“Malaysian banking sector not out of the woods yet but remains resilient”

THE Malaysian banking sector is expected to stay resilient in 2022 amid the challenges of the COVID-19 pandemic. 

Even as impairments begin to surface in the coming year, credit losses will be amply cushioned by healthy earnings accretion, comfortable provisioning buffers and solid capitalisation. 

In the next 12 months, most ratings in RAM Rating’s banking portfolio will remain intact. 

It projects loan growth to come in at 4% in 2022 in line with the anticipated economic recovery. This is a higher rate than the 3% forecasted for 2021 and the 2.5% recorded in August. 

“The household sector will anchor growth next year with mortgages as the main driver, similar with what was seen in previous years,” opined RAM’s co-head of financial institution ratings Wong Yin Ching.

“This is not surprising. Malaysia has a young demographic so household formations are high and there is an underlying demand for homes.”

On the other hand, Wong expects only a slight pick-up for businesses as most firms are currently operating below capacity. 

“Even as the economy gradually recovers, we do not see firms rushing to invest or expand just yet,” she said during a panel session entitled “Moving to a New Normal: What to Expect” at the virtual RAM Credit Summit 2021 last week. 

Meanwhile, RAM’s senior analyst with financial institution ratings Loh Kit Yoong expects funding and liquidity conditions to stay healthy. 

“Banks’ liquidity coverage ratio has generally hovered around 150%, well above the 100% minimum,” she noted.

“We believe that Bank Negara Malaysia (BNM) has a strong incentive to ensure ample liquidity in the financial system; the many regulatory flexibilities introduced since the onset of the pandemic is a testament of that.”

 

RAM Ratings

 

Impaired loans

Although most banks will likely extend further relief to borrowers who are still viable when the nationwide opt-in moratorium expires in 1H 2022, RAM expects some impairments to start crystallising in the later part of the year. 

As such, the rating agency projects the gross impaired loan ratio to rise to between 2.3% and 2.5% in 2022 from the current 1.7% that has been contained by wide-ranging loan repayment assistance and moratorium. As of end-July 2021, about 30% of total loans were under relief. 

“Based on our discussions with some banks, majority of their borrowers under relief stemmed from the middle- and higher-income brackets,” observed Loh. “We are of the view that a sizeable portion of borrowers had taken the moratorium as a precautionary measure given that bulk of these relief loans actually have zero arrears.”

As banks have set aside sizeable forward-looking provisions and management overlays in 2020, RAM foresees banks’ average credit cost ratio to ease to between 50 and 60 basis points (bps) next year from the expected 60 to 70 bps for 2021. 

While hopeful of an economic rebound in 2022, the banking sector is not out of the woods yet, according to RAM. That said, banks went into the COVID-19 pandemic from a position of strength. 

“We believe the sector will remain on solid footing amid our nation’s protracted recovery,” added the rating agency. – Oct 28, 2021

 

Photo credit: HR Asia

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