Myanmar Banking Sector

Transcription

1 The Myanmar Banking Sector December 9, 2015 New growth engine in the region, but challenges remain Several past policy shocks left a legacy of distrust in the financial sector Before Myanmar nationalized banks in 1963, the country had the largest concentration of foreign banks in Southeast Asia with a total of 14 in addition to its 10 domestic banks. Until recently, a series of policy shocks and events had affected the confidence in Myanmar s finance sector and hindered its development, leaving a legacy of distrust in cash as a unit of value and banks as a secure place to hold wealth, see more details in appendix 1 on pages 14 15). Banking sector has grown rapidly over recent years Myanmar s financial system is at the early stage of development. Myanmar is a mainly a cash based economy as less than 20% of the population has access to formal financial services, with rural areas in particular having limited access to banking services. Despite fast growth in recent years (private credit grew 50% over the past four years, especially private banks, which continue to gain shares over SOBs), the banking system remains small relative to regional countries. Meanwhile, the current range of banking products and services remains quite limited and the transparency and risk management standards for Myanmar banks still lag CLMV and regional banks, especially in terms of accounting. In addition, given the fact that there is still no credit bureau in Myanmar, questions about the reliability of financial data, especially data on asset quality, NPLs, and provisioning, may lead to difficulties in regard to proper analysis. Growth outlook not in doubt; the challenge is stability Given that the financial sector in Myanmar remains in the expansion stage, especially when compared with regional bank peers, we see the growth of the Myanmar banking sector continuing to outpace CLMV and regional peers. This should be underpinned by 1) Myanmar s banking sector s low base and low penetration rate; 2) favorable economic growth; 3) the ongoing progress of economic and financial reforms; and especially 4) the likelihood of better stability in the political climate after the election. However, the key challenge is the banking system s stability and quality over the longer term. Although we see ongoing progress with Myanmar s major economic and financial reforms, it will still take several years for the country to be compliant with international practices. Prapharas Nonthapiboon Analyst, no Prapharasn@ktzmico.com 66 (0) Key challenges/concerns Key challenges for Myanmar s banks are 1) lagging transparency and accounting standards; 2) asset quality risk, which may become greater given the prospects of rapid credit growth; 3) progress of economic and financial reforms; and 4) the scarcity of knowledgeable supervisory resources. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 15

2 HISTORY Several past policy shocks left a legacy of distrust in the financial sector Before Myanmar nationalized banks in 1963, the country had the largest concentration of foreign banks in Southeast Asia with a total of 14 in addition to its 10 domestic banks. Until recently, a series of policy shocks and events had affected the confidence in Myanmar s finance sector and hindered its development, leaving a legacy of distrust in cash as a unit of value and banks as a secure place to hold wealth. The main policy shocks included the aforementioned nationalization of banks in 1963, the demonetization of and the banking crisis of 2003 (see more details on the history of Myanmar s financial system in appendix 1 on pages 14 15). CURRENT BANKING STRUCTURE AND RECENT DEVELOPMENT Banking sector landscape: Myanmar s financial system is at the early stage of development. Myanmar is a mainly a cash based economy as less than 20% of the population has access to formal financial services, with rural areas in particular having limited access to banking services (Figure 2). Specifically, farmers, which make up two thirds of the labor force, still have limited access to some formal credit and insurance products. Despite the fast growth in recent years (private credit grew 50% over the past four years, especially private banks, which continue to gain shares over SOBs), the banking system remains small, with credit to the private sector as of Feb 15 amounting to only 16% of the country s GDP (14% of GDP is dominated by private banks) and the system s deposits representing 32.5% of GDP (~22% of GDP for private banks); see Figure 5 8, 10. Meanwhile, total banking assets accounted for 58% of the country s GDP as of Feb 15 (more than half dominated by private banks), up from ~48% of GDP over the past two years. The assets held by the SOBs are mostly government securities and foreign exchange (FX) assets. The range of banking products and services is quite limited; moreover, lending may not be in excess of one year and must be collateralized (usually by real estate or other immovable assets). Figure 1: Myanmar s key banking statistics Myanmar's key banking statistics E 2016E Real GDP growth (%) Central bank rate (%) Domestic credit (% YoY change) Credit to private sector (% YoY change) Credit to private sector (% to GDP) Deposits (% to GDP) Credit to deposits (Loans to deposits) % Source: IMF s forecasts, IMF World Bank Annual Meetings 2015, KT ZMICO Research Figure 2: Basic set indicators on financial inclusion Box: Basic set indicators on financial inclusion % of adults with an account at a formal financial institution 5% % of adults with at least one loan outstanding from a regulated financial institution 19% % of adults with at least one insurance product from a regulated financial institution 3% % of formal SMEs with an account at a formal financial institution 17% % of SMEs with an outstanding loan or line of credit 4% Source: MAP Making Access Possible Myanmar Country Diagnostic 2013, World Bank) REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 2 of 15

