Banking sector not out of the woods yet, but remains resilient

Published on 27 Oct 2021.

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The Malaysian banking sector is expected to stay resilient in 2022 amid the challenges of the Covid-19 pandemic. Even as impairments begin to surface in the coming year, credit losses will be amply cushioned by healthy earnings accretion, comfortable provisioning buffers and solid capitalisation. In the next 12 months, most ratings in RAM’s banking portfolio will remain intact.  

RAM projects loan growth to come in at 4% in 2022, in line with the anticipated economic recovery. This is a higher rate than the 3% forecasted for 2021 and the 2.5% recorded in August. 

“The household sector will anchor growth next year with mortgages as the main driver, similar with what was seen in previous years. This is not surprising. Malaysia has a young demographic, so household formations are high and there is an underlying demand for homes,” said Wong Yin Ching, RAM’s co-head of financial institution ratings during the panel session entitled “Moving to a New Normal – What to Expect” at the virtual RAM Credit Summit 2021 held last week. 

“On the other hand, we are only projecting a slight pick-up for businesses, as most firms are currently operating below capacity. Even as the economy gradually recovers, we do not see firms rushing to invest or expand just yet,” she added.

“Funding and liquidity conditions is envisaged to stay healthy. Banks’ liquidity coverage ratio has generally hovered around 150%, well above the 100% minimum. We believe that Bank Negara Malaysia (BNM) has a strong incentive to ensure ample liquidity in the financial system; the many regulatory flexibilities introduced since the onset of the pandemic is a testament of that,” said Loh Kit Yoong, RAM’s senior analyst with financial institution ratings during her presentation at the Summit.

Although most banks will likely extend further relief to borrowers who are still viable when the nationwide opt-in moratorium expires in 1H 2022, RAM expects some impairments to start crystallising in the later part of the year. As such, RAM projects the gross impaired loan ratio to rise to between 2.3% and 2.5% in 2022 from the current 1.7% that has been contained by wide-ranging loan repayment assistance and moratorium. As at end-July 2021, about 30% of total loans were under relief. 

“Based on our discussions with some banks, majority of their borrowers under relief stemmed from the middle- and higher-income brackets. We are of the view that a sizeable portion of borrowers had taken the moratorium as a precautionary measure, given that bulk of these relief loans actually have zero arrears,” said Loh.

As banks have set aside sizeable forward-looking provisions and management overlays in 2020, RAM foresees banks’ average credit cost ratio to ease to between 50 and 60 bps next year, from the expected 60 to 70 bps for 2021. 

While hopeful of an economic rebound in 2022, the banking sector is not out of the woods yet. That said, banks went into the Covid-19 pandemic from a position of strength. We believe the sector will remain on solid footing amid our nation’s protracted recovery. 

The RAM Credit Summit is an annual flagship event for investors, clients and associates of RAM. This year’s Summit, themed “Looking into 2022 and Beyond” saw a total of 17 presenters and panellists from various industries discuss pertinent issues and their outlook during the event held from October 20 to 22.

Analytical contacts
Wong Yin Ching, CFA
(603) 3385 2555

Loh Kit Yoong
(603) 3385 2493

Media contact
Sakinah Arifin
(603) 3385 2505


About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 


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