The outlook for Malaysia’s banking system is expected to be stable over the next 12-18 months supported by stabilising operating conditions with improvement in global growth, recovery of global commodity prices and continued growth in domestic demand, says Moody’s Investors Service.
“The key drivers of our outlook are expectations that operating conditions will stabilise backed by a gradual recovery in global growth, resulting in more stability for the banks’ asset quality and profitability,” said vice-president and senior analyst Simon Chen.
“The banks’ strong and stable funding levels and, our expectation of continued support from the government also underpinned our outlook for Malaysian banks,” he added.
Moody’s findings were revealed in a report titled, “Banking System Outlook — Malaysia: Stabilising Asset Risks and Profitability, Strong Capital Drive Stable Outlook”.
The outlook was based on Moody’s stable assessment of operating environment; asset quality and capital; funding and liquidity; profitability and efficiency and systemic support.
Moody’s rated eight conventional commercial banks, one investment bank, one Islamic bank and one government-owned development financial institution in Malaysia.
The rated commercial banks accounted for around 80% of Malaysia’s banking system loans and deposits at end of 2016.
It said Real Gross Domestic Product growth should register 4.3% on average in 2017-2018, up from 4.2% in 2016, indicating robust domestic economic activities.
However, Moody’s also said the ringgit’s volatility would likely persist due to further adjustment in capital flows which would weigh on business and consumer sentiment.
The report also said asset risks was stabilising on the back of improving macro-economic conditions.
However, high leverage among corporate and households remained a tail risk, mitigated by Malaysia’s diversified economy and stable employment conditions, it added.
As for capital, the report said banks would demonstrate stable capitalisation owing to moderate loan growth but would remain sufficient to withstand asset quality shocks under various stress scenarios.
“Banks will show stable funding and liquidity profiles because of benign credit growth despite the tightening in domestic liquidity from volatile capital flows,” it added.
So far, the impact of fund outflows since late 2015 has been manageable for the banking system with retail deposits maintaining robust growth and offsetting pressure created by institutional deposit outflows, said the report.
Deposit competition among the banks remain healthy, and was well positioned to comply with Basel III liquidity coverage ratio requirements, it added.
Moody’s report found that profitability over the next 12-18 months would stabilise as credit costs normalised from elevated levels owing to stabilising asset risks. Margin pressure, however, would persist due to competition for deposits.
The report also said the Malaysian government would continue to demonstrate strong capacity in support of banks in times of stress, given its commitment towards fiscal reforms and narrower fiscal deficit.
It continued to view Malaysia as a high-support nation, pointing out that there have been no bank failures since Bank Negara Malaysia’s establishment in 1959.
Moody’s also noted that recent regulatory reforms did not suggest any shift in government policies on the resolution of ailing banks outside liquidation. – Bernama