3 Financial institutions in Myanmar: As of end Oct 15, Myanmar s financial system comprised four state owned banks (SOBs), 24 private banks (nine of which are really semi government institutions), 48 representative offices of foreign banks, 10 finance companies, 12 newly licensed insurance companies and around 130 micro finance institutions. Note that in Oct 2014, the nine foreign banks were granted preliminary restricted banking licenses to do wholesale banking but not retail banking. A new microfinance bank was recently established and authorities are considering license applications for a housing bank and a livestock development bank. Because the country does not yet permit foreign direct investment (FDI) in banking, it has allowed several representative offices of foreign banks in Yangon, which provide liaison support to clients operating in the country. Figure 3: Financial institutions in Myanmar vs. regional peers Myanmar Financial Institutions (Oct 15) Vietnam Financial Institutions (2014) State Owned Banks 4 State owned commercial banks 1 Private Banks 24 Joint stock commercial banks 37 Foreign bank branches 9 Wholly foreign owned banks 5 Representative Offices of Foreign Banks 48 Joint venture banks 4 Finance Companies 10 Policies banks 2 Micro finance institutions and others 130 Cooperative banks 1 Total excl. Micro finance and cooperatives 225 Foreign bank branches 51 Source: Central Bank of Myanmar (CBM) Representative offices of Foreign Banks 50 Finance companies 17 Laos Financial Institutions (2014) Leasing companies 12 State owned banks 3 Micro finance institutions 3 Specialized bank 1 Total 183 Joint venture banks 3 Source: The State Bank of Vietnam (SBV) Private banks 7 Subsidiary banks 6 Foreign bank branches 17 Thailand Financial Institutions (Oct 15) Micro finance institutions 123 Commercial banks (registered in Thailand) 19 Total 160 Foreign banks (Full branch) 12 Source: Bank of the Lao PDR (BOL) Specialized Financial Institutions (SFIs) 6 Finance companies 2 Cambodia Financial Institutions (2014) Credit foncier companies 3 Commercial banks 36 Credit card and personal loan companies* 29 Specialized banks 11 Leasing companies* 661 Microfinance institutions 40 Total 732 Registered credit operators 38 Total excl. leasing companies 71 Leasing companies in operation 6 * End 2014 Non bank service providers 6 Source: Bank of Thailand (BOT) Total 137 Source: National Bank of Cambodia (NBC) Source: KT ZMICO Research, CBM, BOL, NBC, SBV, BOT, IMF REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 3 of 15

