Moody’s: Policy changes weigh on loan prospects for Malaysian banks

However, it maintains the country’s banking system will stay stable for the next 12 to 18 months


Moody’s Investors Service Inc has revised downwards its forecast of loan growth for the Malaysian banking industry in 2018 to 5%-6% from 6%-7% projected earlier, as the private sector has adopted a wait-and-see position due to uncertainties on policy changes by the Pakatan Harapan government.

The international rating agency, however, maintained the country’s banking system will stay stable for the next 12 to 18 months as the sector will continue to benefit from robust macroeconomic conditions domestically and abroad, although policy uncertainty poses a risk.

VP and senior analyst Simon Chen said the revision in loan growth is a more realistic approach as the agency expects a slower change in policies in the country.

“In June, our loan growth forecast was at 6%-7% as we anticipated a quicker turnaround in changes,” he told reporters on the sidelines of Moody’s Islamic finance media round-table in Kuala Lumpur yesterday.

Chen said the private sector is awaiting for the details of Budget 2019, which is slated to be tabled on Nov 2, to help get a clearer picture of what to expect going forward. “Policy changes by the government will weigh on investor and business sentiment over the course of 2018,” he added.

Moody’s assessment is based on six drivers — operating environment (stable); asset quality (stable); capital (improving); funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).

On the matter of the outlook for the country’s Islamic banking sector, Chen said the value-based intermediation (VBI) framework will drive business growth and credit considerations.

“Malaysia’s VBI framework combines common principles to create value for stakeholders,” he said, adding that regulatory support continues to drive industry growth.

Moody’s sovereign risk group VP and senior analyst Anushka Shah highlighted that the country’s high debt burden remains a key credit challenge.

“The country’s strong growth remains a credit strength and it is most likely to remain healthy for the rest of the year. The growth trend may, however, slow down in 2019,” Anushka said.

She noted Malaysia is among the fastest growing A-rated sovereigns, but a ballooning debt remains a key credit constraint.

“Despite fiscal consolidation, debt is above the median for the A-rated sovereign. Hence, to what extent the new government achieves fiscal deficit consolidation will be vital in gauging the eventual effects on Malaysia’s fiscal metrics and credit profile,” she added.

Anushka said the federal government is increasingly using domestic Islamic instruments to fund its budget deficit.

“Islamic finance instruments now account for about 40% of outstanding government debt and the growing share of sukuk issuance supports diversity and stability of funding profile,” Anushka said.

Moody’s has previously announced it expects sukuk issuance by Islamic financial institutions in Malaysia to grow between 10% and 13% in 2018, and Malaysia will remain a key issuer in South-East Asia.

Strong export growth will continue to provide some buffer to the country’s current account, but Anushka believes the ongoing headwinds would cloud the nation’s prospects.

“Supply chain linkages and trade openness increase Malaysia’s openness. Exports to China stand at 8.8% of 2017’s GDP compared to 6.6% exports to the US,” she stated.

Malaysia is susceptible to capital outflows due to high foreign investors participation, but she believes the risk is manageable.