by S BIRRUNTHA / Pic by MUHD AMIN NAHARUL
FITCH Ratings is expecting a moderate increase in loan impairments this year, as forbearance expires.
In a recent report titled “Impact of Rising Interest Rates on the Asia Pacific (APAC) Banks”, the rating agency said system asset quality has held steady over the past two years, due in part to the extensive moratorium and debt relief.
The rating firm added that any accelerated rate hikes in 2022 are likely to amplify these only modestly.
“Malaysia’s economic environment and labour market have strengthened, and Fitch projects GDP growth of 6% in 2022, which should limit the scale of impairments.
“We expect any incremental credit costs to be manageable, especially in the context of a policy rate that is rising only moderately relative to global trends,” it said.
According to Fitch Ratings, banks’ published base rates are highly sensitive to changes in Bank Negara Malaysia’s (BNM) Overnight Policy Rate with minimal transmission lags, leading to swift reflection in higher lending yields as about 80% of loans are priced on variable rates.
The rating agency said term deposit rates are typically adjusted concurrently, which means nominal spreads do not widen significantly.
However, it noted that the lag effect of deposit maturities means that banks’ net interest margins (NIMs) tend to be buoyed in a rising-rate environment.
“We expect system loans to continue growing by the mid-single digits in 2022 and 2023,” it said.
Meanwhile, Fitch Ratings also said the limited use of wholesale, floating-rate funding by Malaysian banks, and ample system liquidity, suggest that banks have adequate slack to withhold much of the rate increases on current and savings account ratio deposits, while term deposits are only repriced with an inherent lag.
It said the system loan/deposit ratio remains stable, at 87% as of May 2022, and the liquidity coverage ratio is healthy at 149%.
In the trading book, it said debt securities held for trading comprise about 3% of major banks’ assets, which suggests mark-to-market losses should be contained as bond yields rise.
Additionally, the rating agency noted that household leverage remains high by regional standards, but fiscal relief and the improving job market have helped indebtedness to start trending back down.
It said corporate deleveraging during the recent downturn also improved median interest coverage and liquidity buffers, but there is significant variation by sector, and many service sectors are still in the early stages of a lengthy recovery.
As such, Fitch Ratings said banks have significantly built-up loan-loss reserves to cater to heightened uncertainty.
BNM’s monetary policy tightening since May 2022 has been measured, with 50 basis points (bps) of hikes to date and Fitch Ratings is forecasting one more 25bps hike this year as administered prices and subsidies have largely contained inflationary pressures.
Fitch Ratings said the ringgit’s 5.5% depreciation against the US dollar in the first half of 2022 is in line with most APAC peers, and foreign portfolio flows have remained positive, hence allaying any immediate need to defend the currency.
“Nevertheless, experience from 2013 has demonstrated that faster-than-expected rate hikes in the US could prompt a reversal in capital flows and a tighter policy stance,” it said.
Separately, Fitch Ratings had noted that the current monetary policy tightening cycle will generally support bank credit profiles in Asia, to the extent that higher interest rates lift NIMs.
It said asset-quality exposures appear well contained, but there could still be risks after a long period of supportive monetary policy that has contributed to rising leverage and asset prices in many markets.
Fitch Ratings, however, does not expect significant deterioration in asset quality in any APAC banking sector, though there may be pockets of vulnerability.
“This partly reflects our expectations for relatively moderate tightening across APAC, where inflation pressure is generally more subdued than in other regions.
“Securities portfolio losses should also be manageable, but banks in Hong Kong, India, Indonesia, Malaysia and Taiwan have the largest securities portfolios and are the most sensitive to yields,” it said.
Fitch Ratings also highlighted that larger than expected US rate hikes could trigger faster or greater tightening in some APAC markets, which could also lead to a higher or more persistent domestic inflation than forecasted.
“More aggressive tightening would add to asset-quality risks without necessarily continuing to deliver revenue benefits for banks.
“Asset-quality deterioration could eventually outweigh revenue upside, particularly if economies were tipped toward recession,” it added.