4 Figure 4: Financial institutions in Myanmar State Owned Banks Representative Offices of Foreign Banks 1 Myanma Foreign Trade Bank 1 DBS Bank Limited 2 Myanma Investment and Commercial Bank 2 National Bank Limited 3 Myanma Economic Bank 3 Brunei Investment Bank (BIB) 4 Myanma Agriculture and Development Bank 4 First Overseas Bank Limited 5 CIMB Bank Berhad (New Licence for Name of Change) 6 Bank for Investment and Development of Vietnam Private Banks 7 Arab Bangladesh (AB)Bank Limited 1 Myanmar Citizens Bank Ltd 8 Siam Commercial Bank Public Company Limited 2 First Private Bank Ltd 9 Maruhan Japan Bank PLC 3 Co operative Bank Ltd 10 Krung Thai Bank Public Company Limited 4 Yadanabon Bank Ltd 11 United Bank of India 5 Myawaddy Bank Ltd 12 Kasikornbank Public Company Limited 6 Yangon City Bank Ltd 13 Hana Bank 7 Yoma Bank Ltd 14 Woori Bank 8 Myanmar Oriental Bank Ltd 15 Vietin Bank 9 Asia Yangon Bank Ltd 16 Korea Development Bank 10 Tun Foundation Bank Ltd 17 Standard Chartered Bank 11 Kanbawza Bank Ltd 18 Shinhan Bank 12 Small & Medium Industrial Development Bank Ltd 19 Industrial Bank of Korea 13 Global Treasure Bank Ltd 20 First Commercial Bank 14 Rual Development Bank Ltd 21 E.SUN Commercial Bank, Singapore Branch 15 Innwa Bank Ltd 22 Bank of India (BOI) 16 Asia Green Development Bank Ltd 23 Kookmin Bank 17 Ayeyarwaddy Bank Ltd 24 Export Import Bank of India 18 United Amara Bank Ltd 25 The Export Import Bank of Korea 19 Myanma Apex Bank Ltd 26 Eastern Bank Limited 20 Naypyitaw Sibin Bank Limited 27 Bank of Ayudhya Public Company Limited 21 Myanmar Microfinance Bank Limited 28 RHB Bank Berhad 22 Construction and Housing Development Bank Limited 29 Commercial Bank of Ceylon PLC 23 Shwe Rural and Urban Development Bank Limited 30 State Bank of India 24 Ayeyarwaddy Farmers Development Bank Limited (A Bank) 31 Cathay United Bank 32 State Bank of Mauritius 33 BRED Banque Populaire Foreign Bank Branches (restricted banking licenses) 34 Busan Bank Co., Ltd 1 The Bank of Tokyo Mitsubishi UFJ, Ltd 35 AEON Credit Service Company 2 Oversea Chinese Banking Corporation Ltd 36 PT. Bank Negara Indonesia (Persero)Tbk 3 Sumitomo Mitsui Banking Corporation 37 Bank of Taiwan 4 United Overseas Bank Limited 38 Taishin International Bank Co., Ltd 5 Bangkok Bank Public Company Limited 39 Taiwan Shin Kong Commercial Bank Co., Ltd 6 Industrial and Commercial Bank of China 40 CTBC Bank Co., Ltd 7 Malayan Banking Berhad (Maybank) 41 Yuanta Commercial Bank Co., Ltd 8 Mizuho Bank Limited 42 Taiwan Cooperative Bank Limited 9 Australia and New Zeland Banking Group Limited 43 Taiwan Business Bank Limited Note: Licenses granted on October 1, Mega International Commercial Bank Co., Ltd 46 Qatar National Bank 47 Sampath Bank PLC 48 Bank of China Source: CBM, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 15

5 Private banks continue to gain shares over state owned banks (SOBs): While the state banks previously dominated the market, private banks have continued to gain shares and post stronger growth vs. SOBs, especially after the rapid growth in recent years. Assets owned by private banks now account for more than half of the total system assets. The SOBs share of total banking sector assets continued to decline to 52% in Mar 15 from 67% two years ago. Meanwhile, private banks share of banking sector assets surged to 48% of system assets; meanwhile, their lending to the private sector accounts for 80% of total system lending and the share of deposits accounted for almost two thirds of total system deposits. Top SOBs and private banks: Among SOBs, the Myanma Economic Bank (MEB) has the largest domestic branch presence and the second largest deposit base (after Kanbawza Bank, a private bank). The private banks, many of which were established after 1992, are dominated by five banks, namely Kanbawza Bank (35.4% of total private bank assets), Ayeyarwaddy Bank (11.3%), Co operative Bank (10.7%), Myawaddy Bank (7.3%), and Myanma Apex Bank (6.8%). These five banks collectively account for 72% of the total assets of private banks and 48% of the total deposits in the domestic banking system. Figure 5: State owned Banks vs. Private Banks Figure 6: Financial Sector Landscape* Source: Authorities data, IMF and IMF staff calculations. Source: Authorities data and IMF. *Other includes cooperatives and financial company. Figure 7: Myanmar: Structure of the Banking System Figure 8: Deposits and Share Held by Private Banks Source: Central Bank of Myanmar and IMF staff calculations. Source: Authorities' data; IMF staff calculations. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 5 of 15

