by TMR/ pic by TMR FILE

THE Malaysian banking system’s asset quality remained sturdy although the gross impaired loan ratio (GIL) edged up to 1.6% as at end-July 2019 from 1.48% as at end-December 2018.

RAM Rating Services Bhd (RAM Ratings) co-head of Financial Institution Ratings Wong Yin Ching (picture) said the weakness largely stemmed from a couple of lumpy impairments from the agriculture and manufacturing sectors.

“The rise in impaired loans is idiosyncratic in nature and we do not foresee industry-wide deterioration emerging in these two segments.

“The GIL ratio at the end of 2019 may slightly exceed our initial expectations of 1.6%, but should stay below 1.7%. At this level, the domestic banking industry’s asset quality continues to compare favourably to regional peers,” Wong said in a statement that was released in conjunction with RAM Ratings Banking Quarterly Roundup.

She said the recent second quarter (2Q) financial results also showed that eight anchor banks’ average credit cost ratio remained modest at 27-basis points in the first half 2019 (1H19), even after excluding a one-off Malaysian Financial Reporting Standards 9-related adjustment by one institution.

In addition, banks have maintained healthy loss absorption buffers with an average GIL coverage ratio of 131% (including regulatory reserves) and a common equity tier-1 capital ratio of 13.9%.

Nonetheless, the profitability indicators of the majority of the eight anchor banks are still under pressure, with an average pretax ROA of 1.33% and ROE of 12.9% in 1H19 (1H 2018: 1.39% and 13.7% respectively).

Domestic loan growth skidded to 3.9% year-on-year (YoY) while already-thinning net interest margins (NIMs) were crimped further subsequent to the May 2019 Overnight Policy Rate (OPR) cut.

Lower net interest income, however, was moderated by improved investment and trading income in 1H19. NIMs may suffer another blow as the probability of an OPR cut later in the year is higher now, given that the worsening trade outlook could heighten downside risks to growth. RAM Ratings stated that loan applications were sluggish, increasing 0.8% YoY (three-month moving average) in July 2019.

On a month-on-month basis, there was a 19.5% rebound in loan applications, primarily from households. However, it remains to be seen whether the momentum can be sustained, particularly in view of the external uncertainties weighing on business and consumer sentiment.

“As such, our 5% loan growth projection for 2019 continues to carry some downside risk,” Wong added.