S&P Global Ratings: Downside risks rising for Malaysian banks


In our base case, we expect the banking industry's nonperforming loan (NPL) ratio to reach 3%-4% and credit costs to stay at 55-60 basis points (bps) annually over 2021 and 2022, before recovering gradually.

KUALA LUMPUR: S&P Global Ratings has affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings on CIMB Bank Bhd., Malayan Banking Bhd., and Public Bank Bhd.

It also affirmed its 'BBB+' long-term and 'A-2' short-term issuer credit rating on AmBank (M) Bhd. and RHB Bank Bhd.

The outlook on all the five Malaysian banks is negative.

Below is the statement by the rating agency:

In our view, downside systemic risks for Malaysian banks are on the rise. We consider that the economic risk trend for Malaysia has turned negative. Banks are also facing rising risk in the competitive environment due to negative government intervention. We now see a one-in-three possibility that Malaysian banks could underperform our base-case asset quality expectations in the next 12-24 months.

The protracted lockdown, rampant pandemic waves, repeated moratoriums on loan repayment, and ongoing political uncertainties in Malaysia have increased the downside risk to the recovery of the country's banking system. These factors have also reduced the headroom in our ratings on Malaysian banks.

In our base case, we expect the banking industry's nonperforming loan (NPL) ratio to reach 3%-4% and credit costs to stay at 55-60 basis points (bps) annually over 2021 and 2022, before recovering gradually.

We forecast Malaysia's GDP to grow by 6% in 2022, and the unemployment rate to improve to 4.4%, although the rate will still be high. Malaysian banks are facing COVID-19 related credit challenges from a position of strength compared with most of their peers in the Association of Southeast Asian Nations. The Malaysian banking sector's NPL ratio and credit costs were at historical lows of 1.5% and 8 bps, respectively, prior to 2020, and banks in general have good earnings buffer to absorb an unexpected rise in credit costs.

We also see an increased risk of negative government intervention in the Malaysian banking industry. The risk is reflected in the repeated government intervention in relief measures given out by domestic banks such as the recent announcement to waive off fourth-quarter interest for B50 (bottom 50% of individual borrowers by income) customers. Such interventions could recur, given the ongoing political instability, and impede the banking sector's ability to operate commercially.

Other examples of past government interventions include the two rounds of extensive, six-month automatically approved moratorium programs for all retail and small and midsize enterprise customers (combined 75% of commercial banking system loans). These have hurt banks' profitability even as they battled asset quality stress during the current credit downturn. Those interventions could also encourage some borrowers to be less disciplined in their repayment behavior. The banking industry's profitability was much weaker in 2020 and is likely to remain under heavy pressure during 2021 due to the interest waiver schemes and still elevated credit costs.

In the worst-case scenario, the proposed interest waiver for the B50 group, could lower the net profit of the banks we rate by more than 20% (annualized) compared with the pre-pandemic 2019 number. Our estimate is based on the assumption that all B50 borrowers will avail of the waiver and the operating expenses and credit costs will remain unchanged from our original projection.

The moratorium take-up rate could rise much higher if the government's interest waiver initiative is applicable to all eligible B50 individual borrowers under the current automatic approval application criteria. The B40 group generally accounts for 20%-25% of retail loans for our rated Malaysian banks.

As of mid-August, the moratorium take-up rate for the banking industry had already gone up to 25%-30% of the domestic loan book from 15% earlier. That's because the application for debt relief temporarily spiked during the first few weeks after the second six-month moratorium came into effect in early July.

We anticipate that Malaysia's banking industry will maintain a healthy level of local currency deposits over the next 12-24 months. The banks benefit from their dominant retail presence and strong consumer confidence, and Malaysia's high savings rate of about 30% of GDP. The banks are also likely to maintain their capital strength, given their satisfactory earnings generation capability and flexible dividend payout policies.

Our rating affirmations of the five Malaysian banks reflect those banks' healthy financial buffers, stable market positions, good capitalization, as well as ample funding and liquidity.

Outlooks

Malayan Banking Bhd.

