By Sherilyn Goh
While maintaining a stable outlook on Malaysian banks, Moody’s Investors Service cautioned that high levels of household debt, expectation of slower gross domestic product (GDP) growth in the Asia-Pacific (Apac) region, and potential further pressure on regional currencies are likely to deteriorate its banking system in terms of asset quality and profitability.
“The deterioration is explained by our expectation of slower GDP growth in Apac, potential further pressure on currencies, and high levels of corporate and household debts in some countries.
“Bank ratings will remain broadly stable because of good capital levels, as well as strong funding and liquidity profiles, as most systems are deposit funded, but the risk for ratings are skewed to the downside in the event of an economic slowdown in the region that is sharper than expected,” said Moody’s Financial Institutions Group Apac managing director Stephen Long.
The global credit research agency added that the operating environment for Apac banks is becoming more challenging as they feel the impact of subdued global growth, aggravated by weaker demand in China. It forecasts real GDP growth in Asia-Pacific to come in at 4.5% in 2016, unchanged from 2015 but below the 4.8% recorded in 2014.
Moody’s has revised downward its 2016 GDP growth forecast for Malaysia to 4.5%, down from 5% previously. It further noted that slower GDP growth is most pronounced in small and open economies including Taiwan, Singapore and Hong Kong, while India, Sri Lanka and Vietnam are seen to be more resilient in contrast.
High household debt levels concern M’sian banks
While high household debt levels are highlighted as a concern for banks in Malaysia, alongside Thailand and Hong Kong, the credit research agency observed that regulatory moves and tighter underwriting banks in recent years have contained its growth.
The ratio of household debt to GDP in Malaysia rose marginally to 87.9% in 2014 from 86.7% in 2013, and is among the highest in the region.
Low commodity prices also represent headwinds for Malaysia and other commodity exporters including Australia, Indonesia, New Zealand and Mongolia.
Apac outlook
Of the 16 banking systems in Apac, Moody’s maintained stable outlook for 13, with negative outlook on China, Mongolia and Hong Kong. Despite the pressures on asset quality, it noted, most Apac banks have strong loss-absorbing buffers and relatively strong loan-loss reserves, which stood at an average of 140% of problem loans in end-2014.
“Profitability will likely weaken but remain sufficiently strong, so that rising impairment expenses can be absorbed without resulting in weaker capitalisation. A moderation in loan growth will also be supportive of relatively stable capital ratios,” it said.
Exposure to energy, commodities and foreign exchange risks are hence expected to be manageable, due to the moderate size and good quality of the exposures.
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