Published: Thursday July 12, 2012 MYT 1:21:00 PM
Updated: Thursday July 12, 2012 MYT 2:57:30 PM
Moody's sees stable outlook for Malaysia's banking sector
KUALA LUMPUR: Moody's Investors Service says the outlook for Malaysia's banking system in the next 12 to 18 months is stable while it expects GDP to expand at a slower pace of 4% this year from 5.1% last year.
A Moody's analyst, Simon Chen said on Thursday the Malaysian government's expansionary policies would support credit growth, despite a slowing economy due to lower demand for exports from the country's main trading partners -- the US, Europe and China.
"Government spending this year will total 26% of GDP, on commercial and fiscal projects that will attract private sector investment, and provide support to domestic business activities and employment. We expect loans to grow by between 9% and 11%, which is slightly lower than the 14% growth recorded in 2011," he said.
He was speaking in Singapore at the release of a new Moody's report entitled "Banking System Outlook: Malaysia". The report was based on the central scenario that Malaysia's economy will grow at a slower, yet robust pace of 4.0% this year, from 5.1% last year.
"Government spending this year will total 26% of GDP, on commercial and fiscal projects that will attract private sector investment, and provide support to domestic business activities and employment. We expect loans to grow by between 9% and 11%, which is slightly lower than the 14% growth recorded in 2011," Chen added.
Below is the statement from Moody's:
Risk-adjusted profits for Malaysian banks are expected to fall modestly, due to moderating credit growth, lower net interest margins, and rising cost pressures for those banks aiming to boost their offshore operations.
However, Moody's believes the banks will continue to expand regionally because of intense domestic competition, high credit penetration and abundant liquidity.
They will also try to compensate for lower loan growth by taking up opportunities from the retreat of European banks in the region, expanding their opportunities in Islamic banking, and focusing on stable fee-generating businesses like wealth management and bancassurance.
Meanwhile, Moody's expects asset quality to remain resilient, supported by low unemployment, continued growth in household incomes and low corporate leverage.
Should the operating environment deteriorate further than expected, however, sectors vulnerable to loan delinquencies would include export-oriented manufacturers, highly-leveraged households and mortgages with high loan-to-valuations relating to speculative segments of the property market.
But Moody's believes banks will have relatively strong capacity to absorb related losses under a deteriorating environment.
Capitalization is strong. With the system's Tier 1 capital ratio of 12.9% at end-April 2012, capital would be sufficient to support asset growth over the next 12-18 months and absorb a significant deterioration in operating conditions and asset quality.
"Under our adverse scenario, which corresponds to a cyclical recession with the impaired loans ratio rising to an average of 8% from current level of 2.7% across the entire loan book, our rated banks would maintain Tier 1 capital at above 10%," says Chen.
Moody's rates eight commercial banks in Malaysia, which together accounted for 81% of total banking system assets as of Dec 31, 2011.