KUALA LUMPUR: Moody’s Investors Service has downgraded Malaysia’s banking sector outlook to negative from stable to reflect growing risks from the coronavirus (Covid-19) outbreak and broad economic deterioration.
It also has downgraded its outlook on 11 other countries’ banking sectors in the Asia-Pacific region for the same reasons.
The international rating agency said in a statement yesterday that Malaysian banks face an increase in asset risks and decline in profitability amid deteriorating economic conditions in the next 12-18 months.
“Robust loan-loss reserves and capitalisation will provide a buffer against growing risks, ” Moody’s said.
Moody’s has maintained its negative outlook on two countries’ banking sectors, namely Hong Kong and Japan, bringing them to a total of negative outlook on 14 countries now.
Moody’s said Malaysia is facing slowing regional growth and trade, while the Covid-19 outbreak and subsequent movement control order that have been in place since mid-March are materially disrupting economic activity.
It said the current situation would hurt the country’s electronics exports and tourism. In addition, political uncertainty will weigh on business and investor sentiment.
“Banks’ internal capital generation will decline as their profitability weakens. However, weaker loan growth will limit expansion of banks’ risk weighted assets, which will result in stable capital ratios, ” Moody’s said, adding that banks’ loan-to-deposit ratios will be stable as deposit and loan growth will broadly match.
“Credit costs will rise from cyclical lows in line with rising asset risks. Net interest margins will decline due to easy monetary policy and weak loan growth. At the same time, continued investment in digital transformation will drive up operating costs, ” it said.
It said the government’s willingness and capacity to support banks in times of need will remain strong.
Moody’s said its negative outlook on many banking sectors in Asia Pacific is to reflect its expectation that the broad and growing scope of economic and market disruption from the Covid-19 pandemic will increasingly strain banks’ operating environment and loan performance.
“Widespread business defaults and restrictions on social interactions will hit economic activity this year, and Moody’s projects a contraction in global economic growth in 2020, ” it said.
Despite the various measures by regional governments designed to shore up the financial position of businesses and soften the negative impact on employment and households, Moody’s expects these measures would be sufficient to fully offset the adverse impact of the Covid-19 induced downturn on banks.