Malaysian banks to ride on economic recovery

Published on 28 Mar 2022.

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RAM Ratings has maintained a stable outlook on the Malaysian banking sector in conjunction with the release of its latest commentary, Banking Insight: A Break in the Clouds. “Malaysian banks have solid fundamentals and will continue to demonstrate resilience in 2022, notwithstanding lingering asset quality headwinds and the risk of contagion from the Russia-Ukraine war,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings.

Key expectations for the sector include the following:

  • Loan growth will come in at 4.5%-5.0% in 2022 (2021: +4.5%), in line with economic recovery. 
  • Banks’ underlying asset quality will unfold when the bulk of relief under the Pemulih stimulus programme expires in 1H 2022. The banking system’s gross impaired loan (GIL) ratio could rise to 2.5% by end-2022 (end-2021: 1.4%).
  • The funding and liquidity profiles of banks are expected to stay sound and supportive of new lending. 
  • Upside to banks’ earnings is limited this year after a strong rebound in 2021. The system’s net interest margin (NIM) is anticipated to remain broadly stable and bottom lines will be weighed down by Cukai Makmur, the one-off prosperity tax. 
  • Capital buffers will stay robust. The uplift from transitional arrangements will taper off this year. 

“Our loan growth projection incorporates the expected downtick in loans outstanding when borrowers resume repayments upon the expiry of various relief measures. Risks to growth however have tilted to the downside on still-evolving geopolitical tensions stemming from Russia and Ukraine. The conflict, depending on its magnitude and duration, could fuel global inflationary pressure, disrupt supply chains and dampen external demand,” Wong said.   

Banks’ exposure to assisted loans has reduced considerably as a big portion of relief under the Pemulih programme has expired in recent months. Based on data of eight selected local banks, the proportion of domestic loans under relief almost halved to an average 15% in January and February compared to last quarter. “The unwinding of relief measures will clear the fog on banks’ underlying asset quality. We may see the sector’s GIL ratio rise to 2.5% by end-2022, which is deemed manageable in our view,” Wong adds.

RAM estimates a credit cost ratio of around 40bps-50bps in 2022. “We expect impairment charges to moderate further but it is too soon to see pre-pandemic levels in view of lingering downside risk. In the latest results briefings, banks also indicated they are in no haste to release accumulated management overlays,” observes Sophia Lee, RAM’s co-head of Financial Institution Ratings. The banking system has robust loss absorption buffers. The GIL coverage (including regulatory reserves) of the eight banks strengthened to 129% as at end-2021 (end-2020: 117%) and the industry’s common equity tier-1 capital ratio stood at a sturdy 15.2% on the same date.

The profit performance of Malaysian banks rebounded strongly in 2021 on the back of lower provisioning expenses, broader NIMs and significantly smaller modification charges. The eight banks’ average pre-tax return on assets was a higher 1.25% (2020: 0.92%). Upside to banks’ earnings is however limited this year as NIMs will stay broadly stable, given that funding cost may come under pressure despite the prospect of a rate hike in 2H 2022. Bottom lines will also be hit by Cukai Makmur. 

RAM expects the funding and liquidity profiles of banks to stay sound and supportive of new lending. Current and savings account deposits continued to grow at double digits, albeit slower (2021: 10.9%; 2020: 19.3%). Fixed deposits, on the other hand, registered full-year growth of 1.1% in contrast to the 3.6% contraction seen last year. 

Bank Negara Malaysia will award five digital bank licences this month. The threat to incumbents in the near to medium term will be limited, in our view, given the temporary asset threshold (less than RM3 bil) and digital banks’ focus on the underserved and unserved markets. Incumbent banks, which can pursue digital transformation under the existing licensing framework, have been digitising existing banking operations and investing in new capabilities to ensure long-term market relevance. 

RAM’s Banking Insight: A Break in the Clouds is available for download at www.ram.com.my.


Analytical contacts
Tan Shu Xuan
(603) 3385 2497

Wong Yin Ching, CFA
(603) 3385 2555

Sophia Lee
(603) 3385 2619


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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Banking Insight 2022 28-Mar-2022 Banking Insight View PDF