Malaysian banks to lag Asian peers in recovery amid extended lockdown, new debt holidays: S&P

MALAYSIAN banks will continue to be an "Asian outlier" in their recovery path, with the road to normalisation likely to be prolonged amid the flare-up of new Covid-19 waves and fresh moratoriums, said S&P Global Ratings on Wednesday.

The new six-month blanket moratorium announced by the Malaysian government on June 28 would freeze the formation of new non-performing loans (NPLs) until early 2022, further distorting the already under-reported impaired loan ratio for the industry, said the credit ratings agency in a report.

It has projected for industry-wide NPL ratio to rise to 3-4 per cent by end-2022. The NPL ratio has been flattish at 1.5-1.6 per cent since December 2019, even as the economy contracted 5.6 per cent in 2020.

S&P noted that the six-month debt holiday for all individuals, micro enterprises, and eligible small and mid-sized borrowers starting from July 7 means few slippages are likely to be reported for the second half of 2021.

That said, there should not be a substantial jump in the moratorium take-up rate from the current 15 per cent, due to the additional interest burden that will be accrued for moratorium borrowers and still-healthy balance sheets for most household and corporate borrowers in Malaysia.

S&P's base case suggests that most weak credits are already covered by the ongoing targeted assistance programmes.

A NEWSLETTER FOR YOU

Friday, 8.30 am

Asean Business

Business insights centering on South-east Asia's fast-growing economies.

Sign Up

Sign Up

Additional participation from uncovered borrowers should be incremental, barring a lengthy lockdown and material deterioration in employment conditions.

For comparison, the moratorium take-up rate peaked at 75 to 80 per cent of the industry loan book during Malaysia's first six-month blanket moratorium last year.

"The length of the current national lockdown in Malaysia and the effective containment of the pandemic are key variables in charting the course of the banking sector's asset quality trend," said S&P credit analyst Nancy Duan.

Estimates on credit costs - a measure of loan-loss provisions - show that Malaysian banks will lag recovery timelines of many other regional banks. The lenders are expected to bear still-elevated, cumulative credit costs of 110 to 120 basis points (to gross loans) for 2021 and 2022 combined.

While reported NPLs remain muted, the banks have held onto a prudent provisioning policy, as reflected in the divergence between high credit costs and low reported NPL ratios. This is likely to persist in 2021, said S&P.

The industry impaired-loan coverage ratio was around 40 per cent by end-April 2021, from 37 per cent at end-2020. The unimpaired loan coverage was 1.1 per cent as at April 2021, up from 0.7-0.8 per cent in 2019.

S&P pointed out that its negative outlook on all rated Malaysian banks reflects the negative outlook on the sovereign rating.

"We maintain our view on the local banks standalone credit profiles, despite reduced rating buffers. Strong capital positions, sound liquidity conditions, and prudent risk management practices of local banks still anchor our current credit assessment of Malaysian banks," said the agency.