Moody's sees stable outlook for Malaysia's banking sector

KUALA LUMPUR: Moody's Investors Service says the outlook for
Malaysia's banking system in the next 12 to 18 months is stable while
it expects GDP to expand at a slower pace of 4% this year from 5.1%
last year.
A Moody's analyst, Simon Chen said on Thursday the
Malaysian government's expansionary policies would support credit
growth, despite a slowing economy due to lower demand for exports from
the country's main trading partners -- the US, Europe and China.
"Government
spending this year will total 26% of GDP, on commercial and fiscal
projects that will attract private sector investment, and provide
support to domestic business activities and employment. We expect loans
to grow by between 9% and 11%, which is slightly lower than the 14%
growth recorded in 2011," he said.
He was speaking in Singapore
at the release of a new Moody's report entitled "Banking System
Outlook: Malaysia". The report was based on the central scenario that
Malaysia's economy will grow at a slower, yet robust pace of 4.0% this
year, from 5.1% last year.
"Government spending this year will
total 26% of GDP, on commercial and fiscal projects that will attract
private sector investment, and provide support to domestic business
activities and employment. We expect loans to grow by between 9% and
11%, which is slightly lower than the 14% growth recorded in 2011,"
Chen added.
Below is the statement from Moody's:
Risk-adjusted
profits for Malaysian banks are expected to fall modestly, due to
moderating credit growth, lower net interest margins, and rising cost
pressures for those banks aiming to boost their offshore operations.
However,
Moody's believes the banks will continue to expand regionally because
of intense domestic competition, high credit penetration and abundant
liquidity.
They will also try to compensate for lower loan
growth by taking up opportunities from the retreat of European banks in
the region, expanding their opportunities in Islamic banking, and
focusing on stable fee-generating businesses like wealth management and
bancassurance.
Meanwhile, Moody's expects asset quality to
remain resilient, supported by low unemployment, continued growth in
household incomes and low corporate leverage.
Should the
operating environment deteriorate further than expected, however,
sectors vulnerable to loan delinquencies would include export-oriented
manufacturers, highly-leveraged households and mortgages with high
loan-to-valuations relating to speculative segments of the property
market.
But Moody's believes banks will have relatively strong capacity to absorb related losses under a deteriorating environment.
Capitalization
is strong. With the system's Tier 1 capital ratio of 12.9% at end-April
2012, capital would be sufficient to support asset growth over the next
12-18 months and absorb a significant deterioration in operating
conditions and asset quality.
"Under our adverse scenario, which
corresponds to a cyclical recession with the impaired loans ratio
rising to an average of 8% from current level of 2.7% across the entire
loan book, our rated banks would maintain Tier 1 capital at above 10%,"
says Chen.
Moody's rates eight commercial banks in Malaysia,
which together accounted for 81% of total banking system assets as of
Dec 31, 2011.