Malaysian banks’ earnings to soften

by **Cals** Wed 23 Mar 2016, 05:23

Malaysian banks’ earnings to soften

By Yimie Yong / The Edge Financial Daily | March 22, 2016 : 10:18 AM MYT

This article first appeared in The Edge Financial Daily, on March 22, 2016.

KUALA LUMPUR: RAM Rating Services Berhad (RAM Ratings) expects banks’ earnings to soften this year as loan growth eases, but noted that Malaysian banks are able to withstand challenges ahead with sound credit metrics, as it reiterated its stable outlook on the Malaysian banking sector.

In a statement yesterday, RAM Ratings said in line with its revised gross domestic product growth forecast of 4.4% this year (2015: 5%), it expects the banking sector’s loan growth to ease to 6% after the 7.9% expansion in 2015.

“We envisage the system’s gross impaired loan (GIL) ratio to come in at 2% at the end of this year, which is still considered healthy, although higher than the current historical low of 1.6%,” said RAM Ratings co-head of financial institution ratings Sophia Lee. “The projected uptick in GILs is also expected to be broad-based,” she added.

The rating agency also noted that the high level of household debt remains a concern, especially among the low-income group and in an environment of rising job cuts and escalating cost of living.

“While we expect some weakening in the credit quality of household financing, the deterioration should not be significant given still accomodative interest rates. As at end-January 2016, the household sector’s GIL ratio remained low at 1.1%. Banks have generally maintained prudent underwriting standards for this sector,” it added.

Meanwhile, it expects corporate borrowers in certain segments — such as those related to construction, oil and gas, wholesale and retail trade, automotive and non-residential property — to face greater earnings pressure if the weak market conditions persist.

“Based on our stress tests, however, credit deterioration in business loans is anticipated to be manageable, as the overall leverage and financial indicators of businesses have stayed fairly healthy,” it said.

Its view is underscored by a “detailed review of close to 50 Malaysian banks and nonbank financial institutions” in the past year, said RAM Ratings.

On the liquidity front, Lee noted that the system’s liquidity position had been kept healthy, as underlined by its Basel III liquidity coverage ratio of 125% as at end-January 2016. Nonetheless, larger capital outflows in the second half of 2015 had tightened funding conditions. As at the same date, the system’s loans-to-deposit ratio had crept up to 87.1%.

“Moving forward, we believe that competition for deposits will remain rife, as banks emphasise stronger liquidity buffers amid the uncertain economic environment,” said RAM Ratings.

As such, its key expectations for the sector this year are: asset quality to remain healthy despite some expected slippage, and capital buffers to be sturdy, while liquidity will stay healthy, albeit with tighter funding conditions.

But given the expectation of slower loan growth and a potential increase in credit costs, banks’ earnings are projected to soften this year.

“Nonetheless, the Malaysian banking system is still well capitalised, with a common-equity tier-1 capital ratio of 13% as at end-January 2016. At the same time, the tier-1 and total capital ratios of the system remained favourable at a respective 13.9% and 16.6%,” it concluded.