PETALING JAYA: The asset quality trend of Malaysian banks will stay weak for longer over the next two years, according to S&P Global Ratings, as new Covid waves and lockdowns dampen economic recovery and weigh further on borrowers.
In a report “Global Banking Country Outlook Midyear 2021: Tantalizing Signs of Stability” published today, S&P said the industry non-performing loan (NPL) ratio will likely rise to 3-4% by the end of 2022 and credit costs will stay elevated at a cumulative 110-120 bps over 2021 and 2022 combined, compared with 79 bps in 2020.
It explained that around 15% of Malaysian banks’ loan book is covered under various targeted assistance measures. The government recently announced a second six-month blanket moratorium for all individuals and small and midsized enterprise (SME) borrowers from July onwards, which delays the timeline for banks’ return to normal.
“That said, we don’t foresee a substantial jump in the moratorium take-up rate, given the additional interest burden from a payment holiday and the still-healthy balance sheets for most household and corporate borrowers in Malaysia. Our base case assumes most weak credits are already covered by the ongoing targeted assistance programs. In comparison, the moratorium take-up rate peaked at 75-80% of the industry loan book during the first six-month blanket moratorium in 2020.”
It believes Malaysian banks’ solid capital buffers (14.6% common equity Tier-1 ratio) and still prudent dividend payouts are important mitigants that support current credit standing and ratings. In its view, the pace of vaccination is the key risk mitigant to cap the short-term downside to the local banking sector.
The new Covid waves and slow progress of the vaccination rollout recently led S&P Global Ratings to materially lower its gross domestic product (GDP) projection for Malaysia this year. It now forecasts that Malaysian GDP will grow 4.1% in 2021, down from its earlier projection of 6.2% (March 2021).
“Accordingly, we have lowered our forecast of industry loan growth to 4% for 2021 from 6%. That said, the government is pushing to accelerate the vaccine rollout. An effective containment of Covid-19 could support a solid economic rebound in 2022 that we forecast to grow 6.3%.”
It said banks’ asset quality hinges critically on the employment situation in the country, given 58% of the system’s loan book is exposed to the household sector.
“We expect the unemployment rate to remain largely stable despite some notable weakening from the prepandemic level of 3-3.5%. In our view, the unemployment rate could peak at 4.8% in 2021 before declining to 4.4% in 2022, compared with 4.5% in 2020.”
On what to look for over the next year, S&P said the new aggressive Covid variants remain a notable risk to GDP growth next year. A more protracted economic recovery could translate into rising job market pressure and more asset quality pains for domestic banks.
In addition, high market interests have been observed for Bank Negara Malaysia’s digital-only bank licences despite the temporary disruptions and delays caused by Covid since last year. The successful new entrants to the local banking sector will be revealed by the first quarter of 2022.