6 Strong credit growth to continue: Myanmar s credit to the private sector posted robust average growth of 50% during on the back of a historically low base of financial intermediation. The growth is expected to continue outperforming direct regional peers over the next five years. Note that the IMF projects lending to the private sector to show continuing favorable growth of around 45% in 2015E and CAGR of 32% in E (see figure 9). The loan to deposit ratio of the banking sector was at 55% at year end Much of the lending has been provided to trade, manufacturing, construction (including real estate) and agriculture, which collectively account for more than two thirds of total lending (see figure 11). Hire purchase lending is also rising, although it still accounts for less than 10% of total credit. Figure 9: Real GDP growth vs. credit growth Real GDP growth (%) Domestic credit growth (%) 70 Credit to private sector growth (%) E 2016E Source: IMF, Central Bank of Myanmar Figure 10: Credit and deposit to GDP % Credit to private sector (% to GDP) Deposits (% to GDP) Credit to deposits (Loans to deposits) % Source: IMF, Central Bank of Myanmar E 2016E Figure 11: Commercial bank lending by sector (% share) Figure 12: Banking sector liquidity (loans/deposits) Source: IMF, Central Bank of Myanmar Source: IMF, Central Bank of Myanmar REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 6 of 15

7 Capital standard: Myanmar s banks currently comply with the Basel I accord, the same level as the CLMV region and Brunei, but behind more developed banking peers, which are mostly under the Basel III standard (see Figure 13). Officially, the CBM reports that the banking sector is well capitalized. The capital adequacy ratio for private banks was over 20% at the end of the 2014/15 fiscal year, well above the 10% minimum requirement (Figure 14). Figure 13: Basel standard Country BIS Standard Cambodia Basel I Lao PDR Basel I Myanmar Basel I Vietnam Basel I Brunei Basel I Indonesia Basel II India Basel III Thailand Basel III Philippines Basel III Malaysia Basel III Singapore Basel III Hong Kong Basel III Australia Basel III Japan Basel III Taiwan Basel III Source: BIS, Central banks Figure 14: Capital Adequacy of Private Banks Source: CBM, IMF Interest rate structure: The CMB policy rate has remained fixed at 10% since January Deposit and lending rates for commercial banks are also administratively determined with the minimum deposit rate at 8% and the maximum lending interest rate at 13% (Figure 15 16). Regarding our exclusive meeting with the Central Bank of Myanmar, the authority has not yet signaled any changes with respect to the interest rate outlook in the foreseeable future. Figure 15: Interest rates in Myanmar (%) Figure 16: Myanmar s interest spread vs. regional banks Source: CBM, CEIC, IMF/IFS Source: CBM, World Bank, IMF REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 15

8 Figure 17: Myanmar s key banking statistics vs. peers Lending interest rate (%) Cambodia (USD) n.a. n.a. n.a. n.a Lao PDR (USD) Myanmar Vietnam Thailand Indonesia Philippines Malaysia Deposit interest rate (%) Cambodia (USD) n.a. n.a. n.a. n.a. 4.2 Lao PDR (USD) Myanmar Vietnam Thailand Indonesia Philippines Malaysia Interest spread (%) Cambodia n.a. n.a. n.a. n.a. 7.3 Lao PDR Myanmar Vietnam Thailand Indonesia Philippines Malaysia Source: World Bank, Central banks Credit card and mobile banking regulations started in : Policy makers have also been actively pursuing opportunities around card payments and mobile financial services. The CBM passed a card payment regulation in 2012 and a Mobile Banking Directive in December 2013, which allows only banks to offer basic mobile financial services. The key unfinished step is to pass regulation that would allow non banks, particularly mobile network operators, to establish special purpose mobile financial service companies. The CBM is preparing a draft regulation to address this issue. Transparency and risk management standards lag peers: Myanmar s bank accounting standards relatively lag behind CLMV and more advanced regional countries, which mostly comply with international financial reporting standards (IFRS). It should be noted that all banks and corporations in Myanmar are under reform, as regulations will require these companies to eventually use the Myanmar Financial Records Standard (MFRS) and make public their audited bank balance sheets and income statements. It is also necessary to note that Myanmar s commercial banks do not yet follow international standards of accounting, which may mean weaker asset quality than currently implied by these ratios. Transparency in data reporting, especially data related to asset quality, NPLs and provisioning, also remains a challenge and may not be comparable with regional banks. Moreover, given the fact that there is still no credit bureau in Myanmar, the process for risk management and credit quality control will be more difficult and potentially less reliable. As per CBM data, the non performing loan (NPL) ratio of private banks was reported at around 2%, which does not seem comparable to other regional banks in our view due to the lagging accounting and transparency standards as mentioned earlier. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 15

