Moody's: Outlook for Malaysian banks stable on robust macro conditions, improving capitalisation

PETALING JAYA: Moody's Investors Service says that the outlook for the banking system in Malaysia (A3 stable) is stable over the next 12-18 months.
Moody's has maintained a stable outlook on the Malaysian banking system since 2010.
"A key supporting factor of the stable outlook is the robust macroeconomic conditions in and outside Malaysia, which will result in a favorable operating environment for Malaysian banks and help stabilise their asset quality and profitability," says Moody's vice-president and senior analyst Simon Chen.
"At the same time, while we will see faster loan growth, such growth will remain at a pace that is slower than the banks' profit retention, which will lead to stronger capital buffers," adds Chen.
Moody's conclusions are contained in its just-released report on Malaysian banks titled "Robust macro conditions and improving capitalisation support stable outlook", authored by Chen.
Moody's rates 11 banks in Malaysia: eight conventional commercial banks, one investment bank, one islamic bank and one government-owned development financial institution. The rated commercial banks accounted for some 85% of total loans and deposits in the Malaysian banking system at the end of 2017.
Moody's assessment is based on six drivers: operating environment (stable); asset quality (stable); capital (improving); funding and liquidity (stable); profitability and efficiency (stable); and government support (stable).
On the operating environment, Moody's said that while macroeconomic conditions will prove robust, policy uncertainty poses a risk. Moody's forecasts that Malaysia's real GDP will expand by 5.4% in 2018, and loans will grow 6%-7% in the same period.
The removal of the goods and services tax could boost private consumption and benefit domestic businesses in the near term. However, uncertainty over future policy changes by the new government will weigh on investor and business sentiment over the course of 2018.
With asset quality, Moody's says that the banks' asset quality will stay stable, against the backdrop of easing stress among troubled corporates and slowing growth in household debt levels. New nonperforming loan formation will remain slow amid a moderate rise in interest rates, as corporate profitability improves and growth in risky household loans eases.
As for capitalization, such levels will improve, as capital generation exceeds asset growth, and prove sufficient to cushion one-time adjustments to capital ratios to meet the MFRS 9 standard.
Moody's also opined that the banks' funding and liquidity will stay stable. In particular, the banks' loan-to-deposit ratios will rise as loan growth accelerates, but such ratios will remain below 100%. In addition, the banks will remain well positioned to comfortably meet minimum requirements under Basel III liquidity and funding rules.
On profitability, Moody's says that revenue improvements — driven by faster loan growth — will underpin the banks' profitability profiles. Faster loan growth will boost pre-provision income, although stiffer deposit competition will limit improvements in net interest margins. Credit costs will rise because of the new MFRS 9 standard, but only slightly, because of continuously benign credit conditions.
Government support for the banks in times of stress will continue to prove strong. Recent legislative reforms have not suggested any shift in the government's policy for the resolution of troubled banks outside liquidation, with a lack of legislation to force bank creditors to bear the cost of any bank bailouts.