PETALING JAYA: After years of improvement, the asset quality of Malaysian banks could see some deterioration with the banking system’s gross impaired-loan (GIL) ratio expected to touch 1.8% this year, although this figure is still favourable compared with their Asean peers.
Last year, the Malaysian banking system’s GIL ratio stood at 1.6%, slightly higher than that of Singapore at 1% but lower than the Philippines (2%), Thailand (2.8%) and Indonesia (2.9%).
Commenting on the asset quality of banks, RAM Ratings co-head of financial institution ratings Wong Yin Ching told StarBiz that the GIL ratio of Malaysian banks stayed at a historical low of 1.6% as of end-January 2017 and compared favourably against those of its Asean counterparts.
“While we expect the system’s GIL ratio to slip as recoveries taper further and economic challenges speed up the pace of new impairments, the indicators are not projected to weaken beyond still-healthy levels.
“We continue to have a stable outlook on Malaysian banking this year as it came through a difficult 2016 well and we expect the same this year,” she adds.
“Correspondingly, banks’ credit-cost ratio (including foreign loans) may rise to between 40 and 50 basis points (bps). Banks have also maintained sturdy capital buffers, with their common-equity tier-1 and total capital ratios at a respective 13.1% and 16.9% as at end-January 2017. These ratios had in fact improved in 2016,” Wong notes.
Among the 10 largest banking groups, she says the credit-cost ratio edged up just five bps to 38 bps (annualised) in the nine months of 2016. “However, the credit-cost ratio would have been much lower if only domestic loans are considered, seeing as the bulk of asset-quality challenges thus far have stemmed from overseas exposure,” added Wong. Loan-loss coverage levels, inclusive of regulatory reserves, stood sound at 96% as at end-September 2016.
RAM Ratings will be releasing its annual Banking Bulletin 2017 which covers various issues in detail of the banking sector.
On loan growth, she said it was likely to remain flat this year at between 5% and 6%, from 5.3% last year, noting that the rating agency did not foresee a broad-based improvement in economic sentiment which was likely to remain a constraint on investment activities.
As for household debt to gross domestic product (GDP) ratio, the rating agency’s fellow co-head of financial institution ratings Sophia Lee said that overall, she expected the ratio to remain sticky at current levels through the medium term.
“Broadly, we expect Malaysia’s household debt levels to remain high for some time given the country’s young demographic profile. For the 25 to 39-year-olds, who are in the asset-accumulating class, make up a sizeable 26% of the population and their number is growing at almost twice the rate of the overall population,” she notes.
After seven consecutive years of rising levels of household debt against GDP, the ratio fell slightly from 89.1% as at end-2015. However, she said the improvement may not be sustainable given the new, more accessible end-financing scheme under PR1MA and increased loan limits for civil servants for the purchase of homes and motorcycles, as introduced by the Government under Budget 2017.
“That said, Malaysia’s household debt to GDP ratio is still one the highest in the region at 88.4% as at end-2016. This leaves domestic banks more susceptible to shocks to unemployment, inflation and interest rates,” said Lee.
As for the asset quality of household loans, she says although she expected the credit quality of household financing to weaken slightly amid the rising cost of living, any deterioration is not expected to be significant, considering accommodative interest rates and contained unemployment conditions. The agency projected the unemployment rate to fall from 3.5% in 2016 to 3.2% in 2017 and expected the overnight policy rate to be held at 3% this year.
On the whole, the asset-quality indicators for household loans have remained healthy with the GIL ratio steady at 1.1% as of end-January 2017. The GIL ratio of business loans also stayed sound at 2.3% as at end-January 2017 (end-2015: 2.3%).
Lee added: “While we expect the business GIL ratio to inch up this year, the vulnerabilities are concentrated in a few troubled sectors, such as oil and gas (O&G) and automotive and, to a lesser extent, steel manufacturing and property developers, especially smaller ones.
“The O&G sector accounts for around 2.5% of local banking groups’ gross loans while listed auto companies account for less than 1% of the system’s loans. “In our view, the stresses faced by these few sectors are far from indicative of any system-wide weakness. Based on our analysis of over 700 non-financial companies listed on Bursa Malaysia, the overall debt-servicing ability of Malaysian corporates remained healthy despite declining profits.”
On the standpoint of liquidity, Wong said the system’s liquidity position continues to be healthy as shown by its monthly average Basel III liquidity coverage ratio of 124% since the beginning of the requirement in June 2015.
The banking system’s loans-to-deposit (LD) ratio (with customer investment accounts or IAs) had tightened to 87.2% as at end-January 2017 (end-2015: 85.4%). “The keen competition for deposits is likely to persist, even if at lower levels than seen previously.
“The funding environment remains highly sensitive to shifts in global sentiment and banks continue to emphasise stronger liquidity buffers amid economic uncertainties. The industry’s LD ratio is expected to remain elevated,” she said.
RAM Ratings expected earnings this year to remain sound, although lower, as a result of higher loan impairment expenses. The return on risk-weighted assets of the 10 largest banking groups slipped further from 2.4% in 2015 to 2.2% (annualised) in nine months of 2016 on the back of higher credit costs and the continued compression of net interest margins (NIMs).
“Amid keen competition for loans and deposits, NIMs narrowed from 2.23% in 2015 to 2.19% (annualised) in the nine months of last year. Full-year NIM, however, is estimated to be broadly unchanged from a year ago, as margins improved considerably in the fourth quarter (Q4) of 2016.
“While the quarter’s trend reinforces our view that the squeeze on margins has loosened compared to previous years, we expect that persistent rivalry will likely keep a lid on NIMs. Much of Q4, 2016 NIM increase also arose from the Thai and Indonesian operations of some banking groups, where wringing out further margin improvements may prove difficult,” Lee said.