“Our outlook for Malaysia’s banking system remains stable," Moody’s Ratings said.
PETALING JAYA: While the asset quality of Malaysian banks is broadly stable, loans to some sectors continue to face stress, with small and medium enterprises (SME) expected to be the most vulnerable borrowers.
Moody’s Ratings said in a report that loans to the real estate and construction sectors also remain a risk to the asset quality of banks, although exposure has decreased gradually over the past two years.
“While asset-weighted loan loss reserves for rated banks have declined to 120.8% as of September 2023, from 147.1% as of December 2022, we consider this adequate as impaired loans secured by properties, which we expect to have low loan losses and higher recovery rate, accounted for 42% of total impaired loans,” it said.
The ratings agency also forecast the banking system’s non-performing loans ratio to be around 1.5% to 2% in 2024, compared with 1.6% as of December 2023.
This will be supported by the improvement in retail borrowers’ repayment capacity, due to favourable labor market conditions and modest inflation, it added
Retail loans with elevated credit risk and weaker repayment capacity have also decreased.
As of June 2023, 4.6% of retail loans were classified as Stage Two, lower than 6.7% as of December 2022.
“Our outlook for Malaysia’s banking system remains stable, supported by higher economic growth and banks’ strong capitalisation.”
Moody’s Ratings predicts the Malaysian economy growing by 4.5% this year compared with 3.7% in 2023.
Favourable labour market conditions will support household consumption, while government policies such as the National Energy Transition Roadmap and New Industrial Master Plan will underpin private and public investments, along with investment flows related to shifting regional supply chains.
“While Malaysian banks are more susceptible to changes in liquidity conditions due to greater use of market funds, the banks have access to liquidity from the central bank when required.
“We also expect loan growth to be broadly in line with deposit growth,” it added.
System-wide credit is forecast to grow at 5.5% in 2024, broadly stable from the year before
According to Moody’s Ratings, the capital ratios of Malaysian banks will remain strong in 2024 as internal capital generation will keep pace with capital consumption.
It also expects banks to maintain prudent dividend policies and offer dividend reinvestment plans to shareholders to support capitalisation, if necessary.
As of November 2023, the Common Equity Tier 1 ratio of the Malaysian banking system was at 14.5%, stable from 14.3% a year earlier.
Meanwhile, the profitability of the overall banking system is also expected to remain largely stable this year.
This will be underpinned by stable net interest margins and mildly higher credit costs.
“We expect repricing of deposits to be limited this year and competition for deposits to moderate as the overnight policy rate remains stable.
“At the same time, we expect credit costs to increase in 2024 as low provisions in 2023 were partly supported by the consumption of existing credit reserves,” it said.
On funding and liquidity, Moody’s Ratings said Malaysian banks are more susceptible to changes in liquidity conditions due to their greater use of market funds.
“Nonetheless, we expect banks to maintain strong liquidity buffers. As of October 30, 2023, the system-wide liquidity coverage ratio remained strong at 151%, above 141% a year earlier.
“We also expect loan growth to be broadly in line with deposit growth,” it said.
Moody’s Ratings also pointed out that the government’s willingness and capacity to support Malaysian banks when needed will remain strong.
“Probability of government support remains high,” it added.
