Published on 22 Mar 2021.
RAM Ratings reiterates our stable outlook on the Malaysian banking sector, underpinned by the industry’s strong fundamentals. While downside risks linger, we believe that domestic banks will remain resilient despite the pandemic-ravaged economy. Key expectations for the sector, as outlined in our recently published Banking Insight, include the following:
“We anticipate loan expansion to come in at around 3% in 2021, with household loans anchoring growth while business loans remain sluggish. Auto and home loans – which charted strong growths last year - will continue to benefit from the various incentives for car and property purchases,” explains Wong Yin Ching, RAM’s co-head of Financial Institution Ratings. However, this projection is subject to downside risks, such as unexpected delays in the vaccination programme or a new wave of COVID-19 infections, which may necessitate stricter lockdown measures.
The banking system’s gross impaired loan (GIL) ratio stayed benign at 1.60% as at end-January 2021, slightly higher than the 1.51% as at end-December 2019. This ratio is likely to be upheld by the targeted repayment assistance (TRA), which has been made available to individual and small medium enterprise borrowers following the conclusion of the six-month blanket loan moratorium in September 2020. Banks also remain committed to assisting corporate borrowers to restructure and reschedule (R&R) their loan repayments.
According to the latest available data, some 13% (ranging from 7% to 18% for individual banks) of eight selected local banks’ domestic portfolios are under TRA and R&R. “Based on our estimates, the industry’s GIL ratio may come up to around 2.3%-2.5% in 2021. We expect GILs to peak only in 2022, after the expiration of all temporary relief measures,” highlights Sophia Lee, RAM’s co-head of Financial Institution Ratings.
Banks pre-emptively built up their provisioning buffers in 2020, as they braced for a rough ride when their underlying asset quality become apparent in 2H 2021 or 2022. The average credit cost ratio of the eight selected banks swelled to 84 bps last year (2019: 30 bps), leading to a stronger adjusted GIL coverage of 118% as at end-December 2020 (end-December 2019: 107%). Amid the myriad uncertainties, impairment expenses are envisaged to stay elevated this year. All said, the banking system’s capital buffers stayed sturdy; its common equity tier-1 capital and total capital ratios came in at a respective 14.9% and 18.5% as at end-January 2021.
Malaysian banks’ earnings in 2020 were weighed down by hefty pre-emptive provisions, modification losses, and narrower net interest margins (NIMs). The eight selected local banks reported a lower average pre-tax return on assets of just 0.9% and return on equity of 8.7% (2019: 1.4% and 13.2%). NIMs were severely crimped by Bank Negara Malaysia’s slashing of the overnight policy rate by 125 bps, compounded by modification charges. Banks’ earnings are anticipated to improve in 2021 with the absence of modification expenses and rejuvenated NIMs as deposits would have mostly been repriced at lower rates. That said, overall profitability is likely to remain pressured by elevated impairment charges.
We expect the banking system’s liquidity position to remain healthy. Its liquidity coverage ratio hovered around 140%-153% in 2020. Notably, the industry’s deposit growth of 3.9% outpaced loan expansion. Retail deposits were still the mainstay of customer funding, accounting for 39% of total deposits as at end-December 2020. On the other hand, loan deferments had boosted CASA deposit growth while fixed deposits contracted for the first time in a decade.
RAM’s Banking Insight: Still Not Out of the Woods is available for download at www.ram.com.my.
Tan Shu Xuan
(603) 3385 2497
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2619
(603) 3385 2577
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