NPLs to rise on political uncertainty, Covid-19

O S&P expects more easing by Bank Negara this year, with a further 5-10bps compression of local banks’ net interest margin

PETALING JAYA: S&P Global Ratings expects slower credit growth and a higher nonperforming loan (NPL) ratio for Malaysian banks amid challenging operating conditions.

The rating agency is revising down its credit growth forecast for these banks to 1-3% in 2020, from the previous 3-5%. It also expects NPLs to reach 1.7-1.8% of outstanding loans this year, versus 1.5% as of Dec 31, 2019.

However, it said the forecasts were based on the assumption that the global Covid-19 outbreak will subside and the domestic political stability can be restored over the coming months.

“We will need to revisit our numbers if those risks stretch beyond the second quarter of 2020.”

S&P believes banks are facing a multitude of headwinds from a position of strength, supported by their solid performance in 2019.

“The global outbreak of Covid-19 and renewed domestic political uncertainty add obstacles for Malaysian banks, which are already grappling with the effects of a slowing economy and dampened investor and consumer sentiments over the past year,“said S&P Global Ratings credit analyst Nancy Duan in a statement, in conjunction with the publication of its report Global Credit Conditions: Covid-19’s Darkening Shadow.

The rating agency believes that the government’s recently announced credit relief measures could buy some time for the sectors most disrupted by the coronavirus outbreak.

“For example, borrowers in vulnerable sectors will be granted extensions on repaying interest or principal on loans. However, in some cases this may just push out asset-quality weakness into 2021.”

S&P also expects more potential easing from Bank Negara Malaysia to shore up the economy, leading to a further 5-10 basis point (bps) compression of banks’ net interest margin in 2020.

“Our base case assumes stable capital adequacy ratios. However, risks are now tilted to the downside, given added drains on profitability and the rising dividend payouts announced by some banks last week. We expect a generally neutral impact to domestic banks from the RM20 billion stimulus package.”

It warned that transitory asset-quality problems could become permanent if the severity and duration of the disruptions were prolonged, as this would eventually push up banks’ credit costs, meaning that the allocation of provisions for impaired and potentially impaired loans.

“We maintain our projection that sector-wide credit costs will be 20-25bps of total loans in 2020, though downside risks are clearly rising.”

S&P said while Malaysian banks’ direct exposure to the most disrupted sectors, such as hotels, restaurants, and airlines, is small at only a single-digit percentage of loan books on average, the global health emergency and domestic political upheaval are hitting oil prices, consumer confidence, and the broader economy in Malaysia.

In conclusion, Malaysian banks are fundamentally strong, as reflected by their low NPL ratios, light credit costs, and large capital buffers.

“The banks credit profiles have remained solid despite muted profitability in recent years. In our opinion, conditions in 2020 will put the banks to a much bigger test to their resilience,“said Duan.