KUALA LUMPUR: Oil and gas loans made up less than 4% of Malaysian's six largest banks'
total loan portfolios at end-2016, says Moody's Investors Service.
The international rating agency said on Friday that by contrast, the asset quality of the banks' Malaysian operations remained robust in 2016.
“While a few banks experienced marginal rises in loan impairments from borrowers in the commodities sector, signs of broad asset quality deterioration across the corporate and household sector were absent,” it said.
Moody's also pointed that the full year 2016 results of the six largest Moody's-rated Malaysian banks by total assets show continued asset quality deterioration from their overseas loan portfolios, weaker profitability from slower revenue growth, as well as higher credit costs.
The banks assessed in Moody's report are: Malayan Banking Bhd
(A3/A3 stable, a3); CIMB Group Holdings Bhd (Baa1 stable); Public Bank Bhd (A3/A3 stable, a3); RHB Bank Bhd (A3/A3 stable, baa3); Hong Leong Bank Bhd (HLB, A3/A3 stable, baa1); and AmBank (M) Bhd (Baa1 stable, baa3).
The rating agency, said that on the other hand, the banks' capital and liquidity profiles remain stable, providing buffers against continued weak operating conditions.
"Gross impaired loan ratios either improved marginally in 2016 or remained flat year-on-year for domestic-focused banks like AmBank, Hong Leong Bank and Public Bank," says a Moody's vice president and senior analyst Simon Chen.
"However, banks with sizable operations in other parts of Southeast Asia, such as Maybank, CIMB Group and RHB, recorded higher gross impaired loan ratios in 2016 from a year ago," he added.
Moody's analysis is contained in its just-released report titled "Malaysian Banks — 2016 results show weaker asset quality and profitability, but resilient capital and liquidity buffers provide
offsets."
The report, which was authored by Chen, pointed out that in terms of banks with sizeable operations
outside of Malaysia, their asset quality issues were similar.
The quality issues were driven primarily by weaknesses in their key overseas loan portfolios, including borrowers from the oil & gas service sector in Singapore, and borrowers affected by weak operating conditions in Indonesia, Thailand and other countries.
Moody's said the asset quality of the banks' Malaysian operations remained robust in 2016.
As for profitability, Moody's report pointed out the profitability of these six rated Malaysian banks was mixed in 2016.
“Hong Leong Bank and CIMB Group showed improved profitability in 2016, while the other four banks recorded declines in their returns on average assets, primarily driven by higher credit provisions; a trend that Moody's expects will persist in 2017, in line with a further weakening in the banks' asset quality,” it said.
Net interest margins improved in 2016, despite the lowering of the country's benchmark interest rate by 25 basis points to 3% in July 2016.
Moody's says that the improved margins were mainly achieved through more aggressive funding strategies, as the banks increased their loan-to-deposit ratios (LDRs), as well as lending to the higher-yielding small- and medium-size enterprise segment.
“Moody's expects that limited upside in net interest margins for 2017 as LDRs moderate and banks continue to face keen competition for customer deposits.
“Capital ratios increased because of muted growth in risk-weighted assets, dividend reinvestment plans, and a capital raising by RHB. For 2017, Moody's says capital buffers should increase further, because increases in risk-weighted assets will be muted,” it added.
Moody's also explained that because deposit growth stayed muted in 2016 and far below loan growth, most banks reported weaker (higher) loan to deposit ratios (LDR); a credit negative.
“Moody's concludes that the higher LDRs were due to the banks deploying more excess liquidity to loans, as part of their efforts in overcoming pressure on net interest margins.
“Nonetheless, the banks maintain liquidity coverage ratios that are well above the regulatory minimum,” it said.
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