RAM: Banks able to weather ‘perfect storm’

PETALING JAYA: Malaysian banks are likely to see softer earnings and weaker asset quality this year, but capital buffers will remain sturdy while funding and liquidity stay healthy, which means they will be able to weather the current “perfect storm” the country is in the middle of, according to a statement by RAM Ratings.

“Escalating headwinds on both the domestic and global fronts pose greater downside risks to the performance of banks this year, even though we believe that Malaysian banks – with their strong fundamentals and prudent risk management – will be able to weather the storm,” said RAM Ratings’ Financial Institution Ratings co-head Wong Yin Ching.

The far-reaching implications of the Covid-19 pandemic is compounding the effects of the US-China trade war, and as such, banks are expected to closely monitor their credit exposures with a likely pick-up in rescheduling and restructuring (R&R) activities.

Malaysian banks are extending temporary financial relief to affected borrowers, which include the R&R of credit facilities as well as a moratorium on loan repayments of up to six months.

“Although banks do not need to set aside provisions for loans that come under the relief measures now, impairment charges may be pushed out to 2021 if borrowers’ weaknesses stretch beyond short-term cashflow issues,” it said.

In light of the battered oil prices, persistently weak prices will constrict activity and again lead to repayment difficulties.

As such, RAM Ratings said the banking system’s gross impaired loan ratio may worsen to 1.7-1.9% in 2020.

“As events are still unfolding, our best estimate of credit cost ratio stands at 50 basis points, which is still manageable in our view,” said Wong.

Apart from pressures on asset quality, RAM notes that Malaysian banks’ loan growth has been dwindling even before the onset of challenges brought on by Covid-19.

Against the backdrop of weak business and consumer sentiments, the banking system’s loan growth clocked in at a multi-year low of 3.9% in 2019, as did aggregate credit expansion.

“For now, we have pencilled in loan growth of 1%-2% for 2020 but we highlight downside risks to our forecast given the evolving nature of the current environment,” said Financial Institution Ratings’ co-head Sophia Lee.