Malaysian banks face risks from leveraged corporates


BANKS in Malaysia are among one out of the five nations that are most prone to deterioration of corporates’ debt repayment capacity, according to Moody’s Investors Service stress test.

In a report published yesterday, Moody’s assistant VP and analyst Rebaca Tan said high corporate leveraging across Asia Pacific is posing an increasing risk to the region’s banks, as slower economic growth and rising trade and geopolitical tensions could weaken debt servicing abilities.

“Our stress test on the impact of income shocks shows India and Indonesia are most prone to deterioration of corporates’ debt repayment capacity, followed by Singapore, Malaysia and China,” Tan said.

The stress test was based on an assumption of a 25% decline in earnings before interest, tax, depreciation and amortisation (Ebitda).

Under Moody’s stress scenario, capital ratios would decline by one to four percentage points in most economies, leaving banks with sufficient buffers. Total corporate debt across the 13 economies covered grew only 1% year-on-year (YoY) in US dollar terms at the end of 2018, the slowest pace since the global financial crisis.

“Yet, overall corporate leverage remains high relative to GDP in many of the region’s economies.

“Moreover, outstanding debt is heavily concentrated among corporates that hold debt more than four times in Ebitda, raising the risk of rising defaults as operating conditions weaken,” Tan added.

Tan also noted that debt repayment capacity of corporates in Malaysia weakened in 2018 because of declines in aggregate operating earnings and increases in debt.

Among the most vulnerable sectors are the oil and gas sector, which is facing declines in offshore exploration due to low global oil prices, and the construction sector, which was hit by the government’s cancellation and postponement of several infrastructure projects in 2018.

Real estate developers, according to Tan, are also grappling with a continued supply glut, offering discounts and rent holidays to clear inventories, which have compressed their margins.

“In 2019-2020, we expect the opera-ting environment for corporates to become more challenging as the trade tensions between the US and China, coupled with growing geopolitical risks, weigh increasingly on the global economy and supply chains at a time when growth is already decelerating.

“Corporate earnings and debt repayment capacity could weaken, although the impact on different sectors will vary, with trade-oriented sectors the most vulnerable to the trade dispute,” Tan said, adding that corporates with elevated levels of debt will be at greater risk of default, given their weaker resilience to sharp revenue declines.

Overall, the report highlights that a spike in corporate defaults would be credit negative for Asia-Pacific banks, given most corporates in the region rely heavily on banks for funding