance, which specialises in automotive lending; and Baiduri Capital, which has access to securities markets in Kuala Lumpur, Singapore and Hong Kong. The bank has 13 branches, according to its website, while Baiduri Finance has two, and the bank’s customers are also able to make use of its 17 off-site ATM locations.

In 2015 Baiduri Bank also won the Domestic Retail Bank Brunei 2015 award for the third year running. The bank was the first in the Sultanate to be given an international rating in April 2014, when S&P gave it a “BBB+” long-term and “A-2” short-term grading. The latter was reaffirmed in February 2016 while the former was lowered to “BBB”.

The most recent figures released by the bank for 2015 show total assets of BN$2.38bn ($1.7bn) for the bank and BN$3.34bn ($2.4bn) for the group, marking decreases of 9.88% and 7.42%, respectively, from 2014. Based on AMBD figures for the sector as a whole, the bank therefore had a 14% share of total banking sector assets. Baiduri Bank’s 2015 figures also show total liabilities for the bank of BN$2.09bn ($1.5bn) and BN$2.93bn ($2.1bn) for the group. These figures represented a year-on-year decrease of 12.2% and 9.51%, respectively. The bank’s net profits stood at BN$42.45m ($30.2m) in 2015, up 10.62% on the BN$38.38m ($27.3m) made in 2014, while the group’s profits grew 0.07% from BN$53.45m ($38m) to BN$53.49m ($38.1m).

In recent years, as regional and global players have exited or limited their operations in Brunei Darussalam, domestic retail bankers have benefitted as they have taken over larger players’ retail networks.

Taking Over

In October 2015 the bank made headlines when it bought the Bruneian retail banking operations of UOB Bank. In a statement to the Singapore Exchange on the sale, UOB Bank commented that the deal had been on a “willing-seller, willing-buyer” basis and the bank’s assets had been transferred for BN$65.04m ($46.3m), less the deposits in the transferred accounts, a deal that would be settled in cash, demonstrating Baiduri Bank’s high financial liquidity.

UOB Bank stated that it would continue wholesale banking and asset management operations in the Sultanate, and that the sale was not expected to have a major impact on UOB Bank’s earnings or assets. Indeed, the bank’s Bruneian operations were not substantial, consisting of one branch in Bandar Seri Begawan opened in 2005. From Baiduri Bank’s perspective, however, the acquisition gave a list of new retail and commercial customers to the bank, widening its base and reach. Explaining the deal at the time, Baiduri Bank told the Borneo Bulletin in October 2015 that the addition of UOB Bank’s customers also helped reduce Baiduri Bank’s cost structure, as retail is a business in which economies of scale are crucial. The acquisition expanded the bank’s reach in a sector where rival BIBD has a major, Sultanate-wide network. The Sultanate’s sharia-compliant institutions offer numerous services beyond basic banking, including takaful, zakat payments, and Hajj or Umrah travel services for Muslim pilgrims THIRD: The final local player is TAIB, which began operations back in 1991. TAIB is a sharia-compliant financial institution with two subsidiary institutions: Insurans Islam TAIB, which markets takaful products; and Darussalam Holdings, which provides Hajj or Umrah travel services for Muslim pilgrims. TAIB offers deposit taking, retail and commercial financing, and zakat payments, but does not have a full range of banking services. The Islamic trust fund has been going through some difficult times lately, according to The Brunei Times, and underwent a reorganisation of senior management in January 2016.

Global Players

Among the internationals, HSBC had long held a significant market share. The bank opened its first branch in the Sultanate in 1947, maintained a network of nine branches, along with 20 off-site ATM locations. It also operated HSBC Finance (Brunei) in the Sultanate, which provided hire purchase, leasing and road tax services, and time deposits. HSBC Global Asset Management also had an office in the Sultanate, yet in 2016 HSBC began winding down all of its operations.

The other major international player is Standard Chartered, which first opened in the Sultanate in 1958 and maintains a network of six branches and one express banking centre in the country, along with 42 on-site and off-site ATMs.

All banks in the Sultanate are in compliance with Basel III in terms of Tier-1 capital requirements, with an overall CAR in the sector of 21.5% as of end-2015.

Moving Forward

Currently, the AMBD is administering a major move by the sector towards the implementation of the 2006 version of Basel II. This is due to begin in 2017, with the final form of the regulations to be outlined by the end of 2016, according to the AMBD. Brunei Darussalam has adopted the core principles of Basel I and all its banks are Basel III compliant in terms of Tier 1 capital requirements, with high CARs being typical. The AMBD also reported that for the sector overall the ratio was 21.5% in 2015.

Full implementation of Basel II will therefore be much more about the achievement of other regulatory goals and higher standards. This will bring the country into line with other ASEAN and Asia-Pacific countries, enabling the Sultanate’s banks to expand their business into financial centres such as Hong Kong, which require new entrants to be at a higher level on the Basel scale, according to the AMBD. In April 2016 the AMBD reported it was well on course for implementation in 2017, with a move on Basel III likely to take place some time after that once the sector had settled Basel II requirements. The AMBD itself has gained the necessary competencies to implement the transition to the next level.

Outlook

With Brunei Darussalam’s economy facing some challenging times, due to the fall in oil and gas prices and subsequent diminution of government revenues, the banking sector can also expect some difficulties. The further consolidation of the sector will likely leave the BIBD in an even more dominant position, with implications for competition and access to international networks. Nonetheless, the sector remains vital for the successful implementation of the Sultanate’s programme of diversification away from hydrocarbons dependency, as well as a reliance on the public sector, by being the potential motor for private business development. How it fulfils that role will continue to be the subject of close attention in the years ahead. Meanwhile, with strong CARs, high liquidity and some internationally attractive ratings, the banks look likely to weather the storm well, with prudent policies maintaining strong profitability and keeping NPLs under control.