by ASILA JALIL / pic by BLOOMBERG
MOODY’S Investors Service Inc has revised Malaysia’s banking system outlook to ‘Stable’ from ‘Negative’ on the back of gradual economic recovery and strong balance sheet, which will improve Malaysia’s operating conditions.
It said local lenders’ prudent underwriting, along with strong capital and liquidity, will protect them from incremental financial stress caused by the Covid-19 pandemic.
Moody’s expects the country’s GDP will expand 6.2% this year after a contraction of 5.6% last year, supported by the government’s fiscal spending and a recovery in global demand that will boost Malaysia’s net exports.
“Non-performing loans will increase when forbearance and support measures for borrowers end. However, proactive increases in loan-loss provisioning in 2020 will enable banks to absorb anticipated new loan losses,” the consultancy noted in a report yesterday.
It said the domestic banking system will record stable profitability backed by conservative loan growth and prudent dividend policies that will enable lenders to maintain their capital ratios at current high levels.
The banking system’s Common Equity Tier-1 ratio stood at 14.8% at the end of last year which the firm noted is a sufficient buffer against unexpected risks.
Moody’s expects deposits growth will keep pace with loan growth.
“Banks will continue to hold sufficient liquidity against any unexpected shock, with the liquidity coverage ratio for the banking system at 148% as at the end of 2020, well above the regulatory minimum,” it said.
Despite anticipated recovery in profitability, it will not go back to pre-pandemic levels. Moody’s stated credit costs of banks will decline as banks have boosted provisions in 2020 to mitigate the impact of the pandemic.
It said provisions will decline after sharp increases last year as the overall economic conditions recover.
The banks’ net interest margins will gradually increase as ample liquidity allows banks to reprice term deposits at lower rates, while unwinding modification losses incurred last year, Moody’s said.
In Malaysia, the firm rates eight conventional commercial banks, one Islamic bank, one investment bank and one development financial situation. The rated entities accounted for about 79% of system loans as at the end of last year.
Read our previous report here