9 OUTLOOK/CONCLUSION Solid growth outlook not in doubt Given that the financial sector in Myanmar remains in the expansion stage, especially when compared with regional bank peers, we see the growth outlook for the Myanmar banking sector continuing to outpace CLMV and regional peers. This should be underpinned by: 1) The banking sector s low base and low penetration rate, especially in relation to regional CLMV and other regional peers (Figure 18 22); 2) Myanmar s favorable economic growth with recent and projected GDP growth being the highest among CLMV and its GDP size and population ranked second among CLMV (see Figure 23 25); 3) Myanmar s ongoing progress of economic and financial reforms; and especially 4) political reform and the likelihood of better stability in the political climate after the new election. All these factors should enhance confidence in the country s economic and investment climates as well as the banking sector as a whole. Note that the IMF expects Myanmar s economy to grow at a robust pace of 8.5% in 2015 and 8.3% in 2016 on account of the expected continuation of an upward trend in FDI inflows and investment related activity. Looking beyond, the economic growth prospects remain solid over the medium term assuming continued progress on economic reforms, a smooth political transition and ongoing FDI inflows in conjunction with infrastructure development under the Five Year National Development Plan. Myanmar has the potential to maintain its number one ranking in terms of economic growth, which is expected to average above 8% until 2020 (see more details in our Myanmar Economic Pulse from November 23, 2015). In terms of the credit side, as noted earlier, the IMF projects the credit to the private sector in Myanmar to show continuing favorable growth of around 45% in 2015E and CAGR of 32% in E. The challenges are the quality and stability of the banking system Although we have little doubt regarding the banking sector s growth outlook given Myanmar s positive economic growth outlook over the medium term, the key challenge relates to the banking system s stability and quality over the longer term. Although we are seeing ongoing progress with Myanmar s major economic, financial and regulatory reforms, it will still take several years for the country to be compliant with international practices in our view. The other significant challenges with respect to implementing economic reforms are the constraints in human capital, institutions and infrastructure. Figure 18: Credit to the Economy Figure 19: Credit to Private Sector* Source: IMF Source: IMF * Based on 2010 for Laos. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 9 of 15

10 Figure 20: Outstanding Deposit with Commercial Banks* Source: IMF * Based on 2010 for Laos. Figure 21: Foreign Bank Penetration in Asia Figure 22: Foreign Bank Penetration in Developing and Emerging Economies Source: Claessens and van Horen (2012), IMF. Source: Claessens and van Horen (2012), IMF. Figure 23: Real GDP growth after liberalization Real GDP Growth (%) (average 5 years after liberalization) 0 IND MYS MMR KOR VNM CHN MOZ THA IDN TWN Figure 24: Myanmar s GDP growth (vs. peers) Real GDP Growth (%) Myanmar Lao PDR Cambodia Vietnam Source: World Bank, IMF, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 10 of 15

11 Figure 25: Myanmar in ASEAN Country GDP size GDP per capita GDP growth Population Inflation Jobless rate (USD, bn) (USD) (%) (Million) (%) (%) Brunei 18 44, Cambodia 15 1, Indonesia 907 3, Lao PDR 11 1, Malaysia , Myanmar 59 1, Philippines 269 2, Singapore , Thailand 408 5, Vietnam 171 1, Note: The country order is alphabetical. Source: IMF ( data average), KT ZMICO Research CHALLENGES/CONCERNS Transparency and accounting standards in Myanmar continue to lag CLMV and other more advanced regional peers given that the country s corporations and commercial banks do not yet follow international standards of accounting coupled with the fact that there is still no credit bureau. This implies that financial data may be less reliable, especially data related to asset quality and provisioning, creating difficulties for proper analysis and comparisons with regional peers. Asset quality risk may be higher and still needs close monitoring given the prospects of continuing rapid credit growth (including hire purchase loans) in Myanmar. The upgrading of financial sector supervision and reform remain key challenges and it should still take several years before Myanmar can become compliant with international practices. Although financial reform is among the top priorities of Myanmar s government in order to facilitate the rapid growth in the financial system and to enhance the system s stability, the scarcity of knowledgeable supervisory resources is another main limitation. Modernizing Myanmar s financial infrastructure (e.g., payment settlement systems, the credit bureau, etc.) is another significant challenge and priority for the system. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 11 of 15

