Banks likely to be spared from rating downgrade

Analysts told StarBiz that comparatively, Malaysia was coping well compared to its regional peers in flattening the Covid-19 curve. As such, its economic outlook and macroeconomic fundamentals are sound. Towards this end, the analysts do not expect any immediate downgrades on Malaysian banks.

PETALING JAYA: Some banks in Asia-Pacific face the risks of being downgraded by global rating agencies due to the ravaging Covid-19 pandemic but analysts are bullish that Malaysian lenders would be spared in view of the country’s improving economic outlook and strong fundamentals.

According to analysts, bank ratings are closely linked with the sovereign ratings.


Recall that S&P Global Ratings last month had revised its outlook on five Malaysian banks – Malayan Banking Bhd (Maybank), CIMB Bank Bhd, Public Bank Bhd, RHB Bank Bhd and AmBank (M) Bhd – from “stable” to “negative”. This was premised on the outlook revision on the Malaysian sovereign rating to negative.

At the same time, the rating agency said it is affirming all its ratings on the banks, given its base-case expectation that these banks’ stand-alone credit profiles have adequate buffers to withstand difficult operating conditions in 2020 and 2021.

However, S&P said ratings on these banks could fall by a notch in case of a downgrade of the sovereign in the next 18 to 24 months.

In April this year, Fitch Ratings downgraded Maybank and Hong Leong Bank by one notch to reflect the adverse operating environment brought about by the Covid-19 crisis.

Fitch has placed most of the banking systems in Asia-Pacific on a negative outlook due to the challenges brought about by the pandemic although the agency said this did not indicate that these economies faced higher risk of financial instability.

Analysts told StarBiz that comparatively, Malaysia was coping well compared to its regional peers in flattening the Covid-19 curve. As such, its economic outlook and macroeconomic fundamentals are sound.

Towards this end, the analysts do not expect any immediate downgrades on Malaysian banks.

They said the country’s economic growth is expected to rebound next year despite headwinds on the external front.

“We expect gross domestic product (GDP) to rebound next year as the economy shows signs of recovery in the second half of the year. The banking sector, as a bellwether of the Malaysian economy, is closely linked to the state of the economy and its performance.

“Therefore, the chances of lenders here being downgraded would depend on how the economy fares, moving forward, ” a banking analyst noted.

Economists are projecting a GDP growth of between 3.5% and 6.5% for next year as compared to a contraction of between 1% and 3% in 2020.

Based on Bank Negara’s estimate, the economy is expected to be between 2% contraction and 0.5% growth this year.

S&P Global Ratings, in a report dated July 15, said it expected that US$2.7 trillion of economic output would be lost in Asia-Pacific over 2020 and 2021, hitting the performance of banks in the region.

The global rating agency believed there are downside risks for Asia-Pacific banks. “We took 50 negative rating actions on lenders in the second quarter of 2020, and we may yet downgrade more institutions.

“Our ratings on lenders are clearly linked to the region’s economic health and we only see Asia-Pacific GDP trends normalising by 2023, at the earliest, ” it added.

In its base case, S&P Global expects that most banks in Asia-Pacific would absorb the hits from Covid-19, and start to recover by the end of 2021.

“Nevertheless, a more severe or prolonged hit to the economies than our current baseline would almost certainly push banks’ credit losses higher, drive their earnings lower and amplify other risks.

“High private-sector indebtedness and still-high asset prices in many countries may have also set up some countries for a disorderly correction, ” it added.

Commenting on the revision of the five Malaysian banks by S&P last month, an analyst told StarBiz: “S&P views that Malaysian banks have strong capital positions and good asset quality before the Covid-19 crisis, which will help mitigate the effects of the sharp credit downturn.

“These banks will continue to benefit from government support and their ratings are capped by Malaysia’s sovereign credit ratings.

“As such, the banks’ ratings will move in tandem with that on the sovereign. In the event the Malaysian sovereign rating is downgraded by S&P, it will also trigger a downgrade on the five banks, which may lead to higher borrowing costs, particularly for their non-ringgit bonds.”

However, the impact is not expected to be significant, given the current low interest rates, the analysts said.

In its report, S&P said it believed Maybank would maintain its solid capital buffer in the next two years to counter strains on asset quality amid the virus outbreak.

The bank’s cumulative credit losses over 2020-2021 could increase to 130 basis points (bps) of gross loans, higher than 45 bps in 2019. It expects the gross impaired loans to remain elevated at above 3% of gross loans for next two years.

“In our opinion, the largest banking group in Malaysia will record muted loan growth of around 1% this year, and rebound to 7%-9% growth in 2021 and 2022, in line with our expectation of an economic recovery in its major markets.

“We also expect a 10-basis-point (bps) net interest margin compression in 2020 as a result of the lowering policy rates in the region, ” the rating agency noted.

As for the second largest lender by asset size, it expected CIMB Bank Bhd’s loan growth to slow down notably to 2% in 2020 amid intense economic headwinds associated with the virus.

However, it said growth would likely rebound strongly to 7% in 2021. “We also anticipate a 10 bps compression in the bank’s net interest margin this year, in line with low interest rates in CIMB Bank’s main markets in Malaysia, Thailand and Singapore.

‘In our view, credit costs for CIMB Bank are likely to stay high at 60-70 bps of gross loans over the next two years due to business and cash flow disruptions caused by the pandemic and associated lockdown. That said, we expected the bank’s earnings to start to recover next year as business activities normalised, it said.

Meanwhile, Moody’s Investors Service in a note on the banking sector said banks in Singapore, Malaysia and the Philippines have the best asset quality with non-performing loans (NPLs) below 2% despite the challenging economic and credit conditions stemming from the outbreak of Covid-19.

It also pointed out that overall, despite banks facing higher problematic loans and lower profitability, most were adequately capitalised to withstand the higher credit risk.

Nonetheless, Moody’s expected asset quality and profitability would deteriorate from good levels in 2019 across most banking systems.

Eugene Tarzimanov, a Moody’s vice-president and senior credit officer said in Asean and India, said bank downgrades in 2020 have been driven by Indian banks, following the downgrade of the sovereign in June.

Meanwhile, RAM’s co-head of financial institution ratings Wong Yin Ching said the domestic banking system’s asset quality was robust with a gross impaired loan ratio (GIL) ratio of 1.55% as at end-May 2020 (end-December 2019: 1.51%).

“We envisage the system’s GIL ratio to stay below 1.70% in 2020, primarily supported by the six-month loan moratorium that will protect banks’ asset quality from borrowers’ short-term repayment difficulties. However, bad loans are expected to rise next year after this temporary relief measure ends, ” she noted.

In the the rating agency’s banking quarterly roundup for first quarter 2020, Wong, however, said that with expectations of further erosion in net interest margins, elevated credit costs and modification charges arising from non-accrual of interest (or profit) on deferred installments of fixed-rate auto and Islamic financing under the six-month moratorium, banks’ profitability is seen to remain under pressure this year.

While the system loan growth remained stable with only a marginal slip to a growth of 3.9% in May as compared to 4% in April, Maybank IB Research pointed out that the hefty contraction in loan applications would put further pressure on loan growth.

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