S&P: Malaysian banks’ credit stable

But S&P says they face challenges including high corporate and household debt

PETALING JAYA: Malaysian banks’ credit profile remains stable but a number of challenges weigh on them, including high corporate and household debt as well as slower economic growth in recent years.

Standard & Poor’s Global Ratings analyst Rujun Duan said in a report that a combination of slower growth and higher leverage has increased the credit risk of the country’s banks.

“A weak energy sector, subdued global demand and tightened domestic spending continue to drag on growth. Meanwhile, corporate and household indebtedness has been steadily rising,” she said.

However, Duan said the Malaysian economy remained resilient, supported by stable employment conditions, deep financial markets and a prudent regulatory framework.

“In our view, however, a number of counter-balancing factors support Malaysian banks’ credit profile,” Duan pointed out.

Factors that support the credit profile include historically-low impaired loan ratios of 1.6% and more than ample capital and liquid- ity buffers, while prudential measures implemented by Bank Negara and tighter underwriting standards enforced by banks will also help to keep credit risks at bay.

Duan said earnings would continue to be sluggish this year, continuing a trend from last year when Malaysian banks reported weak earnings growth. “This is due to slower loan growth, tight margins and weakening asset quality in a few areas, such as commodities-related overseas loan portfolios and household credit.

“In addition, banks face potential risks due to their exposure to industries with structural or cyclical difficulties, such as commercial real estate and automobiles,” she said.

Malaysian banks generally improved their performance in the first quarter ended March 31 compared to the same quarter a year ago, although forecasts remain as underperforming. Banking stock analysts expect better net profit in the second quarter.

Duan said domestic loan growth would remain at around 5% this year, with potential downside coming from faster-than-expected inter- est rate hikes from Bank Negara.

“We are currently expecting one 25-basis-point (bps) hike in the overnight policy rate later this year, followed by a second 25 bps hike in 2018, as Malaysia catches up with the interest-rate normalisation cycle of the US Federal Reserve,” she said, adding that rising interest rates may further pressure net profit.

Duan noted that corporate debt has been building up in the country due to the ample supply of money in the market, with total outstanding corporate debt growing 8.6% last year and 12.7% in 2015.