This article first appeared in The Edge Malaysia Weekly, on March 7 - 13, 2016.

THE EDGE: It is expected to be yet another tough year for the banking industry. You have shared with us your big plans and strategies for Alliance Financial Group Bhd (AFG) and said it will all take time before the results show. How long do you think it will take?

Joel Kornreich: The whole technological set-up will take three years. By that time, our exciting value proposition will be out as well, and we will begin to see some results. We have created, and now strengthened, our platform. This includes our analytics and research.

In the coming year, we will begin executing the transformation and rolling out some of the value propositions. The financial impact of that will not be felt until the end of this financial year.

We’ll continue to go on a good trajectory. We feel that in the next financial year, we’ll have a good chance of maintaining or expanding our margins. We also feel that although the [present] economic conditions are a bit more difficult than last year, we [still] have a strong base to work on ... we have a good chance of growing faster than we did last year. We have to do it efficiently as well.

Faster, in terms of revenue and bottom line?

Everything. The strategy for efficiency really paid off. Just look at the difference between the base of loans growth and the base of revenue growth [so far this financial year]. Loans growth far outpaced revenue growth. What you will find this financial year is that loans growth will be in tandem with revenue growth.

Our goal is to reverse that because we can do other things. That is critical because if revenue growth is in tandem with loans growth, and profit growth is in tandem with balance sheet growth, it means capital ratios stay stable and we are able to distribute dividends reliably. We want to make sure that we look after our stakeholders.

That’s why it is necessary to set the foundation for that.

Any guidance on the gross non-performing loan (NPL) ratio? There is concern in the industry that asset quality may weaken in shaky times. You are exposed to small and medium enterprises (SMEs), which are deemed vulnerable.

Right now, it’s 1.1%. Last year was a bit of a shock to the system because there was a sharp depreciation of the ringgit. There were times when consumer sentiment was weak, leading to weaker retail sales. The consequence of a bit of tougher times has to work its way through to the economy; it doesn’t happen instantaneously. So, that’s what we expect this year — that there will continue to be some of that consequences.

Having said that, the catalysts seem to have stabilised. The currency has stabilised and, barring unforeseen volatility, I think that while 2016 will be challenging, I’m more optimistic as we go into 2017 and 2018 as the Malaysian economy is essentially resilient.

But so far have you seen any stresses?

We have. Obviously, everybody has seen them. It’s episodic and for various reasons.

By and large, we’ve been able to sail through that with our clients. Obviously, there are sectors that are under bigger stress, but oil and gas makes up less than 1% of our portfolio, so it doesn’t really affect us.

We have a couple of clients in the steel sector, which is a tough sector, but we’re working this through with them and they are well-managed companies. So, even though it’s tough times for them, we feel there’s a good chance they will be able to pull through.

Palm oil was depressed, but now the price has gone up a little bit. And frankly, most of the businesses that we support are in East Malaysia, and so they still have some room to deal with the stress.

Our credit onboarding policy has been strong enough that we haven’t really seen very much stress in the SME space, which is good.

What’s the gross NPL in the SME space now?

It’s quite low, at around 1%.

And that’s because of the strong credit processes in place?

Well, it’s a combination of things. Of course we lend some portions clean to SMEs, but we have a combination of secured, we have a combination of making sure that people pass their debt serving ratio — that they can afford the debt — and a credit-scoring system that is getting more efficient as we progress.

As I mentioned, our people are pretty close to the businesses that they deal with, which is very helpful. We’ve avoided losses quite regularly because we are close to our customers and the market.

There’s no great concern for the SME portfolio?

No. I’ve read some articles that say the SME [sector] is risky and all that. It may be true, but I think the way we’re structured and equipped, and the way we approach the loans have been quite effective. It’s not really a huge concern. That’s not to say that people won’t get into trouble. Of course they do, but we don’t anticipate a big wave. We’re not seeing that.

I think what worries me more is the consumer space, with some things being less predictable. Unemployment is the chief issue. If people lose their jobs, evidently, it will be a lot harder to service their obligations, so either you help them through that or acknowledge that there’s going to be issues there. That’s not something that you can model for as there is no model for that.

It looks like you have changed the loan portfolio mix of the group since you took over. So, your single biggest loan segment now is … ?

Today, it’s still consumer, but it’s really primarily mortgages. Mortgages make up almost half of the overall loan portfolio, which is a concern because that’s not the most efficient use of the balance sheet, so we’re actually changing that. That’s why we’re making a contrast between the high risk-adjusted return loans and low risk-adjusted return loans.

Our mortgage book continues to grow, but much more moderately. We are also very clear about risk-based pricing and we make sure that there are some minimum returns.

First of all, risk-based pricing means that anyone can have a mortgage, provided that they qualify for it. It also means that if they are high risk, they won’t get the same pricing as those who are low risk.

Secondly, we focus on helping our business partners. We are more inclined to book a mortgage that’s linked to a developer than trying to chase the next mortgage on the street with the lowest rate possible.

Thirdly, we are interested in using mortgage as a vehicle to help customers manage their debts better. There is no reason why there would be fundamentally different rates for different products if there is a way to consolidate a lower rate for them. That’s how we help them.

We’ve completely stopped hire purchase (HP) loans. But if a business owner needs a car and needs to finance it, we’ll give it, but we’re definitely not chasing HP.

We will focus more on the higher risk-adjusted return loans such as working capital loans for our SME and commercial banking clients, overdrafts for SME, commercial and corporate banking clients, trade for all segments and share margin financing.

Let’s talk about dividends …

We’ve distributed 50%. Our stated policy is between 40% and 60%. What we’re trying to do is make it as predictable as possible by managing the bank in the most predictable way possible. Clearly, BNM (Bank Negara Malaysia), in approving the dividends, they rightly look at profitability and the capital ratios. By improving our capital ratios, by making them more stable and by having stable profitability, we have a better chance of paying reasonable dividends. What we want to do is have a balance between being able to invest in business growth and rewarding the shareholders. 

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