S&P Ratings puts Malaysia’s banking sector in Group 4

KUALA LUMPUR: Malaysia’s high level of stable core customer deposits support the banking system, but S&P Global Ratings cautions that competitive pressure is likely to remain in the home market.

In its latest “Banking industry country risk assessment (BICRA): Malaysia”, it said the pressure was reflected in decreasing margins and earning metrics.

It classified Malaysia’s banking sector in group four under its BICRA. Other countries in the group are New Zealand, Taiwan, Kuwait, Saudi Arabia, Iceland, Ireland, Poland, Slovenia, Spain and Mexico.

The anchor, the starting point in assigning an issuer credit rating, for banks operating only in Malaysia is “bbb”.

“Malaysia’s modest income levels and the vulnerability of its export-oriented economy to global economic conditions temper these strengths.

“Credit risk is elevated because of Malaysia’s high private-sector indebtedness relative to income. The relative financial strength of the Malaysian household and corporate sectors, stable employment conditions, and healthy debt servicing ratios temper this risk,” it said in the report yesterday.

S&P Ratings said Malaysian banks’ asset quality could deteriorate modestly due to slower economic growth amid domestic policy uncertainty and escalating external headwinds.

However, the impact would be manageable, given that non-performing loans are well provided for and are increasing from a low base, it said.

It also pointed out that banks have relied on a combination of cost control and increase in non-interest income to offset pressure on the lending business.

“We consider Malaysia’s regulatory standards to be broadly in line with international norms, and the industry’s risk appetite to be moderate.

“In our view, Malaysia’s economic trend is stable. We see little transitional risk under the new government when it comes to prudential regulation of the domestic banking sector,” it added.

S&P Ratings said the cautious stance adopted by the previous government against potential imbalances in the residential property sector, and the emphasis on prudent and responsible lending have stayed under the new administration.

The various prudential and cooling measures taken by the regulators in the past have moderated the growth of property prices and household debt.

“We view the trend for industry risk in Malaysia as stable. We anticipate that domestic banks will maintain a healthy level of local currency deposits, reflecting banks’ dominant retail presence, strong consumer confidence, and the country’s high savings rate of about 30% of gross domestic product.

“Malaysia’s deep bond market in comparison to most Asian peers further reduces banks’ reliance on external funding, ” it said.