Moody’s turns negative on Malaysian banks as Covid-19 hits borrowers

Covid-19 and subsequent lockdowns that have been in place since mid-March are materially disrupting economic activities


MOODY’S Investors Service Inc has downgraded its outlook on Malaysia’s banking system to negative from stable previously, to reflect growing risks from the Covid-19 outbreak.

“Malaysian banks’ asset quality will deteriorate, driven by impairments of loans to export-oriented manufacturers and companies in the leisure, tourism, hospitality and aviation sectors because of the challenges stemming from coronavirus-related disruption,” it said in a report yesterday.

This comes as the country faces slowing regional growth and trade, while Covid-19 and subsequent lockdowns that have been in place since mid-March are materially disrupting economic activities.

Malaysia’s electronic exports and tourism, in particular, will be hit, while political uncertainty will weigh on business and investor sentiments, Moody’s noted.

However, Bank Negara Malaysia’s blanket six-month moratorium on loan repayments for retail borrowers, and small and medium enterprises (SMEs) will soften the near-term credit negative impact on asset quality.

Lenders will also maintain strong loss-absorption buffers, which will help to mitigate increasing asset risks.

Banks’ profitability will decline amid worsening economic conditions over the next 12 to 18 months, the credit rating firm added.

“Credit costs will rise from cyclical lows in line with rising asset risks. Net interest margins will decline due to easy monetary policy and weak loan growth.

“At the same time, continued investment in digital transformation will drive up operating costs,” it stated.

Although banks’ internal capital generation will decline as earnings are eroded, this will stabilise their capital ratios as weaker loan growth will limit the expansion of their risk-weighted assets.

On a more positive note, lenders will continue to hold sufficient liquidity to withstand liquidity shocks, Moody’s said. Loan-to-deposit ratios will also be stable as deposit and loan growth will broadly match.

The rating agency also changed its outlook on 12 Asia-Pacific banking systems to negative, while keeping a negative stance on Hong Kong and Japan following the Covid-19 outbreak and declining economic environment.

The negative outlook reflects the firm’s expectations for a broad economic and market disruption from the pandemic that strains banks’ operating environment and loan performance.

“Widespread business defaults and restrictions on social interactions will hit economic activities this year, and Moody’s projects a contraction in global economic growth in 2020,” it said.

Governments’ measures to assist businesses’ financial position and soften the blow on employment and households will not be sufficient to offset the negative impact of the corona- virus-induced downturn on banks.

The hotel and restaurant, airline, automotive and retail sectors will be severely hit while SMEs will be vulnerable.

“Moreover, if disruptions from the coronavirus outbreak extend beyond the first half of the year, the credit impact on banks could be significant,” Moody’s said.