Negative events not affecting Malaysian banks, slight spike in non-performing loans seen

RAM Ratings’ co-head of financial institution ratings Wong Yin Ching(inset) said the gross impaired loan ratio – an indicator of the health of the system’s loans – stood at a benign 1.6% as at end-November 2015 and was not expected to exceed 2% this year.

PETALING JAYA: The confluence of recent negative events are not expected to cause a major dent in the asset quality of banks as the gross impaired loan ratio forecast growth of between 1.8 per cent and 2 per cent this year from the current 1.6 per cent is not a worrisome trend in the industry.

Many analysts and industry observers, however, concurred there are areas which would see a slight spike in non-performing loans but it would not on the whole lead to delinquency of asset quality which could trigger a downgrade of the Malaysian banking industry.

International ratings agencies like Fitch Ratings, Standard & Poor's Ratings Services and Moody's Investors Service of late have been closely monitoring the economic conditions in the country and assessing the asset quality and net interest margins (NIM) of banks, among others, for a possible downgrade if the economic conditions worsen.

CIMB Research analyst Winson Ng said he expect the industry's gross impaired loan ratio to rise this year but the magnitude would not be significant - from 1.6 per cent in November last year to 1.8 per cent in 2016.

The research house, which is maintaining its overweight on the sector, said this was premised on Malaysia's still healthy economic growth, benign unemployment rate, a decline in corporates' gearing ratios, pre-emptive tightening by Bank Negara and more stringent lending practices by banks.

From our meetings with institutional investors recently, Ng added gathered that the market appears to believe that a confluence of negative developments over the past one to two years have brewed the perfect storm for a spike-up in banks' impaired loan ratios.

These developments include the plunge in oil prices in the fourth quarter of 2014, the implementation of the Goods and Services Act, the depreciation of the ringgit in between in the second and third quarter of last year, increased retrenchments by corporates and a rise in the cost of living.

Meanwhile, RAM Ratings' co-head of financial institution ratings Wong Yin Ching said the gross impaired loan ratio - an indicator of the health of the system's loans - stood at a benign 1.6 per cent as at end-November 2015 and was not expected to exceed 2 per cent this year.

She added that the other credit metrics of the banking industry also continue to hold up well. Capitalisation was healthy with a total capital ratio of 15.5 per cent and while the funding and liquidity positions of banks have tightened, they are still manageable, Wong noted.

Some of the challenges which analysts said could impact the outlook of the banking sector this year are easing loan growth on slower economic growth, NIM remaining under pressure and non-interest income remaining subdued.

Hong Leong Investment Bank (HLIB) in a research note albeit these headwinds, asset quality was expected to remain robust this year as there was ample liquidity to fund domestic growth.

Apart from this, HLIB there are also attractive valuations following share price corrections, and the full impact of cost management initiatives kicking in this year should cushion banks' bottomlines.

CIMB in a research note said it expected total financial year 2016-17 net profits for banks under its coverage would be reduced by an average 2.7 per cent for every 50 basis points rise in gross impaired loan ratio, based on estimates.

The impact ranges from 1.3 per cent (for Public Bank and RHB Capital) to 4 per cent-4.6 per cent (for Maybank and BIMB), it said, adding that this reflects the research house assumed ratio for additional provision over new impaired loans but not the asset qualities of the banks.

Some of the areas that could be vulnerable for banks' asset quality are in residential mortgages, oil and gas (O&G) sector, loans to importers and lower income borrowers, it added.

"Banks' exposures to the O&G sector and lower-income group are not significant as a percentage of their total loans (about 3-5 per cent for O&G). Also, we do not expect a significant increase in the level of delinquencies for residential mortgages,'' Ng noted.

He said it continue to overweight Malaysian banks, given the potential re-rating catalysts of better projected earnings per share growth this year, a slowdown, if not an end, to the equity fund raising by banks.

Valuations are generally attractive, he said with most banks trading below their five year average price earnings and price to book value ratios, adding that the rise in gross impaired loan ratios would not have a significant impact on banks' earnings.