by PRIYA VASU/ pic by MUHD AMIN NAHARUL
ASSET quality at the largest banks in Malaysia has been more resilient to economic disruptions from the coronavirus outbreak than Indonesia, the Philippines, and Thailand. according to Moody’s investor service.
Moody’s said in a report that local banks also have sufficiently strong capital and liquidity buffers relative to their asset risks, although they are not as strong as their regional peers.
“These factors will enable the Malaysian banks to restore profitability faster than their regional peers,” said Moody’s.
The asset quality is less vulnerable to economic disruptions from the coronavirus outbreak than their regional peers’ because of a greater focus on retail loans that are largely secured, well regulated and supported by ample financial assets held by households.
“The asset-weighted average nonperforming loan (NPL) ratio for the largest banks in Malaysia declined slightly as of the end of 2020 from a year earlier despite the economic shock triggered by the pandemic.
“This is because authorities introduced relief measures for borrowers, such as loan restructuring and payment moratoriums while allowing banks to not classify affected loans as default,” it added.
The largest banks in Malaysia had the lowest NPL ratio on average in the peer group at the end of 2020.
The governments and central banks of the other three countries took similar steps, and as a result, NPL ratios at the largest banks in Thailand were largely stable as well.
“The new NPLs were mostly from the retail segment, in line with the sharp increase in unemployment. NPLs also increased in Indonesia, although that was mainly because of borrowers who already had been delinquent prior to the pandemic and were not covered by debt relief programs linked to the pandemic,” it said further.
Still, deterioration of asset quality will be the least severe in Malaysia because most of the loans covered by regulatory support measures in the country are collateralised mortgages and auto loans.
Profitability at the Malaysian banks weakened in 2020 as it did at their peers in the other three countries, with increases in loan-loss provisions eroding net profit However, the deterioration of profitability at the Malaysian banks was the mildest as the relative resilience of their asset quality limited declines in their earnings.
“Pre-provision income also came under pressure in Malaysia, Thailand and Indonesia in 2020 as NIMs declined amid monetary easing.
“Yet the largest banks in Malaysia offset some of the deterioration in asset yields by cutting time deposit rates. They also tightened control of operating expenses and recognised gains on the sale of government securities to capitalize on declining interest rates,” said Moody’s.
As a result, pre-provision profitability at the largest Malaysian banks was stable.
Bottom-line profitability at banks in the four countries will improve in 2021 given that they have built sufficient loan-loss provisions against anticipated loan losses. “Yet the largest Malaysian banks will see the fastest recovery because relatively low asset risks will reduce the need to keep provisions at as high levels as their regional peers.
“The risk of continued asset quality deterioration in the other three countries are higher, and as a result banks in these countries may need to maintain provisions at these high levels,” said Moody’s.
The largest Malaysian banks’ NIMs could get a further boost from the absence of one-time modification losses in 2020, which were mainly linked to moratoriums on auto loans and reduced their NIMs by around 15 basis points to 65 basis points in the three months to June 2020.
The largest Malaysian banks’ capital and liquidity buffers are weaker than those of their regional peers, but they are still sufficient to absorb potential financial stress because asset risks in the country are lower than in the other countries.
“Banks in Malaysia suspended interim dividend payouts in 2020, as their peers in Thailand did, which helped them preserve capital. The largest banks in Indonesia do not pay interim dividends, while those in the Philippines continued to pay dividends with no restrictions in 2020,” added Moody’s.
The Malaysian banks have lower liquidity coverage ratios (LCRs) on average than their regional peers because the country’s capital markets are more developed, which makes banks structurally more reliant on wholesale funding.
Also, within deposits, banks in Malaysia have a smaller share of funds from retail customers than in Thailand, the Philippines and Indonesia because of the presence of more advanced capital markets in Malaysia, coupled with a more mature fund management industry, lure individuals in the country to stocks and funds away from bank deposits.
“The largest Malaysian banks’ average LCR is still well above the regulatory minimum, and solvency risks that can trigger a liquidity outflow are low because their asset quality is strong,” said Moody’s.
Similar to their regional peers, the largest banks in Malaysia benefited from a reduction in reserve requirements and open market operations by the central bank which has eased liquidity conditions.
Spending cuts by individuals and businesses also led to higher deposit growth in 2020, boosting their liquidity, which also happened in Indonesia and Thailand.