KUALA LUMPUR – Moody’s Investors Service has revised Malaysia’s banking system outlook from negative to stable, reflecting an improving operating environment.
It expects banks’ prudent underwriting, together with strong capital and liquidity, to shield them from incremental financial stress caused by the Covid-19 pandemic.
In a research note today, Moody’s said operating conditions will improve as the country’s real gross domestic product is forecast to expand 6.2% this year after contracting 5.6% in 2020, supported by the government’s fiscal spending and a recovery in global demand that will provide a boost to the nation’s net exports.
It said banks’ asset quality will remain stable despite an increase in non-performing loans when forbearance and support measures for borrowers end, on the back of proactive increases in loan-loss provisioning last year that will enable banks to absorb anticipated new loan losses.
“Malaysian banks’ capital will continue to be strong with stable profitability, conservative loan growth targets, and prudent dividend policies that enable banks to maintain their capital ratios at the current high levels.
“The banking system’s Common Equity Tier 1 ratio stood at 14.8 at the end of 2020, a sufficient buffer against unexpected risks.”
On banks’ profitability, Moody’s said it will recover, but not to pre-pandemic levels.
“Credit costs will decline because banks had already sufficiently boosted provisions in 2020. Net interest margins will increase gradually as ample liquidity allows banks to reprice term deposits at lower rates while unwinding modification losses they incurred in 2020.”
Funding and liquidity will remain sound, it added.
“Banks are largely deposit-funded and not reliant on market-sensitive borrowings for funding. Deposit growth will keep pace with loan growth.
“Banks will continue to hold sufficient liquidity against any unexpected shock, with the liquidity coverage ratio for the banking system at 148% as at the end of 2020, well above the regulatory minimum.”
It also said the probability of government backing remains high, as Putrajaya has a history of providing support to failing banks when needed, while unlikely to adopt a bail-in regime in the next 12 to 18 months. – Bernama, March 25, 2021
