Published on 21 Mar 2023.
RAM Ratings has maintained a stable outlook on the Malaysian banking sector in conjunction with the release of its latest commentary, Banking Insight: On Steady Footing.
“Robust loss absorption buffers, diversified funding and well-controlled asset quality risks continue to anchor the domestic banking system’s resilience. Malaysian banks are well positioned to face potential asset quality deterioration arising from inflationary pressures, higher interest rates and the threat of slower global growth,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings. “We further believe the recent collapse of Silicon Valley Bank (SVB) and two smaller banks in the US will have no rating impact on domestic banks,” she adds.
“We expect loan growth to still be led by the Islamic banking sector, which contributed over 80% of the industry’s growth in 2022. Declining loan applications in the last few months amid rising interest rates signal weaker credit demand. That said, China’s emergence from isolation should stimulate business loan growth as it is a significant contributor to Malaysia’s trade and tourist arrivals,” Wong said.
GILs could edge up as the higher cost of living and the 100-bp cumulative rate hike in 2022 impinge on borrowers’ repayment capability, especially those in the lower income group and smaller enterprises. The continued phasing out of remaining loan forbearance measures could also push up delinquencies although the average proportion of domestic loans under relief in eight selected banking groups has reduced to below 3%. The industry’s GIL ratio was relatively stable at 1.72% as at end-2022 (2021: 1.68%). “We believe credit quality weakening will be contained, considering banks’ prudent underwriting standards. The GIL ratio could steadily increase to a still-healthy 2.0% by end-2023,” Wong adds.
RAM estimates a credit cost ratio of around 25 bps in 2023 (2022: 29 bps). “We expect loan loss charges to drop further as huge management overlays were frontloaded at the height of the health crisis. Some banks have already factored partial overlay writebacks into their credit cost guidance for the year,” observes Sophia Lee, RAM’s co-head of Financial Institution Ratings. The banking system has robust loss absorption buffers – the eight banks registered a GIL coverage (including regulatory reserves) of 132% as at end-2022 (end-2019: 107%). The industry’s common equity tier-1 capital ratio was a sturdy 14.9% on the same date.
Malaysia’s five new digital bank licensees are expected to come online starting 2H 2023. Focus of the digital banks is on the underserved, in line with BNM’s discussion paper on Financial Inclusion Framework 2023-2026. Although they each have an existing captive ecosystem to leverage on, digital banks face numerous challenges. They will have to expand their franchise outside their ecosystems, secure stable funding, design suitable products for their target segments and effectively manage risk and pricing – all this while operating cost-efficiently. The threat to incumbents will be limited in view of the temporary maximum asset threshold of RM3 bil for digital banks and the heavy investments that traditional lenders have sunk into their digital agendas.
As Malaysian banks align themselves to address climate risks in line with regulatory requirements, we expect to see more banks offer and tailor more products (including green, sustainability-linked or transition financing) to help clients and businesses decarbonise, which may offer a way to gain advantage over their competition.
RAM’s Banking Insight is available for download at www.ram.com.my.
Lee Yee Von
(603) 3385 2503
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2619
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Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Credit Rating Agencies, 2023. 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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