KUALA LUMPUR: RAM Rating Services Bhd (RAM Ratings) is maintaining a stable outlook on the Malaysian Islamic banking sector on account of the industry’s sturdy fundamentals.
However, the credit rating agency cautioned that Islamic banks would face heightened uncertainties and challenges in the still-evolving economic landscape with the rapid spread of the Covid-19 pandemic and its far-reaching effects on the domestic and global economy, it said in a statement here.
“Taking into account our expectation of a steep moderation of economic growth, the financing growth of Islamic banks is expected to decline to below 5% in fiscal 2020, from 8.3% in 2019,” explained the RAM Ratings Co-Head of Financial Institution Ratings, Sophia Lee.
Islamic banks’ asset quality remains healthy although its gross impaired financing (GIF) ratio edged up to 1.4% as at end-December 2019 (end-December 2018: 1.3%) due to a couple of lumpy corporate accounts.
“The reported asset quality indicators of Islamic banks should stay manageable in 2020, chiefly supported by the recent financial relief measures initiated by Bank Negara Malaysia (BNM) in response to the outbreak,” said RAM Ratings.
That said, these indicators may not be reflective of the actual credit quality of the Islamic banking system.
Meanwhile, the liquidity of Islamic banks is still in a comfortable position, with the industry’s liquidity coverage ratio (LCR) clocking in at 151% as at end-January 2020.
As part of the regulatory relief measures, banks are allowed to operate below the minimum LCR threshold of 100% given the reduction in cash flow during the moratorium period.
“We foresee headwinds to earnings, given further margin pressure subsequent to the twin OPR (overnight policy rate) cuts in early 2020 and higher credit costs expected going forward.
“Islamic banks continued to boast healthy financing-loss buffers, as reflected in the system’s strong common equity tier-1 capital ratio of 13.6% as at end-January 2020,” it added.
In addition, the GIF coverage ratio (including regulatory reserves) of the sector was a sturdy 116% as at end-September 2019. – March 30, 2020, Bernama