12 Figure 26: Key economic statistics E 2016F Output Gross domestic product, current prices MMK, bn 43,238 47,722 54,699 62,834 76,471 92,641 USD, bn Gross domestic product per capita, current prices USD 1,118 1,100 1,112 1,228 1,269 1,364 Gross domestic product, constant prices % Prices Inflation (avg.) % Inflation (end) % Public Sector Total revenue MMK, bn 5,222 11,156 12,772 16,563 15,919 19,052 % GDP Total expenditure MMK, bn 7,208 11,955 13,732 18,405 19,582 23,379 % GDP government net lending/borrowing MMK, bn 1, ,841 3,664 4,328 % GDP Public debt % GDP External % GDP Domestic % GDP Balance of Payments Volume of exports of goods and services % Volume of exports of goods % Volume of imports of goods and services % Volume of imports of goods % Trade balance USD, bn % GDP Current account balance USD, bn % GDP International reserves USD, bn Months of imports Money and Credit Broad money % Credit to private sector % % GDP Deposits % GDP FX & Rate Exchange rate (end) Official rate Kyat/$ ,027 Market rate Kyat/$ ,070 Interest rate (end) Central bank rate % Other Indicators Foreign direct investment % GDP Population Million Unemployment rate % Source: IMF s forecasts, IMF World Bank Annual Meetings 2015, KT ZMICO Research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 12 of 15

13 Appendix 1: The Legacy of The Past for Myanmar s Banking System (ADB Economic Working Paper) THE LEGACY OF THE PAST Myanmar s banking system was the envy of Asia before the country nationalized banks in 1963, when it had 10 domestic and 14 major foreign banks the largest concentration of foreign banks in Southeast Asia at that time. But until recently, a series of policy shocks and events had buffeted the finance sector and stunted its development, leaving a legacy of distrust in cash as a unit of value and banks as a secure place to hold wealth. A series of policy shocks buffeted the sector thereafter, however, undermining trust in cash as a unit of value and in the security of banks, as noted in the introduction. Of the many events that shaped the country s banking system, this section highlights six particularly important shocks. 1. Nationalization of banks in After the military takeover in 1962, the new government on 26 February 1963 ordered the nationalization of all private banks, eventually incorporating them into four state banks. The nationalization of most large enterprises followed. The number of state economic enterprises grew rapidly, as a result, and by the early 1980s, their expenditures accounted for around 50% of gross domestic product (GDP). Most state economic enterprises faced soft budget constraints in which managers had little incentive to make profits, since the government pressured state banks to extend loans to cover losses. 2.Demonetization of In 1985, the Ne Win administration introduced a 75 kyat note and 15 and 35 kyat notes in the following year. The government, at the time, demonetized the 50 and 100 kyat notes in circulation, following a grace period, during which citizens could exchange some of their old notes for new ones. However, in September 1987, the government issued a series of 45 and 90 kyat notes and demonetized the 25, 35, and 75 kyat notes. This time, two thirds of the value of all cash in circulation was effectively declared illegal with no option to convert existing notes into the new currency. Sporadic protests broke out among students unable to pay their university fees and, by 1988, these had become widespread, ultimately forcing General Ne Win to step down and triggering a bloody army crackdown on 8 August 1988 (Egreteau 2009). The demonetization instilled widespread reluctance to hold currency. Farmers hoarded crops, while others bought what physical assets they could, such as commodities (including gold), land, and even manufactured goods, with whatever domestic currency they possessed. 3.Partial liberalization in the 1990s. During the early 1990s, the military leaders who succeeded General Ne Win in 1988 introduced a partial liberalization of the domestic economy; as part of that process, private banking was restarted. In 1990, the government promulgated the Central Bank of Myanmar Law and the Financial Institutions of Myanmar Law, and the first private bank (Myanmar Citizens Bank) commenced operations in June By the end of 1992, four private banks were in business, and another four in By the end of 1997, Myanmar had 20 private banks. 4.The banking crisis of Given the lack of transparency at the time, its origins are somewhat obscure, but it is thought to have started with the collapse of a number of trading companies that were acting as informal financial institutions. The contagion spread to banks, which were subsequently instructed to pull back all their loans to increase their own liquidity, which, in turn, created a real sector depression that further eroded the value of financial assets. Yoma Bank, the second largest private bank in 2003, could not withstand the abrupt and massive withdrawal of deposits and had to resort to central bank support. Yoma Bank curtailed operations, but it was allowed to remain open purely for the transfer of remittances. It took Myanmar until 2007 to recover from the banking crisis. External factors exacerbated the domestic causes of the crisis. On 3 November 2003, when the crisis was still ongoing, Financial Action Task Force, an international initiative to prevent money laundering and counter the financing of terrorism, imposed additional countermeasures on Myanmar because of the country s continuing failure to address major deficiencies in its anti money laundering regime (OECD 2003). A week later, the United States (US) Treasury announced that the Mayflower Bank and the Asia Wealth Bank were of 4. The reasons behind the move were many. One was to lower inflation by reducing the stock of money in circulation. Another was to render stockpiles of notes held by insurgent groups worthless. A third was to destroy the black market. Unfortunately, demonetization achieved none of these aims, but instead caused widespread distress. Source: ADB Economic Working Paper Series, April REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 13 of 15