The negative outlook on Malayan Banking Bhd. (Maybank) reflects our negative outlook on Malaysia (foreign currency: A-/Negative/A-2; local currency: A/Negative/A-1). Outside of a change in the sovereign rating, our rating on Maybank has headroom for two notches of weakening in the bank's stand-alone credit profile (SACP). We view that as an unlikely scenario over the next two years.

Maybank's SACP could weaken by one notch to 'bbb+' if its asset quality declines sharply. The SACP could also deteriorate if economic risks faced by the domestic banking sector rise, for example due to a protracted economic recovery amid COVID-19. Maybank's market-leading position in Malaysia, diversified revenue profile, and ample capitalization support its credit profile. We believe these strengths will help the bank to absorb downside stress from the pandemic.

We could downgrade Maybank if we lower the sovereign ratings on Malaysia over the next 18-24 months.

We could revise the outlook on Maybank to stable if we revise the sovereign outlook to stable.

Public Bank Bhd.

The negative outlook on Public Bank reflects that on the sovereign ratings on Malaysia. The ratings on Public Bank will continue to be capped by our sovereign credit ratings as we do not expect the bank to be able to withstand the stress associated with a sovereign default. Our ratings on Public Bank will therefore move in tandem with that on the sovereign.

Outside of a change in the sovereign rating, our rating on the bank has headroom for several notches of weakening in its 'a' SACP. We view that as an unlikely scenario over next two years.

Public Bank's SACP could deteriorate if economic risks faced by the domestic banking sector rise, for example due to a protracted economic recovery amid COVID-19.

The bank's SACP reflects its strong market position, resilient asset quality, and superior funding and liquidity metrics. We believe the bank has adequate provisioning and capital buffers to absorb COVID-19 related downside risks.

We could downgrade Public Bank if we lower the sovereign ratings on Malaysia in the next 18-24 months.

We could revise the rating outlook for Public Bank back to stable if we take a similar action on the sovereign outlook.

CIMB Bank Bhd.

The negative outlook on CIMB Bank reflects our negative outlook on Malaysia. Outside of a change in the sovereign rating, our rating on CIMB Bank has headroom for two notches of weakening in its SACP.

We may revise the bank's SACP by one notch to 'bbb+' if: (1) its asset quality deviates materially from its cycle-average as the credit cycle continues; or (2) economic risk faced by the domestic banking sector materially rises, possibly due to a protracted economic recovery amid COVID-19.

We could downgrade CIMB Bank if we lower our sovereign ratings on Malaysia in the next 18-24 months.

We could revise the outlook on CIMB Bank to stable if we revise the sovereign outlook to stable.

RHB Bank Bhd.

The negative outlook on RHB Bank reflects our negative outlook on Malaysia as well as our view that the economic risk faced by the Malaysian banking sector is increasing amid slow economic normalization.

The rating on RHB Bank incorporate a one-notch uplift for government support from the bank's 'bbb' SACP, reflecting a moderately high likelihood of government support.

We could lower the ratings on RHB Bank by a notch if: (1) we downgrade Malaysia; (2) the bank's asset quality deviates materially from its cycle-average as the credit cycle continues; or (3) economic risk faced by the domestic banking sector materially rises, for example due to a protracted economic recovery amid COVID-19.

We could revise the outlook on RHB Bank to stable following a similar outlook revision on the Malaysia sovereign provided that economic risks in the Malaysian banking industry abate.

AmBank (M) Bhd.

The negative outlook on AmBank reflects the outlook on the sovereign credit ratings on Malaysia and the increasing economic risk faced by the Malaysian banking sector.

Our ratings on AmBank incorporate a one-notch uplift above the bank's 'bbb' SACP, reflecting a moderately high likelihood of government support. We expect AmBank to continue to benefit from external support from the sovereign over the next 12-24 months, although the sovereign creditworthiness itself could weaken in that timeframe.

We could lower the rating on AmBank to 'BBB' if we downgrade the sovereign or if economic risks facing Malaysian banks increase. Reduced risk-adjusted capitalization of the group, to sustainably below 7%, would pose further downside pressure on our rating on AmBank if economic risks facing Malaysian banks increase.

We could revise the outlook on AmBank back to stable if we revise the sovereign rating outlook and economic risks in the Malaysian banking sector abate.

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