Moody's maintains stable outlook on Malaysia's banking system

Moody's maintains stable outlook on Malaysia's banking system
Business & Markets 2013
Written by theedgemalaysia.com
Wednesday, 15 May 2013 11:24


A + / A - / Reset
KUALA LUMPUR (May 15): Moody's Investors Service has maintained its stable outlook for the Malaysian banking system for the next 12 to 18 months.

In its Banking System Outlook published Wednesday, the credit rating agency said the stable outlook reflected its expectation of a stable operating environment that would allow the banks to maintain their good asset quality, as well as strong capitalisation levels and funding profiles.

“At the same time, Moody's cautions over the looming risk posed by the twin trends of household leveraging and house price appreciation, which could, in less favorable conditions, undermine asset quality,” it said.

But the rating agency said that this risk was unlikely to materialise within the timing horizon of its outlook.

The author of the report and a Moody’s analyst, Simon Chen said he expects post-election continuity, including the maintenance of accommodative government policies that will support robust growth in GDP, which Moody's estimates will be 5% in 2013.

He also sees bank loans growing by 10% during the same period.

"The key policies supporting this scenario feature government disbursements to implement infrastructure projects already in the pipeline, as well as accommodative monetary policies -- globally and domestically -- that will attract private sector investments, employment and consumption", said Chen.

The report also said that because impaired assets are at record low levels, any further improvement in this area is unlikely.

Chen said that while pockets of the consumer sector may be taking on too much leverage, the associated credit risks should be contained for as long as interest rates remain low.

Chen said any upward movement in current low official interest rates would have a negative effect on various asset classes, such as export-oriented manufacturers, high loan-to-valuation mortgages, and highly-leveraged households.

Moody's estimates that these asset classes account for less than 20% of all loans in the banking system, said Chen.

Moody's stress testing analysis indicates that the loss-absorbing buffers of Moody's-rated banks would allow them to sustain a considerable deterioration in asset quality, while maintaining core equity tier 1 ratio above regulatory minimum.

Furthermore, capitalization levels are highly unlikely to fall below current levels, as the banks manage their balance sheet growth against the higher capital requirements specified under Basel III, which will
lock in existing buffers, it said.

On liquidity, Moody's expects the banking system to maintain robust levels, given that the banks have managed well their funding profiles, characterized by: 1) a stable average overall loan-to-deposit ratio of 79%, and 2) the availability of longer-term funding that the banks may obtain from the debt capital markets.

Moody's rates eight commercial banks in Malaysia, which, at end-2012, held a combined 82% of total banking system assets.