PETALING JAYA: A combination of slower growth and higher leverage in Malaysia increases credit risks for the country’s banks, S&P Global Rating said.
“Malaysia’s economic expansion shifted to a lower gear two years ago, and the momentum has not returned. A weak energy sector, subdued global demand, and tightened domestic spending continue to drag on growth,” said S&P Global Ratings credit analyst Rujun Duan.
Meanwhile, however, corporate and household indebtedness has been steadily rising in an environment of low interest rates and easing credit conditions.
“In 2016, the Malaysian banks we rate reported weak earnings growth, and we expect their full year profitability to remain sluggish in 2017,
“A weakening bank earnings trend comes on the back of slower loan growth, tight margins, and weakening asset quality in a few areas, such as commodities-related overseas loan portfolios and household credit.
“In addition, banks face potential risks due to their exposure to industries with structural or cyclical difficulties, such as commercial real estate and automobiles.
“Heightened leverage in households and the corporate sector, low commodity prices, and oversupply in commercial property add to asset-quality
vulnerabilities,” she said.
The international rating agency said in its view, however, a number of counterbalancing factors support Malaysian banks credit profile.
Industry-wide impaired loan ratios are hovering around a historical low of 1.6%. Capital and liquidity buffers are more than ample to absorb increased stresses.
Separately, it believe prudential measures implemented by the regulators and tighter underwriting standards enforced by banks will also help to keep credit risks at bay.
Heightened volatility in the Malaysia’s exchange rate has a limited direct impact on the country’s banks. This is because ringgit assets make up the bulk of bank balance sheets in Malaysia, and foreign currency liabilities are well matched by foreign currency assets.
Prudent oversight from the regulator also helps to mitigate the relevant risks, S&P Global noted.
Despite the clear merits of a more consolidated banking sector for Malaysia, the research agency said a number of stumbling blocks could make consolidation a protracted process, especially in a slowing growth environment.
Obstacles include difficulties in extracting synergies from deals, or agreeing on retrenchments and restructuring.
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