RAM Ratings: Malaysian banks resilient enough to weather storm in 2020

“Escalating headwinds on both the domestic and global fronts pose greater downside risks to the performance of banks this year, even though we believe that Malaysian banks – with their strong fundamentals and prudent risk management – will be able to weather the storm,” observes Wong Yin Ching, RAM Ratings’ Co-Head of Financial Institution Ratings. While we have maintained a stable outlook on the Malaysian banking sector for 2020, we highlight that banks face heightened uncertainties and challenges in the still evolving economic landscape. Key expectations for the sector are outlined in RAM’s Banking Insight. These include:

• Loan expansion to moderate to 1.0%-2.0% (2019: +3.9%), with a downward bias
• Asset quality indicators to weaken with gross impaired loan (GIL) and credit cost ratios rising to 1.70%-1.90% (end-January 2020: 1.56%) and 50 bps (2019: 30 bps), respectively, even after considering banks’ relief measures
• Capital buffers to remain sturdy
• Funding and liquidity to stay healthy
• Softer profitability amid slower credit growth, compressed net interest margin (NIM) and heftier credit losses

The decade has gotten off to a rocky start with the outbreak of COVID-19 and political uncertainties. The far-reaching implications of the pandemic are anticipated to compound the effects of the US-China trade dispute, which had already slowed down the global economy in 2019. “We expect banks to closely monitor their credit exposures amid the present challenging scenario and envisage a pick-up in rescheduling and restructuring (R&R) activities,” highlights Sophia Lee, Co-Head of Financial Institution Ratings.

Although the immediate impact of COVID-19 will be felt in the airline and tourismrelated industries, retail trade, restaurants and hotel segments as well as in certain manufacturing sub-segments, spillover effects will be broad-based across economic sectors. Malaysian banks are extending temporary financial relief to affected borrowers, which include the R&R of credit facilities as well as a moratorium on loan repayments of up to six months. Although banks do not need to set aside provisions for loans that come under the relief measures now, impairment charges may be pushed out to 2021 if borrowers’ weaknesses stretch beyond short-term cashflow issues.