Bank Islam Malaysia, one of the country's three Islamic commercial banks, may be looking at securitizing some of its non-performing loan portfolio, according to talk emerging last week from Kuala Lumpur.

By the end of last year, the bank had around M$900 million ($238.7 million) of NPLs on its books, accounting for 10.2% of its total loans, but analysts predict the NPL ratio will rise when it next reports results.

If Bank Islam does decide to securitize route, it would be the first NPL deal in Malaysia to feature a fully impaired portfolio. State asset management company Danaharta, established in 1998 to clean up the loan performance problem in the banking system, issued a M$310 million deal in November 2001. However, that transaction featured formerly bad loans that had been cured for at least a year before the deal was launched.

Following its CLO issue, arranged by Alliance Merchant Bank and Deutsche Bank Securities, it was expected that securitization would form a major part of Danaharta's resolution strategy. The agency said as much when it closed the deal, having seen how successful its counterparts in Korea and Japan had been securitizing sizeable chunks of their non-performing loans. However, no further ABS deals have followed its debut offering and Danaharta has been able to meet its goals through other means. Earlier this year, Danaharta said it had realized M$29.03 billion - 94% of its target - from NPLs since its inception.

This has been a major contributory factor in reducing the non-performing loan ratio in the banking system to 5.9% - the lowest level since the Asian Financial Crisis of 1997.

However, not all banks have been successful in lowering exposure and some bankers feel there is value in securitization. "Most banks are trying to establish a more systematic remedial management internally to recover loans as quickly as possible," explained one banker. "However, for those who have not done that, these loans are dragging their capital ratios down and putting pressure on their ratings outlook."

Noting the rich yields, the banker added that he still liked the asset class, assuming the investor fully understand the risks associated with NPLs, as well as the varying geographic legal structures in issuing countries. Italy is one country that has been very successful in securitizing its NPLs and tax and social security receivables, and I would like to see this replicated in Malaysia," the banker added.

Others were more sceptical. "There are several issues that need to be addressed for a successful deal to happen," a rival banker said. "You obviously need to find a decent servicer, and as always, it will all boil down to pricing and how comfortable issuers are with taking a haircut." While "it would be good to see this asset class re-emerge," the banker added that "Rating agencies will also play an important role."

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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