S&P sees Malaysian banks’ recovery now further away due to Covid

Strong capital positions, sound liquidity conditions, and prudent risk management practices of local banks still anchor S&P's current credit assessment of Malaysian banks.

KUALA LUMPUR: S&P Global Ratings expects Malaysian banks will continue to be an Asian outlier in their recovery path and the recovery will be further away due to the flare-up of new Covid-19 waves and the inevitable disruptions in near-term economic prospects.

In its report on Wednesday, it said the path to normalisation is “likely to be protracted”. The six-month blanket moratorium revealed by the government on June 28 should further delay the timeline for banks' return to normal.

"The length of the current national lockdown in Malaysia and the effective containment of the pandemic are key variables in charting the course of the banking sector's asset quality trend," said S&P Global Ratings credit analyst Nancy Duan.

The new moratorium would freeze the formation of new non-performing loans (NPLs) until early 2022, further distorting the already under-reported impaired loan ratio for the industry.

The industry ratio of NPLs has been flattish at 1.5%-1.6% since December 2019, even as the economy contracted -5.6% in 2020 amid Covid-19.

S&P said the six-month debt payment holiday for all individual, microenterprises, and eligible small and midsized borrowers, starting from July 7, 2021, means few slippages are likely to be reported for the second half of 2021.

“That said, we don't foresee a substantial jump in the moratorium take-up rate from the current 15%. That's because of the additional interest burden that will be accrued for moratorium borrowers and still healthy balance sheets for most household and corporate borrowers in Malaysia.

“Our base case suggests most weak credits are already covered by the ongoing targeted assistance programmes.

“Further, additional participation from uncovered borrowers should be incremental, barring a lengthy lockdown and material deterioration in employment conditions. In comparison, the moratorium take-up rate peaked at 75%-80% of the industry loan book during the first six-month blanket moratorium in 2020, ” it said.

S&P’s estimates on credit costs -- a measure of loan-loss provisions -- show Malaysian banks will lag recovery timelines of many other regional banks.

“We now forecast Malaysian banks will bear still-elevated, cumulative credit costs of 110-120 basis points (to gross loans) for 2021 and 2022 combined. The industrywide NPL ratio should rise to 3%-4% by end-2022, in our view, ” it said

While reported NPLs remain muted, Malaysian banks have held onto a prudent provisioning policy, as reflected in the divergence between high credit costs and low reported NPL ratios; this is likely to persist in 2021.

The industry impaired-loan coverage ratio stayed around 40% by end-April 2021 from 37% at end-2020. The unimpaired loan coverage was 1.1% as of April 2021, up from 0.7%-0.8% in 2019.

Strong capital positions, sound liquidity conditions, and prudent risk management practices of local banks still anchor our current credit assessment of Malaysian banks.

“Our negative outlook on all rated Malaysian banks reflect the negative outlook on the sovereign rating. We maintain our view on the local banks stand-alone credit profiles, despite reduced rating buffers. This report does not constitute a rating action, ” it explained.

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