14 Appendix 1: The Legacy of The Past for Myanmar s Banking System (ADB Economic Working Paper) Continued 5.Closure of Universal Bank in On 5 August 2005, troops closed and sealed branches of the Myanmar Universal Bank, the chair and managing director were arrested, and Myanmar Economic Bank eventually absorbed the bank. It is still not clear what prompted this government action. Some suggest the bank was involved in money laundering, which the government wanted to stop; others claim the action was to punish the bank s owners for being too closely connected to the previous prime minister, who had just been deposed and arrested on corruption charges (The Irrawaddy 2005). 6.The Mini crisis of On 5 October 2012, following a rumor spread through social media, there was a run on KBZ Bank, Myanmar s largest private bank. Prompt action by the CBM, which included media statements emphasizing the financial soundness of all banks and the central bank s willingness to guarantee their finances, helped quell the panic. The episode was a reminder of the fragility of the banking system, but also highlighted the important role appropriate central bank policies can play in ensuring stability. Implications for the current banking system. The policy and internal shocks that Myanmar s finance sector suffered left several legacies, the most severe of which is a lack of public trust in the banking system. The shocks left the banking system fragile and vulnerable to small shocks. At the same time, the CBM, which was only recently made an independent institution, remains a product of its past. It has limited capacity and has never had the mandate or the authority to oversee state banks. It is institutionally suspicious of the private banking system and its motivations, as reflected in many direct central bank restrictions on private banking activity, including strict limits on acceptable collateral for loans, loan maturity, interest rates and fees, branch openings, and daily reporting of financials. The emphasis on ex ante controls has meant the CBM has not developed the capacity to implement indirect prudential regulations that give banks discretion to intermediate funds within well defined risk parameters and ensure their adherence to these regulations through offsite and onsite supervision. Source: ADB Economic Working Paper Series, April REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 14 of 15

15 DISCLAIMER This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user. KT ZMICO RESEARCH RECOMMENDATION DEFINITIONS STOCK RECOMMENDATIONS BUY: Expecting positive total returns of 15% or more over the next 12 months OUTPERFORM: Expecting total returns between 10% to +15%; returns expected to exceed market returns over a six month period due to specific catalysts UNDERPERFORM: Expecting total returns between 10% to +15%; returns expected to be below market returns over a six month period due to specific catalysts SELL: Expecting negative total returns of 10% or more over the next 12 months SECTOR RECOMMENDATIONS OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months. NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months. UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 15 of 15