Stable outlook for Malaysian banks’ ratings and sector

by FARA AISYAH / pic by TMR GRAPHIC

FITCH Ratings Inc has a stable outlook for Malaysian banks’ credit ratings and the sector this year.

In its 2020 Outlook: Global Banks Compendium report, the rating agency stated the risks to watch out for Malaysian banks are net interest margin pressures, select loan weaknesses and trade or macro tensions.

It noted the rating outlooks for banks in the country generally remain stable due to solid capitalisation levels and asset-quality stability.

“A combination of slowing economic growth, sustained low-interest rates and high levels of indebtedness may increase vulnerabilities for key banking jurisdictions.

“Banks’ execution risks, and political and non-financial risks, will be in focus,” Fitch Ratings warned.

It added that the banking sector outlooks have turned negative in Germany and Japan in 2020, and remains negative in China, India and the UK.

For key emerging markets (EMs), only banks in Malaysia, Brazil and Russia have stable outlooks for both credit ratings and sector.

China, India, Indonesia, Mexico and Turkey have stable credit rating outlook for banks but negative outlook for the sector.

Fitch Ratings has a negative outlook on South African banks’ credit ratings and sector.

As for the developed markets, Canada, France, Korea and the US have stable outlooks for both banks’ credit ratings and sector.

The credit rating outlook for banks in Germany, Hong Kong, Japan, Singapore and the UK are stable, but negative for their banking sector.

Banks in Italy have negative outlook for their credit ratings, but stable sector outlook, while Australian banks have negative outlook for their credit ratings and sector.

Fitch Ratings also said the banks’ ratings and sector outlooks for Asia-Pacific (APAC) developed markets are stable.

The risks to watch for the region’s outlooks for developed markets include rising risk appetite to counter profitability pressure; trade protectionism and slower global growth; cyclicality of regulations to stabilise economy/systems; exposure to higher leverage; and concentrations raising downside risks.

Fitch Ratings’ outlooks for the banks’ ratings and sector of APAC EMs are stable, with risks to watch including rising risk appetite to counter profitability pressure; authorities’ support to buffer near-term vulnerability to macro risks; exposure to higher leverage exacerbates vulnerability; and weak capital constraints acceleration of credit growth.

Fitch Ratings previously said global macroeconomic challenges are exerting pressure on the earnings outlook for investment-grade banks in APAC into 2020, with lower interest rates squeezing net interest margins and loan growth subdued across most markets.

Profitability is challenged due to high prudential standards, acute competition in a low interest-rate environment, weak growth prospects and higher costs, the global credit ratings and research agency said.

It said banks are selectively increasing their risk appetite to alleviate pressure and navigate innovations in digital technologies.

However, while most banks in the Asia-Pacific investment-grade markets reported sound asset quality metrics, this may not be representative of the risks being built during a benign operating environment, Fitch Ratings cautioned.

“Aside from China and India (where there is already stress), we see asset quality problems potentially being masked by high loan growth in the Philippines and Vietnam, while Malaysia has limited room to manoeuvre around relatively high household leverage,” it said in a recent report.