RATING Agency Malaysia Bhd (RAM) has reaffirmed a positive outlook on the local banking sector in view of the continued improvement in asset quality owing to the gradual economic recovery and the resolution of the Lion group debts.
RAM expects the net non-performing loan (NPL) ratio to stabilise in the range of between 5.7% and 6.7% by the end of the year.
The rating agency said that following the closure of the Corporate Debt Restructuring Committee (CDRC) in July 31 last year, only the RM8.6bil debts of the Lion group remained outstanding as at the same date.
With the Lion group debt restructuring exercise already in its final stages, we expect this to have a favourable impact on the banking system this year, RAM said in its latest report.
The agency also pointed out that most of the large non-performing corporate loans had already been resolved, with the remainder of them being smaller ones.
As the economic recovery appears to be well under way, there is a higher likelihood of the remaining smaller NPLs being resolved, the report said.
RAM said the incidence of new NPLs would be on a declining trend as a result of the economic recovery, shift in lending from corporate to retail loans and the heightened focus on risk management.
It said the shift in lending to retail loans boded well for the overall asset quality of the banking sector, given that such loans had experienced lower and more stable default rates compared with other sectors.
We have a positive view of such efforts as they would ensure that activities are undertaken in a more prudent manner, RAM said.
Commenting on the profitability of the banking industry, RAM noted that the sector had begun to exhibit a recovery.
Judging from the latest results announced, most major anchor banks appeared to be performing better, indicating improved overall profitability for the sector and RAM attributed the better profitability to lower provisioning and claw-backs of interest-in-suspense.
It has also recognised the progress made at the operational level (profit before provision), thanks to strong loan growth in retail financing and the boost in non-interest income from innovative services and products.
We expect this momentum to continue through to 2003 in view of the gradual economic recovery, further cost savings arising from the consolidation and streamlining of operations, as well as the re-pricing of home loans, RAM said in the report.
RAM believes that the local banking sector would remain resilient and well poised to ride the gentle wave of economic recovery.
Greater efforts are required from the anchor banks to maintain their strength and competitiveness to face the challenges arising from the liberalisation of the globalisation of the financial sector, it concluded.
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