RAM Ratings has maintained a stable outlook on the Malaysian banking sector in 2019, reflecting the industry’s sturdy fundamentals. While there are lingering headwinds, we anticipate banks to be able to sustain their performance this year. Key expectations for the sector, featured in our publication Banking Insight, include the following:
• Slight moderation in loan growth to 5% (2018: +5.6%).
• Asset quality to stay robust, with no widespread fragility.
• Credit cost to inch up from a low base.
• Capital buffers to remain sturdy.
• Ample liquidity, although competition for deposits will still be keen.
• Pre-tax ROA to remain stable, albeit with a mild downward bias.
“The 5% projected loan growth takes into account our forecast of a slight moderation in GDP growth and the latest findings of the RAM Business Confidence Index. The indices are at their lowest levels since inception two years ago, albeit still above the threshold that indicates positive sentiment,” explains Wong Yin Ching, RAM’s co-head of Financial Institution Ratings. Loan applications and approvals, both leading indicators, recorded slower increases of a respective 2% and 5% in 2018 (2017: +5% and +10%).
The banking system’s gross impaired loan (GIL) ratio ended 2018 at a low of 1.45% (2017: 1.55%). “We expect this ratio to keep below 1.6% in 2019, even if there is some deterioration for vulnerable segments, i.e. commercial real estate, construction, and oil and gas (O&G) as well as lower-income households,” highlights Sophia Lee, co-head of Financial Institution Ratings. Banks have already made the necessary provisions for their O&G exposures as the downturn had begun four years ago. They have also been exercising caution on commercial real estate; the annual growth of loans for the purchase of non-residential properties skidded from double-digit levels pre-2016 to just 2.0% in 2018.
While having declined since 2016, Malaysia’s household debt-to-GDP ratio of 83.8% as at end-June 2018 is still on the high side relative to our national per capita GDP (~USD10,000). There are challenges from the lower-income segment (i.e. individuals earning less than RM3,000 per month) and among self-employed borrowers. However, the borrowings of the lower-income bracket had declined proportionally to 20% of total household debt as at end-June 2018 (end-December 2014: 24%). The macroprudential measures introduced in the last few years will help preserve the credit quality of household loans. Furthermore, the national unemployment rate stayed low at 3.3% in December 2018 while interest rates remained accommodative. Bank Negara Malaysia could loosen monetary policy if the risks to economic growth become more pronounced.
Despite the implementation of Malaysian Financial Reporting Standards 9 (MFRS 9) that brings forward the recognition of credit losses, the credit cost ratio of the eight Malaysian anchor banking groups eased to 22 bps in 2018 (2017: 33 bps) – a four-year low – amid a slower formation of impaired loans. As pockets of risk remain, this ratio could inch up from a low base, albeit still at a manageable level.
The banking system’s common equity tier 1 capital ratio remained strong at 13.4% as at end-January 2019, despite a decline in 2018. The drop is partly attributable to a one-off capital impact from the adoption of MFRS 9. On balance, MFRS 9 has strengthened banks’ loan-loss buffers, with the eight anchor banks’ GIL coverage ratio (inclusive of regulatory reserves) climbing up to 113% as at end-December 2018 (end-December 2017: 102%).
With a monthly average liquidity coverage ratio of 141% in 2018, the banking system’s liquidity is healthy. Besides, deposit growth outpaced credit expansion in 2018 – a first since 2011. Nonetheless, competition for deposits has intensified of late and will persist as banks brace for the implementation of the net stable funding ratio requirement. This will keep compressing net interest margins.
Despite revenue pressure, the eight anchor banking groups still managed to lift their aggregate pre-tax profit (excluding exceptional or non-recurring items) by a commendable 6% in 2018, thanks to lower impairment charges and strong cost discipline. Their average pre-tax ROA stayed stable at 1.4%. Looking ahead, continued loan growth and ongoing cost control will mitigate the impact of margin compression and incremental credit costs. While technology/digital spending will be stepped up, this will be done at a measured pace. As such, RAM expects banks’ pre-tax ROA to remain largely resilient in 2019, albeit with a mild downward bias.
RAM’s Banking Insight is available for download at www.ram.com.my.
Analytical contact
Lim Yu Cheng, CFA, FRM
(603) 3385 2492
yucheng@ram.com.my
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my
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